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Prepackaged Bankruptcy

A prepackaged bankruptcy is a bankruptcy case that begins with the filing of a plan of reorganization that has already been accepted by creditors (or as to which solicitation of acceptances is already underway as of the date of the initiation of the bankruptcy case). The bankruptcy case is the means of implementing the accepted plan.

In Curaçao, the first pre-pack case was decided upon on February 2, 2017 in the Curaçao Drydock Company NV case. The company – at its own request – was declared bankrupt and the proposed sale and purchase of certain assets of the company was approved by the Court of First Instance. By means of this sale and purchase, the employment of all employees was secured, as well as the continuance of specified third party contracts. Also, funding was guaranteed to pay out all creditors 50% of the outstanding amounts. The court decision contained other terms and conditions.

For the parties involved, a pre-pack has several advantages, such as:

  • Through a prepackaged and pre-negotiated bankruptcy, a debtor working closely together with the critical group of its creditors, can implement changes to certain economic conditions without being hindered by holdouts and/or non-responsive parties;
  • By formulating and obtaining binding support in favor of a plan before a request for bankruptcy is initiated through a prepackaged or pre-negotiated approach, the debtor’s business faces significantly less uncertainty and disruption as a result of the bankruptcy case;
  • Certain protective provisions (court approved releases and court findings in good faith e.g.), provided for in the Bankruptcy Ordinance can be a significant benefit to the parties to the negotiation;
  • The debtor has a degree of freedom with respect to the disclosure statement in a prepackaged bankruptcy case that the debtor does not have in a conventional bankruptcy case.

Because an out-of-court, prepackaged and pre-negotiated process takes at least several weeks, if not several months, to effectuate, one of the critical questions for the company and its advisers to consider (and one of the potential pitfalls of a prepackaged or pre-negotiated bankruptcy) is whether the company either has sufficient liquidity for the duration of the pre-filing period or is able to obtain additional financing.

For the company and its advisers, it is critical to have the possibility to negotiate without the disturbance of creditors. Under certain conditions a stay – a period whereby all actions against the debtor are “frozen” – can be requested. Communication is key under these circumstances.

Although a prepackaged plan may not be feasible if the company will not be either reinstating or paying in full pre-petition trade, lease rejection, employee or union claims, the company and its key creditors can consider utilizing the pre-negotiated approach, with a timeline that allows for formation of a statutory committee and a reasonable period of time to engage with its professionals. The amount of time required will vary greatly depending on the circumstances. Generally, such a timeline would not be less than two months and more likely would be about four to six months. If the proposed plan involves issues that raise concerns for the committee, such as investigations into pre-petition transactions or avoidance actions, depending on the complexity of the circumstances, more time may be required.

In the Curaçao Drydock Company NV case, the fact that the employment for all employees was secured by means of the proposed pre-pack, was crucial for the court to approve with the approach. Also, the fact that the continuance of specified third party contracts was guaranteed was of eminence for the restructuring of the company, and therefore the approval.