Pre-pack insolvency

A (large) company that concludes that its insolvency is inevitable may request the court to appoint a silent administrator (beoogd curator). That silent administrator examines whether a going-concern sale and business restart after insolvency may be feasible. In this way, a restructuring can be prepared discreetly, without the adverse effects typically associated with a public insolvency filing.

How does a pre-pack insolvency work?

In an ordinary insolvency proceeding, substantial destruction of value often occurs immediately upon the declaration of bankruptcy, for example as a result of negative publicity and the consequent rapid erosion of goodwill. If there is a realistic possibility of a going-concern restart, swift action is usually required. Suppliers and customers will, after a period of continued uncertainty, quickly seek alternatives elsewhere. The going-concern value therefore diminishes by the day. If the intended insolvency practitioner has already had the opportunity, in his or her capacity as silent administrator, to explore the various options for a restart before the bankruptcy order is made, the eventual sale or restart may yield a significantly better return. This may result not only in a higher purchase price, but also in the preservation of more employment. A pre-pack can therefore help avoid unnecessary destruction of value.

During the pre-pack phase, the intended insolvency practitioner is clearly not acting as adviser to the debtor. As in an insolvency, he or she must be guided by the interests of the joint creditors. However, the intended insolvency practitioner may provide the debtor with clarity as to whether the existing plans for a sale or restart of the business after the declaration of bankruptcy are feasible. This provides much-needed certainty.

Under current Dutch law, the pre-pack remains without a general statutory basis. As a result, the pre-pack has not been uniformly available in practice, and several Dutch courts no longer cooperate with pre-pack procedures. Its legal framework has also been shaped by case law, including the position of employees in pre-pack-related transfers of undertaking. In addition, legislative efforts have been made to regulate the pre-pack more formally.

But as matters currently stand, the pre-pack is still encountered in practice, but only to a limited extent and not as a generally available, statutorily codified tool. Its use depends on the willingness of the competent court to cooperate and is therefore not uniform across the Netherlands.

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