Regulated Pre-Packs Come to Sweden: Opportunities and Risks Under the New EU Insolvency Directive

The reform seeks to address a familiar challenge in distressed situations: the rapid destruction of value that often occurs once a business enters formal insolvency proceedings. Customers leave, suppliers tighten terms, key employees depart and financing becomes more difficult to obtain. By enabling a business sale to be prepared before formal insolvency proceedings commence and implemented shortly thereafter, regulated pre-packs are intended to preserve going-concern value and improve recoveries for creditors.

For Sweden, the introduction of a regulated pre-pack framework would represent a notable change. Swedish insolvency law currently contains no dedicated statutory pre-pack procedure. While transactions with pre-pack characteristics have occurred in practice, they have taken place without a specific legal framework governing the preparation, marketing and execution of the sale process. The 2019 rescue of Ving following the collapse of Thomas Cook Group is commonly discussed as a Swedish example of a transaction with pre-pack features: speed helped preserve business value, but the transaction also illustrated the types of transparency, process and confidence questions that a regulated framework is intended to address.

The Directive therefore presents both an opportunity and a challenge. A regulated framework may increase efficiency and preserve value in distressed situations, but it also raises important questions regarding creditor protection, transparency and the role of related-party bidders. The success of the Swedish implementation is likely to depend on how those competing interests are balanced.

Why pre-packs matter: The economic rationale behind pre-packs is straightforward. In many insolvencies, value deteriorates rapidly once financial distress becomes public. A business that may have been viable as a going concern can quickly lose customers, suppliers, employees and goodwill.

Traditional insolvency sales are often conducted under considerable time pressure. Potential purchasers know that the insolvency officeholder may have limited time to complete a transaction and that the value of the business may continue to deteriorate while a sale process is ongoing. As a result, distressed businesses are frequently sold at a discount.

A regulated pre-pack seeks to address this problem by allowing the sale process to be prepared before formal insolvency proceedings are opened. In essence, part of the sale process is moved to an earlier stage, before confidence in the business has materially deteriorated. The objective is not merely speed, and it is not to facilitate fire sales. The objective is the preservation of enterprise value.

What would change in Sweden? Unlike several other European jurisdictions, Sweden currently has no dedicated statutory framework for regulated pre-pack proceedings. The closest existing mechanism is business reorganisation (Sw. företagsrekonstruktion), under which a debtor may, in certain circumstances and subject to the consent of the administrator, dispose of assets or transfer parts of its business. However, such transactions occur within the existing restructuring framework and are not designed as accelerated insolvency sales following a dedicated preparatory phase. A Swedish implementation will also need to address the boundary between a pre-pack sale and the rules on transfers of undertakings (Sw. övergång av verksamhet) under the Swedish Employment Protection Act (Sw. lagen (1982:80) om anställningsskydd, “LAS“), including how employee protection rules interact with a rapid sale process intended to preserve enterprise value.

The Directive would require Sweden to introduce a formal pre-pack procedure consisting of two phases: a preparation phase and a liquidation phase. During the preparation phase, a monitor would oversee the process while the debtor remains in possession and continues operating the business. The sale process must be competitive, transparent and fair and conducted in accordance with market standards. Following the opening of liquidation proceedings, the court may authorise the sale of the business or part of the business. Where a bid has been identified during the preparation phase, that bid may serve as a stalking horse bid in a subsequent auction process. The Directive also contemplates that the initial bidder may receive certain protections, such as cost coverage or break-up fees if a higher bid is ultimately accepted, which may help attract serious early bids but will need to be designed carefully so as not to chill competition.

Credit bids and the position of secured creditors: One of the more commercially significant features of the Directive concerns the position of secured creditors. Member States are encouraged to allow secured creditors to submit bids based on the value of their secured claims rather than new cash consideration. Such credit bids may strengthen the position of lenders in distressed situations and influence negotiations between secured creditors, competing bidders and other stakeholders.

The practical significance of this mechanism will depend on how it is implemented in Swedish law. At the same time, the Directive recognises that credit bids should not confer an unfair competitive advantage or discourage participation by other bidders. The Swedish implementation will therefore need to balance the commercial benefits of lender participation against the need for an open and competitive price discovery process.

The challenge of related-party bids: The most debated aspect of the new regime is likely to be the treatment of related-party bidders. The Directive expressly contemplates that parties closely connected to the debtor may participate in the bidding process. Such parties may include existing owners, former owners, directors, controlling shareholders and persons closely associated with them. Importantly, the Directive does not treat a related-party bid as improper in itself. If there is no reason to disqualify the bidder, the related party should be eligible to participate, but the process should be subject to enhanced scrutiny.

From a value-preservation perspective, this approach has a clear rationale. Related parties often possess detailed knowledge of the business, its customers, operations and prospects. They may therefore be better placed than third parties to assess value, obtain financing and complete a transaction quickly. In some cases, a related-party bid may also represent the highest available offer, producing the best outcome for creditors.

However, the same factors that make related parties attractive bidders may also create concerns regarding fairness and transparency. A closely related bidder will often enjoy a significant informational advantage over external bidders. Access to information may make it easier to assess value, structure a transaction and obtain financing. The resulting imbalance may discourage competing bids and reduce confidence in the competitiveness of the process.

There is also a broader policy concern. A related party may be able to continue substantially the same business through a new legal entity while leaving historic liabilities behind. Even where such a transaction maximises value, it may create a perception that the process primarily benefits insiders rather than creditors as a whole. The key policy challenge is therefore that the bidder most likely to preserve value may also be the bidder most likely to undermine confidence in the process.

What safeguards should Sweden introduce? The Directive allows Member States to introduce additional safeguards when authorising pre-pack sales. The effectiveness of the future Swedish regime is likely to depend on the robustness of those safeguards. Potential measures include enhanced market-testing requirements, independent valuation procedures, greater disclosure obligations, enhanced court scrutiny of related-party transactions and mechanisms designed to reduce information asymmetries between related parties and external bidders. A particular Swedish concern is confidence in the independence of the bankruptcy trustee where a transaction has effectively been negotiated before formal insolvency proceedings commence. Even where no formal conflict of interest exists, the perception that the later sale process merely confirms a pre-agreed transaction may undermine creditor confidence. The central objective should be to ensure that related-party bids remain genuinely competitive rather than merely formally permissible.

Looking ahead: The introduction of regulated pre-pack proceedings will require Sweden to make a number of important policy choices. The challenge will not be whether pre-packs should be available, but how the framework should balance speed and value preservation against transparency, creditor protection and confidence in the sale process. If that balance can be achieved, regulated pre-packs may become a powerful addition to the Swedish restructuring toolkit, improving recoveries for creditors while preserving viable businesses that might otherwise be lost in a traditional insolvency process.