Vol 11 (2014) - Issue 1

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Dutch Pre-pack Alternatives on the Rise

Introduction
Recently, there have been a number of successful 'prepack' restructurings in the Netherlands. A pre-pack is the term used for the restructuring of a company through a transaction that is prepared as much as possible outside of formal insolvency proceedings, and whereby the business survives but some or all of the company’s debt is restructured. The aim behind preparing the transaction in advance is to ensure maximum preservation of value. Several types of prepacks can be distinguished.

Silent trustee
The term is mostly used in relation to the structure whereby a Dutch court is requested to designate a 'silent trustee', who participates in negotiations with the relevant stakeholders (usually the company’s management and secured creditors and the sponsors of the surviving entity), resulting in a transaction that is effectuated after the commencement of formal bankruptcy proceedings. The concept of a silent trustee is not provided for in the Dutch Bankruptcy Act ('DBA'). What happens formally is that the company asks the court to let it know beforehand who, in the event of a formal application for a bankruptcy, the court would appoint as a trustee. If the court is willing to provide this information – and most courts in the Netherlands are – it will usually reserve the right to refrain from appointing that individual in the event the company does not cooperate with the silent trustee prior to the insolvency, e.g. by failing to provide him/her with all information required.
Where a silent trustee has been designated, the time between the opening of the bankruptcy proceedings and the signing and closing of the transaction will usually be very short: a matter of hours, rather than days. To date, there have been two successful large restructurings that were accomplished in this manner.

Schoenenreus
One such restructuring was that of Schoenenreus, a chain of shoe stores. There were several reasons why a restructuring with the participation of a silent trustee made sense in this case: a real risk of value destruction in formal insolvency proceedings, a large number of employees and the involvement of many different parties. Schoenenreus operated approximately 200 stores in the Netherlands and Belgium and employed about 1,500 people. It was believed that the business needed to be significantly sized down in order to be viable. A pre-pack restructuring was the only way in which employment could be safeguarded for the majority of the employees. The transaction was prepared with the close involvement of a bank that held a pledge over almost all the company’s assets. In early January 2013, the court was asked to designate a silent trustee.
Immediately after the designation of the silent trustee, the parties started negotiations with him about the envisaged transaction. Negotiations took place between the trustee and the envisaged purchaser (a newly incorporated entity), as well as between the trustee and the bank; there were also discussions where all three of these parties were present. There were many different aspects to be considered: which assets would be transferred, what the purchase price would be and what part of the proceeds would go to the secured creditor (the bank) and what part to the estate. The role of the silent trustee was not merely for form’s sake: his position was to represent the interests of the joint creditors. After about a week, the principal features of the transaction were agreed upon. Immediately thereafter, the company filed for a suspension of payments, during which the business was continued. During the suspension of payments period, the purchaser contacted important suppliers and landlords to find out whether they were willing to enter into agreements with the new entity. The suspension of payments lasted two weeks. On 24 January 2013, the silent trustee, the purchaser and the bank reached agreement on the transaction. On the same day, the suspension of payments was converted into a bankruptcy. All stores were closed briefly: those stores that were purchased by the new entity reopened the next day. The time in between was used to convert all systems, instruct the employees, inventorise stocks, etc. The whole transaction was thus wrapped up within a month.