Legal framework

Pre-packaged sales, or “pre-packs,” have long been utilized in the United Kingdom and the United States as a restructuring mechanism that enables the sale of a distressed business to be arranged prior to the commencement of formal insolvency proceedings. The objective is to preserve the company’s value by facilitating its sale as a going concern, rather than through piecemeal liquidation.

Following previous unsuccessful attempts, the Belgian legislator introduced pre-pack proceedings (or “closed preparation for bankruptcy”) through the September 2023 legislative reform of Book XX of the Code of Economic Law (hereinafter “CEL”). This reform implemented European Directive 2019/1023 on restructuring and insolvency, which was itself inspired by Anglo-Saxon insolvency regimes.

Under Article XX.97/1 CEL, a company that meets the bankruptcy conditions may submit a petition to discreetly prepare, prior to the official declaration of bankruptcy, the transfer of part or all of its assets and activities. If the court determines that the bankruptcy conditions are satisfied, it will appoint a prospective bankruptcy trustee and supervising judge. The court must decide on the request expeditiously, within a maximum of three days. If granted, the debtor has 30 days to prepare the full or partial transfer of its assets and activities (extendable to a maximum of 60 days). This procedure is particularly designed for companies operating in markets where customers will abandon the bankrupt debtor for alternative suppliers, even following a brief interruption of services.

After two years of operation, this presents an opportune moment to conduct an initial evaluation of the pre-pack procedure by highlighting its advantages and examining the ongoing challenges and unresolved questions.

Main advantages

Confidentiality represents a crucial advantage for distressed companies seeking to prepare the transfer of their assets and activities prior to publicly filing for bankruptcy.

Another significant advantage is that, compared to an ordinary, fully out-of-court negotiated transaction, there are no time-consuming notification requirements to address, particularly regarding public creditors.

The likelihood of the transfer being challenged subsequently is also minimal, as it is prepared under the supervision of the future trustee and supervising thereby providing enhanced legal certainty to all parties involved. While it is fair to acknowledge that the pre-pack procedure has been embraced by legal practitioners for the aforementioned reasons, the limited legal framework (comprising only six articles) inevitably gives rise to potential issues and unresolved que

Unanswered questions

Primarily, it remains unclear who bears responsibility for executing the transfer agreement on behalf of the distressed company. In principle, the company has not yet been declared bankrupt during the pre-pack stage. Logically, the company’s director should execute the agreement. However, the future trustee plays an essential role in that he or she must approve the transfer (as negotiated by the director(s)). Some scholars therefore contend that the asset transfer must be executed solely by the trustee, which would only be possible after bankruptcy proceedings have commenced.

Furthermore, during the transfer preparation period (maximum 60 days), business operations continue, as do the activities of the distressed company’s competitors. Throughout this interim phase, all involved parties (including prospective acquirers) must invest in the distressed company to maintain its viability. This is inherently risky, as the company, already on the verge of bankruptcy, could collapse at any moment. Ensuring continued operations for even one or two additional months presents a significant challenge. While this period is valuable for conducting necessary due diligence and finalizing transfer arrangements, if the company ultimately enters bankruptcy without a transfer, these interim investments may be lost entirely (as claims in this regard are, in principle, not privileged).

Third, throughout the preparation period, creditors retain the right to enforce security interests, take protective or enforcement measures, and petition for the company’s bankruptcy. A prospective seeking to take over a business through pre-pack bankruptcy proceedings will need to renegotiate with customers and/or suppliers, either to obtain their consent for the transfer of existing agreements or to negotiate entirely new contracts.

A fourth challenge concerns the annual bonuses and holiday pay of employees of the bankrupt company. If the bankrupt company failed to reserve the necessary funds,question arises whether the acquirer becomes responsible for paying the full year’s bonuses – even if the transfer occurs in the final months of the (financial) year.

Conclusion

While the underlying objective of maximizing the value and preserving the employment of distressed companies on the brink of bankruptcy is commendable, the aforementioned uncertainties clearly demonstrate that the Belgian pre-pack procedure – after two years of operation – remains in its developmental stages.

We have successfully handled numerous cases involving this new instrument and are therefore well-positioned to assist clients with these proceedings, as well as other insolvency and restructuring matters.

For questions or additional information, please contact Bart Heynickx and/or Roel Verheyden at [email protected] and [email protected].