The pre-pack in the new Insolvency Law

The procedural deadlines in traditional insolvency proceedings under Spanish insolvency law are incompatible with the dynamics of the debtor’s insolvency situation. Pre-pack has arisen to speed up the sale or restructuring of the bankrupt’s assets. This permits the court to approve an asset liquidation program for the total or partial payment of the insolvency debt, and thereby to reduce the commercial decline of the company and its assets.

An alternative to ordinary bankruptcy procedure, pre-packs involve judicial appointment of an independent expert who helps carry out negotiations between the main creditors and debtors. The objective is to open insolvency proceedings in relation to productive assets and to produce a binding offer for their sale or restructuring.

The pre-pack concept originates in British and Dutch law and has been consolidated in European Directive EU/2019/1023 on restructuring and insolvency. Pre-packs are designed to ensure the continuity of businesses, maximize the value of assets, and preserve jobs.

EU Member States have legislative competence over pre-insolvency procedures, but the EU Directive seeks to harmonize standards among Member States. In Spain, Spanish courts had approved basic practice guidelines for the initiation of corporate restructuring, but these were voluntary. There was an imperative need for more definitive rules, which lead finally to the publication of Law 16/2022 on 6 September. The Law reformed the Insolvency Law, and, in addition to unifying regulation and applicable criteria at the national level, formally introduced the pre-pack and its procedure.

The main characteristics of this new legislation are:

– Prerequisites for the pre-pack procedure

The prerequisite to initiate a pre-pack is that any natural or legal person carrying on a business or professional activity (the debtor) is: (i) probably or actual or imminently insolvent; (ii) insolvency proceedings have not been commenced; and (iii) restructuring measures or negotiations with creditors are commercially viable.

– Appointment of an expert

The business or professional activity described above may request the court with jurisdiction over insolvency to appoint an expert. The expert’s appointment will be reserved, and his or her main responsibility will be to lead the negotiations and obtain offers for the sale of assets or the restructuring of the production unit. The expert’s appointment is subject to regulations on the appointment and responsibility of an insolvency administrator, and in particular, the expert must respect the debtor’s powers of administration and disposition.

The expert should: assist the insolvent debtor in selling the assets; familiarize himself or herself with the legal and economic situation which the insolvent debtor is facing; inform privileged creditors, unsecured creditors and workers; ensure transparency of the procedure; and, finally, draft a final report on the procedure, the steps carried out, and the final proposals for implementing purchases or restructuring of the production unit.

In the judicial phase, the court may revoke or ratify the appointment of the expert. If the expert is ratified, he or she will be appointed insolvency administrator.

– Application for bankruptcy with binding offer

En el momento del concurso, la unidad de producción también puede presentar una propuesta vinculante por escrito a terceros para su venta o reestructuración. Sin embargo, la presentación de una oferta vinculante de un acreedor o de un tercero junto con la solicitud de concurso voluntario no desencadenará automáticamente la apertura de la liquidación.

– Competition between different stakeholders

The new legislative procedure seeks to encourage competition among interested parties by allowing a period of fifteen days for creditor observations and the presentation of a third party’s best offer. However, in practice, it is unlikely that bids could be prepared and submitted in that short period of time.

– Regulation of the procedure

When the application for the declaration of insolvency is filed together with the binding offer, the judge will follow the new procedure in the Insolvency Act, with its very precise and tight deadlines.

– Commitment to maintain the activity

The bidder is obliged to continue or restart the activity with the production unit for a minimum of two years, and failure to do so could give rise to damages. However, if the bid was submitted after the declaration of bankruptcy, the bidder must commit to maintain or restart the activity for three years.

– Benefits and incentives after the pre-pack negotiation

The buyer – if not a person related to the insolvent party – will not be liable for the debts or liabilities of the insolvent seller, except for those expressly assumed, those provided for by law, and, lastly, those related to labor and social security credits of the workers whose contracts are subrogated.

– Formulation of a takeover bid by the workers

The reform permits the employees to make a binding takeover offer by setting up a cooperative, worker-owned company. This proposal, if equal or higher, would have priority over other offers if it is in the interests of competition.

While the pre-pack is a new concept in the Spanish legal system, it has proven to be effective in preserving the business fabric and is a mechanism to support the continuity of insolvent companies. It also helps to address the bureaucracy and long schedules of ordinary insolvency procedure, as well as the previous absence of an attractive alternative for insolvent production units in insolvency.

As a tool to meet the current business needs and economic realities of insolvent companies, the pre-pack is a worthwhile alternative for debtors and creditors to consider.