In Belgium and France he is known well enough, and his services are being used for years already in the United States and Great Britain: the silent pre-pack administrator. The task of a silent pre-pack administrator is to negotiate and perform what is known among lawyers as a pre-pack. In the early stages of a bankruptcy, the silent pre-pack administrator (and future receiver) works secretly on a restart of the company. By already opening talks with financiers and takeover candidates at such an early stage, the company in need may make a quick restart after its bankruptcy is pronounced – sometimes even on the same day. The advantages are obvious. Restarting a company ‘going concern’ brings in more than selling a company that is already bankrupt.

The Silent Revolution

The silent pre-pack administrator (and the pre-pack approach) is one of the greatest, if not the greatest, renewals of insolvency law in recent years. The remarkable thing about it is that it lacks a statutory basis. In fact, legal practice has taken the lead here, running ahead of legislative initiatives from The Hague.

Origins

The seeds of silent pre-pack administration were sown on 11 April 2012 at a conference in Amsterdam. At this conference, which was attended by two hundred attorneys, receivers, bankruptcy judges and financial specialists, various supporters of pre-pack made their case. The former Court of Den Bosch (now Court of Oost-Brabant) energetically set to work with it. Until now there have been twelve pre-packs, seven of which took place under the jurisdiction of the Court of Oost-Brabant. Meanwhile, almost all courts are experimenting with the silent pre-pack administrator. Only the Court of Limburg (formerly Maastricht and Roermond) and the Court of Midden Nederland (formerly Utrecht) have not joined in; they refuse to use the procedure in the absence of statutory regulations.

Two Striking Success Stories

The most prominent pre-pack restarts are those of the shoe store chain Schoenenreus and of Prime Champ, the largest mushroom grower in the Netherlands. Schoenenreus, with two hundred stores and 1,500 staff, was saved from a classic bankruptcy by the pre-pack. The stores never even closed and within a few days the chain had been restarted with most stores and 1,000 jobs preserved. Prime Champ is a similar success story. Prime Champ was restarted by the Irish Monaghan a few days after its bankruptcy was pronounced. The company’s activities were not halted for one moment – which is crucial in the food industry – and 750 of the 900 employees could keep their jobs.

Supporters and Opponents

Is it all hosanna then? Supporters of the silent pre-pack administrator and the pre-pack do think so and point to the importance of continuity of the business and the preservation of jobs (which implies a shift from the interest of creditors – on which Dutch insolvency law is based – to the public interest). Thus, the public interest is used to legitimize a tool that has no legitimacy in law.

Opponents point out that the pre-pack distorts competition and mainly serves the interests of entrepreneurs and shareholders. Such a restart sanctions the dismissal of the most expensive employees and makes the business come out considerably stronger. Let us look again at the restart of Schoenenreus: Schoenenreus restarted under the same majority shareholders and let one third of its staff go. The trade union FNV Bondgenoten objected to this, because it received signals that stores that had been closed were reopening with cheaper and younger staff. Former employees were rejected, allegedly because they did not fulfill the criteria.

Another point of criticism is that the silent pre-pack administrator operates in secret and can therefore only speak with the entrepreneur or with parties pushed forward by the entrepreneur. As there is no thorough market research, critics fear that not all potential candidates are approached and that the maximum purchase price possible is not obtained. As a result, the interests of the creditors are not best served.

It’s Your Move, Government

Anyhow, the ball is now in the court of the government. The idea of the silent pre-pack administrator is not new; the legislator knows it too. Mention of the silent pre-pack administrator was already made in the Draft Insolvency Act of the Insolvency Law Committee from 2007, a bill intended to result in the integral review of the Dutch Bankruptcy Act dating from 1896(!). This bill has meanwhile been taken off the table, since the Minister of Justice considered the project too comprehensive and too controversial.In November 2012 the current Minister of Security and Justice, Ivo Opstelten, announced in a letter to Parliament that he is reviewing bankruptcy law and is preparing six bills in this respect. One of these six will concern the phenomenon of the silent pre-pack administrator and will be offered for consultation this fall. Eventually this will provide the statutory basis and satisfy the needs felt by parties in the field.