12.3.4 Test for insolvency or pre-insolvency

As noted above, pre-insolvency proceedings are a phenomenon of insolvency law. They are derived from the creditors’ collective enforcement rights. From this it follows that cooperation of the debtor is not, or at least should not be, required. It should be possible to impose a plan without the debtor’s consent. The value that is available at the time that the plan becomes effective, is distributed among the stakeholders who, on the basis of their rank, still have a claim to the available value. Lower-ranked creditors and shareholders who are out-of-the-money on the day of reckoning, definitively lose their prospect of recovery. Minority creditors who would prefer to receive cash in a liquidation, can be forced by a majority to take non-cash under the terms of a restructuring.

Given the far-reaching effects, the use of pre-insolvency proceedings is justified only if the debtor is in insolvency or pre-insolvency. In that event, the creditors are or inevitably will become entitled to exercise their collective enforcement rights providing the basis for an intervention and interference with parties’ rights. This means that the application of pre-insolvency proceedings requires that a court test whether the debtor is in a financial state of insolvency or pre-insolvency and the collective enforcement rights of creditors have been, or inevitably will be triggered.