Directive for the harmonisation of certain aspects of insolvency law

1. Harmonization of Pre-packs

The European Union seeks to harmonize European Insolvency Law. It has proposed a Directive for the harmonisation of certain aspects of insolvency law across Member States, including pre-packs.[1] The Commission’s ambition is to have this Proposal for a European pre-pack adopted as a Directive already by January 2026 (“the Proposal”).[2]

A pre-pack is a prepared insolvency procedure in which the sale of the business to a new owner is arranged prior to the opening of insolvency proceedings. Normally, this sale process takes place in a closed bidding environment and even in secrecy, in order not to disrupt the business and to ensure value maximization for creditors. Once the company is declared insolvent, the first thing that will typically happen is that the court appointed trustee will transfer the business to the highest bidder coming out of the sale process.[3]

Pre-packs have a tainted reputation, at least in jurisdictions where they are being used.[4] In part this is due to the highly legal nature of a pre-pack which overrides what people see in the street. In case of a prepack, a company as legal entity is declared insolvent by the court, but the business uninterruptedly continues to operate with a new owner. Creditors can no longer pursue their claim against the business (which is transferred to the new owner) and will have to file their claim with the trustee of the bankrupt entity. As long as pre-packs are conducted with outside parties, there is however little room for abuse. The procedure would then simply seek to ensure that the business is sold to the highest bidder in the interest of the joint creditors.[5] The prevention of damage caused by disruption by ensuring a confidential preparation only maximizes value. If this is what the pre-pack is all about, there is little cause for the tainted reputation.