Impact of EU "Pre-pack proceedings" directive in Belgium, the Netherlands and Luxembourg

On 7 December 2022, the European Commission published the Proposal for a Directive of the European Parliament and of the Council harmonising certain aspects of insolvency law. This Proposal is intended to harmonise the insolvency laws of EU member states in order to make insolvency proceedings more predictable and efficient. The Proposal also includes a number of principles the pre-pack proceedings in each member state must meet. This series will explore pre-pack proceedings in the Netherlands, Belgium and Luxembourg legal systems. For more details, follow this link to the main article.

Pre-pack proceedings under Belgian law: is this a fresh start?

Belgium is finally about to transpose Directive 2019/2023 on preventive restructuring frameworks and regulated pre-pack proceedings are now accessible.

European and Belgian legislative developments

Insolvency law has experienced significant activity in recent years, both at European level and at Belgian level, in favour of a paradigm shift of restructuring through pre-pack proceedings instead of liquidation.

The EU regulation 2015/848 on insolvency proceedings  (link Here) first settled conflicts of law in insolvency matters, such as internal jurisdiction, applicable law, interaction between insolvency proceedings opened in different member states.

Directive 2019/2023 on “preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 (Directive on restructuring and insolvency)” (link Here) aimed to do the following:

• maximise the continuity of insolvent entities thanks to preventive restructuring frameworks;
• allow a fresh start; and
• make insolvency proceedings more professional and more efficient.

On 7 December 2022, the European Commission published a draft directive harmonizing certain aspects of insolvency law to further financial and economic integration in the EU.

In Belgium, after two major changes to the insolvency law in 2009 and 2017, the long-awaited bill implementing Restructuring Directive 2019/1023 was finally voted in Parliament on 25 May 2023 and will probably come into force on 1 September 2023. This Bill has yet to be published in the Belgian State Gazette.

Gradual introduction of pre-pack proceedings in Belgium

Following the European trend, Belgian insolvency law has also evolved considerably over the past 15 years, aimed at giving maximum priority to ensuring the continuity of activities rather than shutting them down in the event of bankruptcy.

In this context, in 2017 the Belgian legislator considered introducing a pre-pack procedure into the Belgian insolvency proceedings arsenal. The pre-pack procedure means that an entity facing financial difficulties can prepare a sale of its business, without its financial difficulties becoming public or known to its stakeholders, with the purpose of increasing the value of the business. This project was eventually shelved due to both the Smallsteps case and trade union opposition.

With the difficulties arising from COVID-19 weakening the financial health of entities, the Belgian legislator introduced a “kind” of pre-pack proceedings that enabled the debtor to discreetly prepare for judicial reorganisation proceedings under the supervision of a judicial administrator.

The purpose of this procedure was to confidentially test the possibility of an amicable or collective arrangement with the debtor’s most important creditors "in the shadow" of formal insolvency proceedings. This occurs during a court-supervised preparatory negotiation phase. If the negotiations in this pre-pack phase are successful, the procedure is then introduced into the existing judicial reorganisation proceedings aimed at obtaining either an amicable agreement with two or more creditors, or a collective reorganisation agreement.

This procedure was therefore limited to agreements reached with creditors and did not directly allow for the transfer of business activities.

New tool available for entities: private preparation for bankruptcy

With the directive transposition, genuine pre-pack proceedings called “Private preparation for bankruptcy” (Préparation privée d’une faillite/Besloten voorbereiding van het faillissement) will be introduced into Belgium law.

The preparatory work of the bill explains that the pre-pack proceeding is “an opportunity for a company not to lose its total value which is more valuable being in a going concern than in a piece-by-piece sale”.

The debtor may ask the Court to declare bankruptcy, but before the bankruptcy is declared, the transfer of all or part of its assets and activities has to be prepared. The debtor must, however, demonstrate that the discreet preparation of the bankruptcy will give the creditors the opportunity to be reimbursed at a higher amount, and maximise job retention.

The Court will appoint, for a maximum of 30 days (and extendable to 30 more days if necessary), one or more liquidation experts (who will be confirmed as bankruptcy trustees if the bankruptcy is declared), and also a supervisory judge. It is important to note that the debtor stays “in possession” during the process.

The liquidation expert will prepare, jointly with the debtor and under the supervision of the judge, the debtor’s bankruptcy. The expert represents the creditors’ interests. If there is a contemplated transfer of the assets/activities to persons/entities linked to the debtor, the expert must inform the supervisory judge in writing. The preparatory work of the bill is quite precise: “The main reason for introducing this procedure is to protect creditors and employees against illegitimate self-assignment, and is essentially an anti-abuse procedure.”

The procedure is completely confidential in order to avoid the negative effects of bankruptcy. It remains to be seen whether the contemplated pre-pack proceedings will meet expectations.

For more information, contact your CMS client partner or this CMS expert: Grégory de Sauvage

Proposal for European rules on pre-pack proceedings should be supported

On 7 December 2022, the European Commission published the Proposal for a Directive of the European Parliament and of the Council harmonising certain aspects of insolvency law. This Proposal is intended to harmonise the insolvency laws of EU member states in order to make insolvency proceedings more predictable and efficient. The Proposal also includes a number of principles the pre-pack proceedings in each member state must meet.

The Proposal defines pre-pack proceedings as:

“expedited liquidation proceedings that allow for the sale of the business of the debtor, in whole or in part, as a going-concern to the best bidder, with a view to the liquidation of the assets of the debtor as a result of the established insolvency of the debtor.”

The explanatory memorandum to the Proposal states the following about pre-pack proceedings:

“In a pre-pack proceeding, the sale of the debtor’s business (or part of it) is prepared and negotiated before the formal opening of the insolvency proceedings. This makes it possible to execute the sale and obtain the proceeds shortly after opening the formal insolvency proceedings intended to liquidate a company.”

This part of the Proposal is of great importance for insolvency practice because it provides for the introduction of pre-pack proceedings in all member states. For a careful settlement of bankruptcies, it is important that debtors in every member state have access to these proceedings. This prevents forum shopping and contributes to legal equality. In addition, it is important that the Proposal sets a number of minimum requirements for pre-pack proceedings at the European level, which increases the quality of the national statutory regulations.

Court of Justice of the EU (CJEU) case-law has created uncertainty regarding the feasibility of pre-pack proceedings because there is a risk of a transfer of business or undertaking within the meaning of Directive 2001/23/EC. If that is the case, the party purchasing the business will take on all employees of the transferring party by operation of law. This may affect the conclusion of the transfer or the purchase price.

With the Proposal, the European Commission is taking an important step forward in the development of the pre-pack proceedings as a method to limit the harm or loss of parties involved in bankruptcies, such as debtors, employees and customers. The Netherlands was one of the front-runners in the development of legislation on pre-pack proceedings. Informal pre-pack proceedings existed in the Netherlands. Eight of the 11 District Courts informed the debtor fearing bankruptcy of the identity of the appointed bankruptcy trustee should the debtor file a bankruptcy petition. This "prospective bankruptcy trustee" would be able to prepare the bankruptcy proceedings (i.e. an immediate sale of the assets). In the Netherlands, there have been about 100 cases of informal pre-pack between 2012 and 2017.  On 21 June 2016, the Dutch House of Representatives passed the Continuity of Enterprises Act I (Wet continuïteit ondernemingen I). The Continuity of Enterprises Act I provides a legal basis for the pre-pack practice developed in Dutch legal practice. However, the CJEU’s judgment in 'Smallsteps^' brought pre-pack practice to a standstill in the Netherlands, including the debate on the Continuity of Enterprises Act I in the Dutch Senate. In its judgment in Smallsteps, the CJEU held that the exception to the employment protection of Article 3 and 4 of Directive 2001/23 included in Article 5(1) of Directive 2001/23 applies only when the main objective of the insolvency or similar proceedings is the liquidation of the assets of the transferor and not the preservation of the business. According to the CJEU, if the transfer of the business is prepared in pre-pack proceedings down to its last detail in order to enable a swift relaunch of the business’s viable units after the declaration of insolvency, the requirement that the proceedings are being initiated with a view to liquidation is not met. The CJEU also held that in the Dutch context, the requirement that these proceedings are under the supervision of a public authority is not met either.

In its judgment in 'Heiploeg', the CJEU once again answered the question to what extent the pre-pack proceedings, as described in the judgment of the Supreme Court of the Netherlands in referring that case to the CJEU for a preliminary ruling, meet the exception requirements of Article 5(1) of Directive 2001/23. In this judgment, the CJEU repeated that the application of the exception provision of Article 5(1) of Directive 2001/23 depends on whether the situation involves bankruptcy proceedings that were initiated with a view to the liquidation of the assets of the transferor or with a view to the continuation of the activities. The CJEU held that it is an established fact that in this case the transfer of the business concerned took place in the context of bankruptcy proceedings intended to liquidate all the assets (i.e. of the business of the transferor). The wording of Article 5(1) of Directive 2001/23 shows that the exceptional situation does not apply only to businesses whose activities ended before or after the transfer. This exception is intended to rule out the serious risk of a general decrease in the value of the transferred business or general deterioration of the living and working conditions of the employees. For this reason, it should be possible to transfer a business subject to the deviation laid down in the aforementioned provision. Because Article 5(1) of Directive 2001/23 does not pertain to the period prior to bankruptcy or insolvency proceedings, it is irrelevant to the application of this criterion whether the transfer was prepared before the initiation of the bankruptcy proceedings. According to the CJEU, when the primary objective of pre-pack proceedings, followed by bankruptcy proceedings, is to obtain the highest possible payment for its joint creditors after the declaration of insolvency and after liquidation, these proceedings jointly, in principle, meet the second condition set out in Article 5(1) of Directive 2001/23. It must be established not only that the primary objective of these proceedings is to achieve the highest possible payment to the joint creditors, but also that the implementation of the liquidation through a transfer of the business or a part thereof as a going concern, as prepared in the pre-pack proceedings and implemented following the bankruptcy proceedings makes it possible to achieve this primary objective. Finally, the CJEU ruled that the conditions of Article 5(1) of Directive 2001/23 can be satisfied when bankruptcy proceedings are prepared in pre-pack proceedings, provided that the pre-pack proceedings are governed by statutory or regulatory provisions.

The judgment in Heiploeg demonstrated that pre-pack proceedings, once provided for by law, can fall under the scope of the exception of Article 5(1) of Directive 2001/23. From the perspective of the parties involved in the bankruptcy, who benefit from having the harm or loss limited as much as possible and seeing the highest possible proceeds, it is good to see that EU law wants reinstate the pre-pack practice through the Proposal after the same EU law saw it unseated earlier.

I refer to the attached article published in the Dutch review Tijdschrift voor Insolventierecht (2023, 3/14), 'Proposal for European rules on pre-pack proceedings should be supported'. In this article, I have discussed and commented the Proposal. I also have given a number of suggestions for additional provisions with reference to the Dutch proposal for pre-pack legislation:

This article was first published in Tijdschrift voor Insolventierecht:

M.R. van Zanten, 'Proposal for European rules on pre-pack proceedings should be supported' published in May 2023 in Tijdschrift voor Insolventierecht, number 3 (Special), 2023/14, p. 99-108, available here: https://nvrii.nl/wp-content/uploads/2023/05/TVI_2023_03_V2A_congresversie.pdf

For more information, contact your CMS client partner or CMS expert: Marc van Zanten

The future of pre-pack sales in Luxembourg

On 7 December 2022, the EU Commission issued a proposal for a directive harmonising certain aspects of insolvency law (the Draft Directive). One key aspect of this Draft Directive is the regulation of pre-pack proceedings.

In the absence of any currently existing pre-pack procedure, this means that such a procedure will ultimately need to be introduced in Luxembourg law. Furthermore, pre-pack sales may have a more immediate future through Luxembourg Bill No. 6539 A, which entirely revamps Luxembourg insolvency law and should be passed in the near future.

1. What is a pre-pack sale?

Although they take various forms around the world, pre-pack sales typically consist in the sale of a debtor’s business (or part of it), which is prepared and negotiated before the formal opening of the insolvency proceedings with the sale executed shortly thereafter. The goal is to maximise recovery value for creditors with the idea that a business sold before the opening of insolvency proceedings is likely to have more value before impacted by the insolvency proceedings.

2. The quasi-impossibility of pre-pack sales under current Luxembourg insolvency law

Luxembourg law currently does not include any specific pre-pack procedure.

Also, contrary to other countries where pre-pack sales have arisen as an unregulated practice of insolvency practitioners to maximise recovery value for creditors, current Luxembourg law makes pre-pack sales almost impossible in practice due to the lack of modern and adequate reorganisation proceedings.

Apart from bankruptcy proceedings, which aim at the liquidation of the insolvent company, Luxembourg law knows of two insolvency procedures: the composition with creditors and controlled management; and a pre-insolvency procedure that is called the stay of payments procedure.

We will not address here the many technical reasons why these procedures are inadequate except to point out that in the recent years, Luxembourg courts have almost never ordered them. This fact says as much about their lack of appeal for debtors as about the difficulty to meet the required criteria for opening these procedures.

The consequence of this is that, apart from a few rare exceptions, insolvency in Luxembourg leads almost inevitably to a winding-up of the debtor.

The sale of a debtor’s assets in a bankruptcy context is carried out by the insolvency practitioner and requires either the authorisation of the supervisory judge (juge-commissaire) for movable assets subject to perishment or imminent depreciation, or the authorisation of the District Court, which rules upon a report drafted by the supervisory judge for other assets.

This makes the job of the insolvency practitioner particularly difficult given that the practitioner usually knows nothing about the debtor’s business when appointed and that time is of the essence, such as for perishable assets or for businesses likely to be impacted by the opening of insolvency proceedings.

Also, there are no specific rules governing the sale of businesses, which means the debtor’s assets are usually sold piece by piece.

Clearly, the current insolvency regime is not optimal when it comes to maximising recovery value for creditors.

A mitigating factor in this conclusion is the fact that many financing and restructuring transactions in Luxembourg involve financial collateral arrangements, which – since the transposition in Luxembourg of the Directive 2002/47/EC on financial collateral arrangements by the Law of 5 August 2005 – allow for out-of-court enforcement and are hence immune from most aspects of insolvency law.

3. The possibility of pre-pack sales with Bill No. 6539 A

Fortunately, Luxembourg is in the process of substantially reforming its insolvency laws with Bill No. 6539A. Inspired by Belgium law, this Bill will transpose the EU Directive on restructuring and insolvency and inter alia introduce a new judicial reorganisation procedure (known as the JRP).

A JRP can have three goals (with the understanding that separate goals can apply to separate businesses or parts of a business):

• reaching an agreement with creditors;
• allowing the transfer by way of judicial order of all or part of the debtor’s assets or businesses; or
• seeking the agreement of creditors on a reorganisation plan, which may include the sale of all or part of the debtor’s assets or businesses.

In the latter case, Bill No. 6539 A includes a set of rules regulating and facilitating the transfer of businesses, not just of assets. The sale, however, will still require a judicial order from the District Court, which will rule on the basis of a report drafted by the judicially appointed agent in charge of organising the sale and a report drafted by a “delegated judge” in charge of overseeing the sale.

While Bill No. 6539A in its current version does not include any pre-pack procedure debtors will de facto be incentivised to prepare the sale ahead of the filing for a JRP so that the sale can be executed as soon as possible after the opening. In that context, debtors will also have the option of requesting the appointment by the Minister of Economy of a conciliator (conciliateur d’entreprise) to assist in the preparation of the sale ahead of the opening of a JRP and ultimately to serve as the judicially appointed agent to speed up the process.

4. The Draft Directive's regulation of pre-pack sales

The Draft Directive will require the inclusion of a new pre-pack procedure in Luxembourg law.

This procedure includes two separate phases:

• A preparation phase, which aims at finding an appropriate buyer for the debtor’s business or part thereof.

During this phase, a judicially appointed monitor will be tasked with documenting and reporting the sale process, ensuring that it is competitive, transparent, fair and meets market standards, recommending the best bidder and justifying why the bid meets the interest criterion of the creditor.

During this phase, which does not qualify as an insolvency procedure, the debtor retains control over its assets and business. Also, the debtor may benefit during this phase of a stay of individual enforcement actions when it is insolvent or in a situation of likely insolvency.

Typically, this phase remains confidential (although confidentiality is not a requirement of the Draft Directive).

• A liquidation phase, which aims at having the sale judicially approved and executed and distributing the proceeds to the creditors.

The liquidation phase qualifies as an insolvency procedure so that its opening will be made public. Also, the monitor who has prepared the sale during the preparation phase is appointed as insolvency practitioner for the purpose of the liquidation phase.

The Draft Directive also includes various safeguards in connection with both phases of the procedure that regard rules on offers made by parties closely related to the debtor, interim financing and creditor rights.

The Luxembourg legislator has not yet reacted to the Draft Directive, and it is unknown at this stage whether it will delay the adoption of long-overdue Bill No. 6539 A, in order to anticipate the transposition of the Draft Directive.

For more information, contact your CMS client partner or CMS expert: Antoine Reillier