Europe-wide harmonisation of insolvency law and pre-pack proceedings: A view from Germany
Thorsten Hunsalzer
by Thorsten Hunsalzer
Thorsten Hunsalzer is an attorney, specialist solicitor for insolvency law, managing partner and associate at Gehrke Econ, and a former insolvency administrator. He has almost 20 years’ experience in corporate restructuring, turnaround, M&A and due diligence. His focus is on avoiding insolvency proceedings. Contact Thorsten.
The old pre-pack plan
Pre-pack means that a pre-packed insolvency plan is submitted to the insolvency court at the same time as the insolvency application, and this procedure has been used for some time in Germany. The purpose of a pre-pack is to accelerate the proceedings. Activities usually undertaken during the (preliminary) insolvency proceedings are already completed before the insolvency application is submitted. The appointed insolvency expert immediately receives all documents in order to prepare their expert report as quickly as possible. The insolvency court has the option to open the insolvency proceedings quickly and to enable fast decisions by the creditors.
The purpose of a pre-pack plan is to limit the ability of others to influence the result of the proceedings. Third parties have no time to check the company (due diligence) and make a risk-free offer to acquire the company. This is especially relevant if a self-administration is chosen in which the previous managing director remains in office, and the self-administration is not published. Other potential buyers will not take any notice of the option to buy the debtor's company. The chance that the debtor's pre-pack plan will be implemented increases significantly.
It should be noted that the creditors must agree to the debtor's plan. They can also demand that other restructuring options be examined, such as search for other buyers (dual-track).
New pre-pack proceedings
The EU Commission’s draft directive of 07 December 2022 contains several ideas for the harmonisation of insolvency law. These include, for example, insolvency avoidance, asset tracing, director liability, simplified winding-up proceedings for micro-enterprises, and pre-pack proceedings.
The Art. 19 proposal contains the specification of pre-pack proceedings divided into a preparation phase and a liquidation phase. In the preparation phase, a buyer is to be found to whom the company will be sold in the liquidation phase. This intention differs from the previous practice in Germany of securing the company for the previous shareholders. Furthermore, the procedure is formalised and documentation is determined by an appointed monitor. This creates a competitive and transparent procedure with a sale to the highest bidder. For Germany, this means, above all, creditor protection and a higher acceptance of the pre-pack proceedings. Art. 34 is dedicated solely to creditor protection interests.
Both the old pre-pack plan and the expected new pre-pack proceedings represent an exciting restructuring tool in an international context. Companies which make early efforts to restructure will also be rewarded by this.
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