Pre-pack in the Spanish insolvency procedure

The “pre-pack” refers to the Anglo-Saxon terminology of what we understand in Spain as the sale of production units. This sale of production units is made in a situation of insolvency proceedings. This procedure occurs when a person is unable to meet the totality of the payments due. The insolvency proceeding has a series of disadvantages, among which we find the destruction of employment. Another consequence is the loss of the productive units of the company. The pre-pack arises as a method to alleviate the negative consequences of the bankruptcy. The solution lies in the sale of the productive units prior to the insolvency proceeding. In this way, subsequent use and conservation is allowed.

What is its regulation?

In Spanish legislation there is no express regulation of the figure of the insolvency pre-pack. However, similar figures can be observed. For example, Article 14 of Royal Decree-Law 16/2020 on procedural and organizational measures to deal with COVID-19. It declares as preferential the actions aimed to the disposal of productive units. Its realization is possible by means of auction, judicial or extrajudicial, or by any other method of realization authorized by the judge.

Within the European regulation, Directive (EU) 2019/1023 regulates this figure. The main objective of this Directive is to ensure a more orderly and efficient liquidation procedure. The method to achieve this is by trying to reduce insolvency proceedings in order to achieve a higher recovery percentage. However, this Directive has not been transposed into Spanish law.

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Which is the procedure to apply?

For the time being, there is no specific legal regulation of this figure in the Spanish legislation. But from the actions already carried out, the following structure can be observed:

First, there is a preliminary phase. During this phase, the entrepreneur must inform the Court of the opening of negotiations with its creditors. Then, it must communicate that operations are being carried out regarding the sale of production units. An independent expert appointed by the company will be in charge of carrying out the sale of the production units. This independent expert will also be in charge of ensuring compliance with the law and providing transparency to the process. Once the insolvency proceedings are declared, this independent expert will become the insolvency administrator.

The second phase is the judicial phase of authorization and implementation of the pre-pack operations. This will be done through Article 530 of the Consolidated Text of the Insolvency Law. This determines that the debtor must present a liquidation plan with a proposal for the acquisition of the productive unit. Subsequently, the judge will agree the opening of the liquidation phase.

Which are the advantages?

This figure entails a series of advantages for both the entrepreneur and for creditors and customers:

1. Continuity of the company’s productive units. It allows the preservation ofthe productive units of the business that are still viable.
2. Higher revenues in favor of creditors. By preventing the productive units from losing value, they can be sold at a higher price. In addition, the rapid speed of sale means that the brand name does not lose value. The direct consequence is, therefore, an increase in revenues to satisfy creditors.
3. Reduction of the duration and time of the insolvency proceedings. The liquidation of the production units must be carried out prior to the insolvency proceeding. This leads to a shorter procedure.
4. Reduction of costs. By shortening parts of the insolvency proceedings, the costs associated with them are reduced.
5. Preservation of positions. The employees are kept and, therefore, there are no labor indemnities. This means that there is no increase in the company’s liabilities.
6. Option for the closing of a company in insolvency.

What are the disadvantages?

Initially, there are no disadvantages. The concern about this process lies in the transparency with which the sale of the productive units is carried out. This is due to the lack of control that occurs when the sale of these units is carried out before applying for the tender. This is why the figure of the independent expert is so important. He/she will be in charge of ensuring the correct functioning of the process.

Conclusions

The pre-pack in bankruptcy proceedings is a figure that has many advantages. At a time when the number of companies in insolvency proceedings is so high, it becomes necessary. It could reduce the damage caused to companies by the COVID, allowing many of them to survive where they wouldn´t before.

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