12.3.1 The justification for and purpose of pre-insolvency proceedings

In Chapter 3, building on the creditors’ bargain theory and normative foundation of insolvency proceedings in general, I investigate the justification for and purpose of pre-insolvency proceedings. A first observation is that in a situation where the debtor is solvent and no need exists to interfere, there is no basis to infringe on a party’s rights simply because a majority of other similarly situated parties might be willing to agree to a proposed amendment of their rights. I conclude that pre-insolvency proceedings allowing for the power to impose a measure against a party’s will, are ultimately derived from the collective enforcement rights of the creditors. As such they form an insolvency instrument intended to serve the interests of the creditors and to assist them in the exercise of their collective enforcement rights. Pre-insolvency proceedings should not be seen as a rehabilitation instrument intended to serve the interests of the debtor, which could unduly obstruct the creditors in the exercise of their enforcement rights and work to their detriment.

The purpose of pre-insolvency proceedings, more specifically, is to provide creditors with an alternative, improved means of exercising their collective enforcement rights outside the framework of formal insolvency proceedings. Creditors can use pre-insolvency proceedings to liquidate the business outside formal insolvency proceedings in order to improve the recoveries of the creditors as a whole. Creditors can also use pre-insolvency proceedings to implement a restructuring outside the framework of formal insolvency proceedings in order to improve the recoveries of the creditors as a whole.