The prepack bankruptcy: theory vs. practice

Since Sept. 1, 2023, the prepackaged bankruptcy procedure, also known as the "silent bankruptcy" or "flash bankruptcy," has been in place.  But what exactly does this procedure entail and how does it differ from a transfer under judicial authority?

In a prepack bankruptcy, the entrepreneur asks the court for permission to prepare a transfer of all or part of the company's assets and operations in private before the bankruptcy is officially declared.

Its purpose is:

• the highest possible yield for creditors and/or
• Maintain employment for the company's staff to the maximum extent possible.

After the preparation phase, the company will be declared bankrupt regardless of the outcome of the preparatory work.

This is a "closed" procedure: the fact that the transfer of assets is done in preparation for bankruptcy remains completely secret unless the company itself discloses it to third parties.

The application process for a prepackaged bankruptcy is very similar to that of a regular bankruptcy, but requires a separate petition to the business court. The business owner must demonstrate how and why the private preparation may be beneficial to creditors and/or employees. The court will hear the entrepreneur on the feasibility of transferring all or part of the assets (ideally from a trade fund). 

If the court approves the petition, a proposed receiver and a proposed bankruptcy judge are appointed. The company is given 30 days to prepare for the transfer, in consultation with the intended receiver. This period can be extended once for another 30 days at the request of the intended receiver.

1. No protection from creditors: The opening of prepack bankruptcy provides no protection against executive action by creditors or against subpoena in bankruptcy by prosecutors or creditor(s). It is therefore perfectly possible for the company to be summoned in bankruptcy and declared bankrupt while it was preparing a transfer in full seclusion, after opening a prepack bankruptcy.
2. Preparation, not execution: The entrepreneur can prepare the transfer of assets, but he cannot realize these transfers himself before the effective declaration of bankruptcy. The transfer of assets must be signed finally by the trustee, which is possible only once the bankruptcy is declared.
3. Staff transfer: The takeover of personnel must take place on the day of the bankruptcy declaration. This cannot be postponed to a later date.

The only way to make this as legally sound as possible is to force a binding offer from a prospective buyer for the assets in question. Anything but obvious, as the company is not in the best negotiating position, is under time pressure, may be negotiating with several prospective acquirers at the same time, rumors are piling up....

Specifically with regard to the transfer of staff: the takeover of staff must of necessity occur on the date of bankruptcy adjudication, which depends on the agenda of the corporate court. The (logical) request of a prospective transferee to transfer the staff to the 1^e of the following month, the company will not be able to comply; but without the context of the prepack bankruptcy, this is difficult to frame.

The private nature of prepack bankruptcy is (for the aforementioned reason) rather a utopia: how do you negotiate (without the context of prepack bankruptcy) a transfer of trade funds, when you cannot possibly present the blank certificates of NSSO, VAT, direct taxes,...? And if you can already obtain a binding offer from a counterparty, how do you explain that its acceptance must wait for days, possibly even weeks (until the transfer of other assets is also complete, until the bankruptcy can be declared...)...

Therefore, in practice, it may be appropriate at some point in the negotiations, to introduce the prospective trustee to the prospective transferee in order to clarify, in private, the concrete context and the further process, and thereby remove any uncertainties of the prospective transferee.

Important detail: assets can be taken over by persons associated with the bankrupt company (shareholder, director, etc.), provided, of course, that the intended receiver agrees to the offer in question.

A bid for real estate will not be able to be accepted until the trustee, after opening the effective bankruptcy, receives an appraisal report from an expert appointed by him/her with the intention of verifying the market conformity of the bid.

Thus, the trustee cannot accept it on the day of the bankruptcy itself, but only when the bid can be verified with the appraisal report.

Prepack bankruptcy leans closely to the procedure transfer under judicial authority, or the former "WCO 3." Since September 2023, this procedure has been reformed into a smart or efficient liquidation procedure with classic creditor protection. The transfer under judicial authority is done by a court-appointed liquidation expert.

Depending on the outcome of the proceedings, the company can either continue to exist, be liquidated or be declared bankrupt.

Prepack bankruptcy is a new procedure that is still in the process of development and will have to be shaped mainly by practice. Although there are already some successful precedents, today's bankrupt entrepreneur still encounters many practical and formalistic pain points that complicate negotiations.

The priority, therefore, will be to shape the procedure as efficiently as possible in practice, by clearly framing everyone's roles in the negotiations (including those of the intended trustee), and not letting the negotiations be hampered by too much formalism.

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