On 7 December 2022, the EU Commission issued a proposal for a directive harmonising certain aspects of insolvency law (the Draft Directive). One key aspect of this Draft Directive is the regulation of pre-pack proceedings.
In the absence of any currently existing pre-pack procedure, this means that such a procedure will ultimately need to be introduced in Luxembourg law. Furthermore, pre-pack sales may have a more immediate future through Luxembourg Bill No. 6539 A, which entirely revamps Luxembourg insolvency law and should be passed in the near future.
1. What is a pre-pack sale?
Although they take various forms around the world, pre-pack sales typically consist in the sale of a debtor’s business (or part of it), which is prepared and negotiated before the formal opening of the insolvency proceedings with the sale executed shortly thereafter. The goal is to maximise recovery value for creditors with the idea that a business sold before the opening of insolvency proceedings is likely to have more value before impacted by the insolvency proceedings.
2. The quasi-impossibility of pre-pack sales under current Luxembourg insolvency law
Luxembourg law currently does not include any specific pre-pack procedure.
Also, contrary to other countries where pre-pack sales have arisen as an unregulated practice of insolvency practitioners to maximise recovery value for creditors, current Luxembourg law makes pre-pack sales almost impossible in practice due to the lack of modern and adequate reorganisation proceedings.
Apart from bankruptcy proceedings, which aim at the liquidation of the insolvent company, Luxembourg law knows of two insolvency procedures: the composition with creditors and controlled management; and a pre-insolvency procedure that is called the stay of payments procedure.
We will not address here the many technical reasons why these procedures are inadequate except to point out that in the recent years, Luxembourg courts have almost never ordered them. This fact says as much about their lack of appeal for debtors as about the difficulty to meet the required criteria for opening these procedures.
The consequence of this is that, apart from a few rare exceptions, insolvency in Luxembourg leads almost inevitably to a winding-up of the debtor.
The sale of a debtor’s assets in a bankruptcy context is carried out by the insolvency practitioner and requires either the authorisation of the supervisory judge (juge-commissaire) for movable assets subject to perishment or imminent depreciation, or the authorisation of the District Court, which rules upon a report drafted by the supervisory judge for other assets.
This makes the job of the insolvency practitioner particularly difficult given that the practitioner usually knows nothing about the debtor’s business when appointed and that time is of the essence, such as for perishable assets or for businesses likely to be impacted by the opening of insolvency proceedings.
Also, there are no specific rules governing the sale of businesses, which means the debtor’s assets are usually sold piece by piece.
Clearly, the current insolvency regime is not optimal when it comes to maximising recovery value for creditors.
A mitigating factor in this conclusion is the fact that many financing and restructuring transactions in Luxembourg involve financial collateral arrangements, which – since the transposition in Luxembourg of the Directive 2002/47/EC on financial collateral arrangements by the Law of 5 August 2005 – allow for out-of-court enforcement and are hence immune from most aspects of insolvency law.
3. The possibility of pre-pack sales with bill no. 6539 a
Fortunately, Luxembourg is in the process of substantially reforming its insolvency laws with Bill No. 6539A. Inspired by Belgium law, this Bill will transpose the EU Directive on restructuring and insolvency and inter alia introduce a new judicial reorganisation procedure (known as the JRP).
A JRP can have three goals (with the understanding that separate goals can apply to separate businesses or parts of a business):
- reaching an agreement with creditors;
- allowing the transfer by way of judicial order of all or part of the debtor’s assets or businesses; or
- seeking the agreement of creditors on a reorganisation plan, which may include the sale of all or part of the debtor’s assets or businesses.
In the latter case, Bill No. 6539 A includes a set of rules regulating and facilitating the transfer of businesses, not just of assets. The sale, however, will still require a judicial order from the District Court, which will rule on the basis of a report drafted by the judicially appointed agent in charge of organising the sale and a report drafted by a “delegated judge” in charge of overseeing the sale.
While Bill No. 6539A in its current version does not include any pre-pack procedure debtors will de facto be incentivised to prepare the sale ahead of the filing for a JRP so that the sale can be executed as soon as possible after the opening. In that context, debtors will also have the option of requesting the appointment by the Minister of Economy of a conciliator (conciliateur d’entreprise) to assist in the preparation of the sale ahead of the opening of a JRP and ultimately to serve as the judicially appointed agent to speed up the process.
4. The draft directive's regulation of pre-pack sales
The Draft Directive will require the inclusion of a new pre-pack procedure in Luxembourg law.
This procedure includes two separate phases:
- A preparation phase, which aims at finding an appropriate buyer for the debtor’s business or part thereof.
During this phase, a judicially appointed monitor will be tasked with documenting and reporting the sale process, ensuring that it is competitive, transparent, fair and meets market standards, recommending the best bidder and justifying why the bid meets the interest criterion of the creditor.
During this phase, which does not qualify as an insolvency procedure, the debtor retains control over its assets and business. Also, the debtor may benefit during this phase of a stay of individual enforcement actions when it is insolvent or in a situation of likely insolvency.
Typically, this phase remains confidential (although confidentiality is not a requirement of the Draft Directive).
- A liquidation phase, which aims at having the sale judicially approved and executed and distributing the proceeds to the creditors.
The liquidation phase qualifies as an insolvency procedure so that its opening will be made public. Also, the monitor who has prepared the sale during the preparation phase is appointed as insolvency practitioner for the purpose of the liquidation phase.
The Draft Directive also includes various safeguards in connection with both phases of the procedure that regard rules on offers made by parties closely related to the debtor, interim financing and creditor rights.
The Luxembourg legislator has not yet reacted to the Draft Directive, and it is unknown at this stage whether it will delay the adoption of long-overdue Bill No. 6539 A, in order to anticipate the transposition of the Draft Directive.