(Originally published in the online magazine RestructuringBusiness : The Pre-Pack Procedure – Deutscher AnwaltSpiegel )
On December 7th, 2022, the EU Commission published a draft directive for the harmonization of certain aspects of insolvency law [Com (2022) 702 final]. The overarching goal of the draft and the resulting directive is to further promote the capital markets union in Europe and to strengthen the European internal market. The harmonization of insolvency law plays an important role here. Creditors, investors and investors should find uniform investment protection and a comparable legal framework in a potential insolvency scenario in Europe.
This should make cross-border investments more attractive.
To this end, the EU has already implemented various insolvency legislation. These are the European Insolvency Regulation (EUInsVO) and the Directive (EU) 2019/1023 on the preventive restructuring framework, which the German legislator codified with the StaRUG at the beginning of 2021. With the new draft directive, the substantive insolvency law in the member states is to be harmonized in certain areas.
The draft policy regulates the following seven areas:
- insolvency challenge law
- Asset Tracking
- Company sales negotiated before insolvency (pre-pack procedure)
- Obligations to file for insolvency
- Simplified liquidation of insolvent micro-enterprises
- Creditors’ Committees
- Transparency measures on national insolvency law
The draft shows some parallels to German insolvency law. In particular, the provisions on the right to contest, the obligation to submit an application and the creditors’ committees are already largely contained in German law. On the other hand, the regulations for tracing assets, the pre-pack procedure and the simplifications in the event of insolvency of micro-enterprises are new. In the following, the pre-pack procedure, its procedure and planned legal privileges are presented and discussed how this new procedure fits into German law.
The pre-pack procedure is a company sale prepared in advance of insolvency, which is carried out when insolvency proceedings are opened. This is intended to shorten the duration of the insolvency proceedings and avoid the so-called insolvency stigma. This procedure already exists in some European countries, such as Poland. In Germany, this procedure has not yet been institutionalized, but it is actually used by a so-called transferrable restructuring.
After the presentation of the EU draft directive, the pre-pack procedure is divided into a preparation phase and a liquidation phase. During the preparation phase – as the name suggests – the sale is prepared. The debtor should retain the power of disposal over his assets and the management authority. A so-called monitor is placed next to it. In the German version, this monitor is referred to as a guardian, but this should not be confused with the guardian in the context of so-called self-administration. The terminological agreement between these two personal designations is probably due to the original English text of the draft directive.
The administrator must essentially accompany the sales process. To do this, he must document the process, check the market and competition standard, select the best bid and confirm that the selected bid is in the best interests of the creditors, and in particular that it does not achieve a worse value than in a so-called individual liquidation. In the latter case, however, he only has to confirm that there is no obvious violation. The administrator must have the same professional qualifications as an insolvency administrator and can be appointed as insolvency administrator in the subsequent liquidation phase.
With the opening of insolvency proceedings, the sale is completed and approved by the responsible court. Basically, the buyer acquires the company, or the essential parts of the company, debt-free. The unfulfilled contracts required for the continuation of operations are transferred to the purchaser without the need for the consent of the contractual partner. This is a major innovation in the pre-pack regulations compared to the previous regulations in Germany.
There are some favorable regulations for carrying out the pre-pack procedure. This includes that enforcement measures can be prohibited during the preparatory phase, interim financing that is important for the implementation of the procedure is privileged and a so-called credit bid is permissible under certain conditions. Creditors can (partially) offset their outstanding claims against the debtor against the purchase price claim. With receivables from the interim financing, for example, this is possible without restrictions. Persons close to you, such as spouses or shareholders, may also bid in the sales process. However, in order to prevent any “taste” because these people have an information advantage and can therefore place a bid more quickly, certain regulations must be observed to prevent misuse. For example, they must disclose their status as a related party and the other bidders must be given sufficient time to bid.
On closer inspection, the regulations on the pre-pack procedure can essentially be integrated into the existing structure of German insolvency law, in particular into the preliminary procedure. A separate law will not necessarily be required for this. Some changes in the InsO are of course necessary, such as the transfer of operationally necessary contracts, the regulations on interim financing and the involvement of related parties. Other regulations, such as protection from enforcement, already exist in Section 21 Paragraph 2 No. 5 InsO.
From a German point of view, the draft directive does not contain many substantial innovations. The structure of the pre-pack procedure, which is fundamentally new in German law, has already been created and is actually used with the transferred restructuring. This seems to show that German insolvency law already meets the minimum standard desirable from a European perspective. Of course, the requirements of minimum harmonization also affect the other member states. It remains to be seen how the further legislative procedure will develop and how the member states and other European bodies (Council and European Parliament) will react to the draft. Certainly there will be some changes
For further information, please contact:
Dr. Sven Schelo, Partner, Linklaters