The pre-pack was widely used as a restructuring tool in the Netherlands in the aftermath of the global financial crisis. The process was developed by the Dutch restructuring market and facilitated by the majority of Dutch courts.
However, as a consequence of the judgment of the European Court of Justice (ECJ) in the Estro-case in 2017, the use of pre-packs had almost disappeared in the Netherlands. In short, the judgment resulted in the Dutch pre-pack no longer being deemed a feasible restructuring tool in restructurings where the workforce needed reshaping, which was typically the case. But then, the ECJ’s judgment in the Heiploeg-case in 2022 opened the door for using the Dutch pre-pack restructurings where the purchaser does not require or wish to take over all employees together with the business from the debtor. One of the requirements posed by the ECJ is that the Dutch pre-pack process must have a statutory basis.
Although the Dutch legislature had already been preparing pieces of legislation that are relevant to the Dutch pre-pack (which were paused because of the Estro case), the Dutch pre-pack has no statutory basis yet.
In December 2022, the Proposal for a EU Directive harmonising certain aspects of insolvency law (the Proposal Directive) was published. The Proposal Directive prescribes, among other things, that Member States of the European Union provide for a pre-pack procedure in their legislation. The Dutch legislature is now expected to pick up the gauntlet again, by finalising the draft bill ‘Act on Continuity of Enterprises I’ (Wet Continuïteit Ondernemingen I; WCO I). WCO I sought to codify the Dutch pre-pack process.
In short, that process is as follows:
- a debtor in financial distress negotiates and prepares an asset transaction, in which negotiations and preparations are monitored by a court-appointed prospective bankruptcy trustee and a court-appointed prospective supervisory judge;
- when the transaction is negotiated and prepared, the debtor files for bankruptcy and the court appoints the prospective bankruptcy trustee and prospective supervisory judge as the actual bankruptcy trustee and supervisory judge respectively; and[1]
- once the bankruptcy is declared, the bankruptcy trustee signs and completes the transaction, transferring the business of the debtor (or parts thereof) to the purchaser as soon as possible and subsequently liquidates the debtor.
The Proposal Directive prescribes a process that is in line with the existing Dutch pre-pack procedure, consisting of two phases and having a court-appointed official monitor the first phase (the preparation phase) and appointing that official as insolvency practitioner in the second phase (the liquidation phase) of the process.
However, the Proposal Directive prescribes a number of features that are not yet available in the Dutch process and are not included in WCO I, but which are expected to contribute to the best possible outcome of a pre-pack process. These include:
- giving the court an ability on request to declare a stay of individual enforcement actions in the phase during which the sale of the business is prepared;
- ensuring the assignment of executory contracts which are necessary for the continuation of the debtor’s business and granting the courts the ability to terminate those executory contracts where that is in the interest of the business or where the purchaser is unable to meet the obligations under those contracts;
- ensuring that measures to maximize the value of the business, such as providing a regime relating to interim financing, ensuring that no pre-emption rights can be used by bidders and allowing for credit-bidding (albeit under certain circumstances);.
The Proposal Directive does also prescribe certain elements of the pre-pack procedure, which may (depending on the manner of implementation by the Dutch legislature) affect the efficiency of the Dutch pre-pack compared to current practice and WCO I. For example, the Proposal Directive requires that sale process carried out during the preparation phase is competitive, transparent, fair and meets market standards or, alternatively, a public auction must be held in the liquidation phase. WCO I may need amendment to comply with the Proposal Directive, given that Dutch pre-packs were often prepared in secrecy and the bankruptcy trustee would finalise the transaction after the bankruptcy being declared without having an auction taking place. Also, the Proposal Directive prescribes that creditors and shareholders of the debtor have the right to be heard by the court prior to the sale of the business, which is not the case under the current Dutch pre-pack process and which may affect its efficiency.
Regardless of what the implementation of the Proposal Directive (once adopted) will look like exactly, it is fair to say that the (Dutch) restructuring market is eagerly awaiting the revival of the Dutch pre-pack!
[1] A more extensive article on the judgments of the ECJ mentioned here was published in the Restructuring Newswire.