EU member states’ different and unharmonized insolvency and restructuring laws have long been regarded as one of the greatest obstacles to the free movement of capital in the EU. That is within the EU in general and to cross-border investments from third countries. On 7 December 2022, the European Commission published a proposal for a Directive harmonising certain aspects of insolvency law, with the aim to further financial and economic integration in the EU, including to reduce legal uncertainties for investors in cross-border investments.
The topics put forward for harmonisation are avoidance actions, tracing of assets belonging to the insolvent estate, director’s duty to request the opening of insolvency proceedings (and civil liability), the winding-up of microenterprises, creditors’ committee and measures enhancing transparency of national insolvency laws. A central topic is also the introduction of a pre-pack procedure to quietly prepare for bankruptcy in order to achieve the highest possible return for creditors.
Title IV of the Directive deals with “pre-pack proceedings”, in which the sale of the debtor’s business (or part of it) are prepared, negotiated (referred to as the “preparation phase”) and executed (referred to as the “liquidation phase”) before the formal opening of insolvency proceedings. Pre-pack then comes down to an accelerated liquidation procedure in which the debtor is wholly or partially sold as a going concern. The assumption is that more value can be recovered in liquidation by selling the business (or part thereof) as a going concern rather than by a piecemeal liquidation.
During the preparation phase, a suitable buyer for the company is sought, with the debtor retaining full control and disposal of his assets (DIP, or: debtor in possession). This phase also includes the possibility of a cooling-off period that is identical to the “stay” of the Restructuring Directive 2019/1023, which by the end of 2024 had been implemented in all EU countries (except Denmark).
In the liquidation phase, the purchase and sale are concluded and executed. This phase is expressly designated as an insolvency procedure within the meaning of the Insolvency Regulation (Recast) (EU 2015/848) and as a bankruptcy procedure or similar procedure within the meaning of Article 5 Paragraph 1 of the Transfer of Undertakings Directive (2001/23/EC). In doing so, the proposed directive codifies case law of the Court of Justice of the EU, so that there should be no doubt that the ‘bankruptcy exception’ of Directive 2001/23 applies to this procedure.
At the request of the debtor, the court appoints a so-called monitor, who documents and reports the sales process. The monitor, who must be appointed as insolvency practitioner in the possible liquidation phase, may be liable for the damages suffered by creditors or third parties as a result of the breach of his obligations.
The sales process must be competitive, transparent and fair, in line with market standards. This means that the process has to be compatible with the standard rules and practices on mergers and acquisitions in the member state concerned, including an invitation to potentially interested parties to participate in the sale process, disclosing the same information to potential buyers, enabling the exercise of due diligence by interested acquirers, and obtaining offers from the interested parties through a structured process. In connection with possible applicable competition law, the proposal includes a provision to avoid unnecessary delays in the sales process.
The intended sale must be submitted to the court and the monitor must inform the court about the bid and the added value of the going concern sale. The proposed Directive also allows member states to opt for a public auction of the business or part thereof during the liquidation phase. The best bid from the preparatory phase can function as a stalking horse bid, which is a bid arranged in advance of an auction to act as a reserve bid. The intent is to maximize the value of a debtor’s assets or avoid low bids, as part of the auction. To ensure that the best bid wins, preferential rights with respect to the debtor are prohibited. These pre-emption rights in the course of the sale process would distort competition in the pre-pack proceedings. Potential bidders might, for this reason, abstain from bidding. Holders of pre-emption rights that were granted prior to the commencement of the pre-pack proceedings, instead of invoking their option, should be invited to participate in the bidding.
Additional provisions set out safeguards for cases where the prospective buyer is a party closely related to the debtor. The additional safeguards include an obligation for the insolvency practitioner to assess, in situations where the only offer comes from a closely related party, if the offer satisfies the best-interest-of-creditors test. If this assessment results in a negative conclusion, the offer should be rejected by the insolvency practitioner.
Creditors and shareholders have the right to be heard before the court approves the sale. This right may be limited with respect to parties that cannot expect a payment in a liquidation and with respect to counterparties that are entitled to full payment under the pre-pack.
To generate maximum revenue, the proposal also contains a number of other provisions. The buyer of the company must be able to acquire it free of any debt that the buyer has not expressly accepted. Reciprocal agreements necessary for the continuation of the company can also be transferred to the buyer without the consent of the other party, regardless of the law applicable to the agreements. All this is different if the buyer is a competitor of the other party. In addition, the court can also terminate such agreements if doing so is in the interest of the company or if the agreement concerns the provision of public services and the buyer of the company does not meet the requirements to take over this obligation.
License agreements relating to intellectual property rights are exempt from the possibility of termination in the interest of the company. Remarkably, the proposed regulation is a clear infringement of freedom of contract. The question is of course whether the possible value-enhancing effect justifies this infringement.
Two years (and European elections) after the proposal for a Directive came about in December 2022, it is being dealt with by member states. In the Netherlands, for example, it has been noted with regard to the pre-pack proposals that they do not leave sufficient flexibility for member states to maintain existing arrangements (such as the Dutch scheme on turbo-liquidation) or to take additional measures (such as the Dutch pre-pack procedure for which a legislative process on the protection of employee rights is already underway).
On 25 November 2024, it was announced that the Council now settled its position on the key elements in relation to avoidance actions, asset tracing, including insolvency practitioners’ access to beneficial ownership registers and certain national registers and databases, and directors’ duty. The Council has ensured that directors must submit the request for the opening of insolvency proceedings within three months of becoming aware that the company is in financial distress. Member states may also provide that this obligation is suspended if they take measures that are designed to avoid damages to the creditors of the insolvent company and ensure a level of protection of creditors that is equivalent to the protection provided by the duty to file for insolvency proceedings.
The pre-pack proposals were again on the table on 7 March 2025. In particular, the proposals regarding the automatic transfers of executory contracts were discussed. In the context of the nature of a pre-pack proceeding (preparation of the sale of the debtor’s business prepared and negotiated before the formal opening of the insolvency proceedings; the execution of the sale and obtain the proceeds in a swift manner) the transfer of executory contracts means that contracts which are essential for the continuation of the business are automatically transferred from the debtor to the buyer of the business without the consent of the debtor’s counterparty. Indeed, the principle of freedom of contracts had the interest of many around the table. Although the importance of keeping the existing contracts in force to continue the business post-insolvency was recognized, it was concluded that further technical work is needed to define exceptions to the general rule of automatic contract transfer.
The Council aims to reach a general approach on the full proposal by the end of the Polish presidency’s term. But it could be done by Denmark (July-December 2025) of even Cyprus’ (January 2026-June 2026) presidency? Whatever the case, the place and time of the final agreement (between European Parliament, Commission and Council) is not yet known.
References
Proposal for a Directive harmonising certain aspects of insolvency law
COM/2022/702 final
https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A52022PC0702
https://www.consilium.europa.eu/en/meetings/jha/2025/03/07/
This is a slightly adapted version of a regular column Bob Wessels is writing for Global Restructuring Review (GRR) on the topic of cross-border restructuring and insolvency in a European context. GRR is a subscription-only publication and the column appeared in GRR of 21 March 2025. See www.globalrestructuringreview.com.