Pre-pack procedure in Italy and France: legislation gaps and possible applications

Pre-pack proceedings in France: Are they the best of two worlds?

Implemented by an order dated 12 March 2014, French pre-pack proceedings were created either to impose the execution of a turnaround plan drafted before any insolvency proceedings can be opened or to prepare for the sale of a company in difficulty. The proceedings are segmented into two phases: an amicable confidential phase followed by a judicial and public phase. Despite their efficiency,  such pre-pack plans are not numerous in France due to the success rate of amicable restructurings. The new rules contained within Title IV of the draft Directive dated 7 December 2022 published by the European Commission should not disrupt the French legal landscape on this topic.

2. The pre-pack plan: breaking free from consensualism

The implementation of the pre-pack plan is preceded by an amicable phase (mandat ad hoc or conciliation, two French amicable procedures) during which a turnaround plan (e.g. debt waive-off or standstill, new contribution of money in debt or capital, etc.) is prepared. In fact, the French system encourages addressing financial difficulties at an early stage. French amicable proceedings are governed by consensualism and some stakeholders may refuse to agree to execute the draft agreement. Thus, if the debtor is confident that its plan will be adopted (particularly regarding principles set out in the Directive (EU) 2019/1023 of the European Parliament and of the Council dated 20 June 2019 and transposed into French law by an order dated 15 September 2021), it can request the Commercial Court to open French insolvency proceedings and have the plan previously negotiated adopted by the same Court in order to overcome the refusals of the dissenting signatories. Indeed, the rules allowing the adoption of the plan within a French insolvency proceeding do not require the unanimous agreement of the affected parties.

There is a special French procedure for this purpose (sauvegarde accélérée), which carries the precondition that an agreement must have been reached with creditors whereby the agreement can be adopted within the context of the French insolvency proceedings pursuant to the voting rules applicable to classes of affected parties.

The new concepts introduced into French law by the transposition of Directive n°2019/1023 allow practitioners to be ingenious in anticipating, during the out-of-court phase, a segmentation of creditors into different classes of affected parties, according to a scheme that would secure the adoption of the plan by a Commercial Court if the majority rules are applicable. Such maneuvers are often detrimental to creditors who are least protected by the best-interest-of-creditors test.

2. The “pre-pack cession”: fast and efficient

Similar to the pre-pack plan, the sale of a business as a going concern can be anticipated and prepared within a secure amicable framework before being implemented within the framework of a French insolvency proceeding.

In this particular context, the insolvency practitioner appointed by the President of the Commercial Court to monitor the out-of-court proceedings prepares the conditions of the assignment with one or more identified bidders, usually with the assistance of an investment bank or M&A advisor. The bidders carry out their due diligence quickly and provide the monitor with their offer to take over the company's assets and activities, which complies with the rules applicable in the framework of a French insolvency proceedings.

The advantage lies in the confidentiality associated with the search for buyers. At this stage, the debtor is not in public insolvency proceedings, which makes it possible to preserve the value of its assets and avoid the deleterious effects of the opening of insolvency proceedings.

The offer must meet all the criteria listed in the law (e.g. it must be valid, list the cherry-picked assets, the jobs taken over). There is genuine preparation for a judicial sale.

So, in general terms, French law has already incorporated many of the new features proposed by the draft Directive dated 7 December 2022 (i.e. segmentation into two phases, appointment of an insolvency practitioner, assignment of the assets/activities, etc.). Specific points will still need to be clarified from a French law perspective. Examples include the need to demonstrate that the search for a buyer during the amicable phase was transparent, which is already a point of contention in France, even though the procedure is confidential, or whether the status of the buyer is "closely related to the debtor" since French law restricts the rights of specific parties close to the debtor to acquire its activity.

For more information on pre-pack procedures in France, contact your CMS client partner or these CMS experts: Guillaume Boute and Leo Gironde

Pre-pack procedure in Italy: legislation gaps and possible applications

The European Commission proposal for the directive published on 7 December 2022 (the “Proposed Directive”) seeks to increase harmonisation of insolvency legislation of EU member states, providing common rules on: (a) avoidance actions; (b) the tracing of assets belonging to the insolvency estate; (c) pre-pack proceedings; (d) the duty of directors to submit a request for the opening of insolvency proceedings; (e) simplified winding-up proceedings for microenterprises; (f) creditors’ committees; (g) the drawing-up of a key information factsheet by member states on certain elements of their national law on insolvency proceedings.

Italy had previously implemented most of the measures requested at the EU level with Regulation 2015/848 and Directive 2019/1023 through several structural changes to the insolvency law, which dated back to 1942 and is now completely re-organised on the basis of terminological amendments aimed at “rebranding” insolvency law. This “Code of Crisis and Insolvency” (CCI) actually addresses some of the matters in the Proposed Directive.

The reform has not introduced specific rules on pre-pack sales though, which are supposed to be structured as the sale of the debtor’s business (or part thereof) as a going concern, negotiated before the formal opening of insolvency proceedings and implemented quickly afterwards, although certain provisions under the CCI and past practices already contemplate and allow the use of similar instruments.

According to the Proposed Directive, in the pre-pack proceedings, the debtor’s business or part thereof is sold as a going concern under a contract that is negotiated confidentially prior to the commencement of an insolvency proceeding under the supervision of a monitor appointed by a court and followed by a brief insolvency proceeding in which the pre-negotiated sale is formally authorised and executed.

The pre-pack procedure is structured in two different stages: (i) an out-of-court preparation phase under the supervision of the monitor; and (ii) a court liquidation phase, expressly qualified by the Proposed Directive as an insolvency procedure.

Essentially, it contemplates (i) the organisation of the restructuring of the indebtedness prior to the opening of the procedure; (ii) financial support to the continuity of the debtor’s business; and (iii) the competitive sale of the business to a third parties through a system aimed at ensuring achievement of the best possible market value as envisaged by the Proposed Directive.

The Italian CCI expressly provides for a mechanism that is comparable to pre-pack proceedings and can be applied in the composizione negoziata della crisi impresa (negotiated settlement procedure) and the concordato semplificato (simplified composition with creditor) procedures.

The composizione negoziata is an out-of-court procedure aimed at the early managing of the unbalance situation of a distressed company that will not be dispossessed of its management.

The scope of this procedure is the fast restoration of the company's full business continuity, which may be achieved through the accelerated sale of the business (or specific business units) to be carried out in compliance with specific rules to ensure the fairness and competitiveness of the sale under the supervision of an expert not appointed by the court.

The sale normally occurs under the sanction of the Court (if the company has asked for protective measures such as moratoria, prohibition for suppliers to terminate supply contracts, etc.) since in this case ordinary Italian rules do not apply, which are applicable to the sale of business as a going concern (article 2560 of the Civil Code) and oblige the buyer to succeed in all existing debts attached to the transferred business. It is debated whether such an exemption applies also to tax debts. The sale, however, cannot prejudice the position of the workforce that as a general rule must be maintained within the transferred business.

An important difference compared to the pre-pack procedure set out under the Proposed Directive is that the distressed company may also dispose of its business without the Court’s approval if it has not applied for protective measures. In this case, the exemption from article 2560 of the Civil Code does not apply to the effect that the transferred business will not be free from existing debts.

Similarly to the pre-pack procedure set out under the Proposed Directive, during the composizione negoziata, the debtor is not dispossessed from the business and, as mentioned above, the Court may request protective measures if they are deemed necessary to protect business continuity.

Also, concordato semplificato, which is a liquidation procedure to which the company may resort only if it has firstly applied for composizione negoziata, provides that, if contemplated by the liquidation plan, the Court may authorise the sale of the business or a business unit to a pre-identified buyer, but only after having verified the absence of more favorable options and upon the Court homologation of the concordato semplificato plan.

Of note, some forms of pre-pack procedures were and are still used in insolvency practices even if not expressly regulated. They are, however, used outside the specific cases described above.

For example, it still common that a company in distress leases its business (or a part thereof) to a third party (a competitor or even a big client) in order to preserve its business continuity providing for a purchase option at a pre-determined price. The company may eventually resort to pre-insolvency procedures like a composition with creditors, which include concordato preventivo, a composition with creditors procedure different from the concordato semplificato mentioned above, or the ristrutturazione del debito procedure, which is more often settled out-of-court than a concordato. Or the company may go bankrupt, in which case the lease may survive but the purchase option is normally not enforceable and the relevant purchase price is taken as mere reference for a competitive sale to which any interested buyer can participate (and the option holder has no pre-emption right). In this case, except as otherwise provided for in the bidding rules, the selected bidder will buy the business free of any existing debts that will be paid out under the relevant insolvency or pre-insolvency procedure according to their ranking.

Given the above, the Italian legislator will likely make slight amendments to the current legislation to properly regulate the out-of-court preparation phase. However, it is not foreseeable whether for the sale process to be implemented in the court liquidation phase the amended legislation will opt for a high standard to “ensure that the sale process carried out during the preparation phase is competitive, transparent, fair and meets market standards” or whether the amendment will decide to opt for the public auction in the liquidation phase.

For more information on Italy's Code of Crisis and Insolvency and expended amendments to Italian law, contact your CMS client partner or local CMS experts: Paolo Bonolis, Gianfabio Florio