Developments in Europe for pre-pack proceedings

News Update Employment & Pensions

Developments in Europe for pre-pack proceedings
3 February 2023

On 7 December 2022, the European Commission put forward a proposal for a Directive aimed at increasing the predictability and efficiency of insolvency proceedings.

Pre-pack proceedings form a major element of the proposed directive to harmonise insolvency proceedings. 

Pre-pack proceedings concern a practice developed for undertakings whose bankruptcy is unavoidable. In a pre-pack, a prospective insolvency administrator examines, under the supervision of a prospective supervisory judge, whether a restart of the undertaking is possible following a declaration of bankruptcy. If this is the case, the undertaking can be quickly restarted following the bankruptcy, because in practice the undertaking or parts of it are sold. During the proceedings, the insolvency administrator and supervisory judge endeavour to secure the highest possible return for the creditors of the bankrupt undertaking, while also preserving employment as far as possible.

The Dutch legislature wishes to create a legal basis for the pre-pack with the 'bill for the continuity of undertakings I' (Wetsvoorstel continuïteit ondernemingen I, WCO I). In the draft 'bill for the transfer of undertakings in bankruptcy' (Wetsvoorstel overgang van onderneming in faillissement, WOVOF) the legislature wishes to lay down that a pre-pack restart entails, in principle, all affected employees being transferred to the purchaser while retaining their rights, with the purchaser having the option not to take on all employees for economic, technical or organisational (ETO) reasons. If the purchaser does not take on all the employees, additional procedural requirements will apply.

The debate on both bills was suspended for some time while awaiting the outcome of the Heiploeg case, which was to give a definitive answer as to whether in pre-pack proceedings an undertaking can be transferred with the result that all employees are transferred by law to the ‘new’ restarted company while retaining all their rights and obligations. 

On 28 April 2022, the European Court of Justice ruled in the Heiploeg case that the purchaser of the bankrupt undertaking is not required to take on all the employees, provided that the pre-pack proceedings concern liquidation and have a statutory or regulatory basis. 

The European Commission’s proposal is in line with the Heiploeg case. The proposal clarifies that the liquidation phase of pre-pack proceedings should be regarded as bankruptcy or insolvency proceedings with the aim of liquidating the assets of the transferor under the supervision of a competent public authority. In addition, the proposal states that the court plays an important role in the pre-pack.

Under the proposal, Member States are required to include pre-pack proceedings in their insolvency regime, consisting of two successive phases: the ‘preparation phase’ and the ‘liquidation phase’. 

The aim of the preparation phase is to find a suitable party to whom the debtor’s undertaking, or a part of it, can be sold as a going concern. The aim of the liquidation phase is to approve and conduct the sale of the undertaking and pay the proceeds to the creditors. 

In addition, under the proposal the directors are required to submit a request for the opening of insolvency proceedings no later than three months after they have become aware (or should reasonably have been aware) that the undertaking is insolvent. If they fail to do so, the directors may be held liable for any resulting loss suffered by the creditors.

The Dutch legislature will have to consider the extent to which the WCO I and WOVOF bills need to be amended in response to the European Commission’s proposal for a directive to harmonise insolvency proceedings.

Jet Stolk has previously discussed the Heiploeg case in a podcast (only in Dutch).

Written by:

Key Contact

Advocaat | Partner