Pre-pack dossier: Smallsteps for men, one giant leap for mankind

The pre-pack procedure is not having an easy time of it. In a previous blog, we reported that the advocate general of the European Court of Justice (ECJ) had concluded that the Dutch pre-pack procedure cannot be regarded as bankruptcy or liquidation proceedings, and that the provisions for transfer of undertaking therefore also apply to pre-packs. The ECJ has now confirmed his standpoint.

Transfer of undertaking

When a company changes hands, in principle, its personnel become employees of the new owner, and retain all the rights and obligations they had at the moment of transfer. Such protection applies by virtue of a European directive, implemented in Netherlands law. An exception is however made in the event of bankruptcy –  then this protection does not apply.

The pre-pack procedure exploits this exception: it envisages a change of hands such that the viable portions of the company can restart immediately following the bankruptcy order. The pre-pack aims to prevent to as great an extent possible the interruption of operations which usually accompanies bankruptcy, so that both the value of the company and the jobs of its employees will remain as intact as possible.

On 22 June 2017, the European Court of Justice ruled, in an action brought by trade union FNV against child day-care centre operator Smallsteps, that companies engaged in a restart immediately after bankruptcy may not unceremoniously sack their employees either. The rights enjoyed by employees in the event of a transfer of undertaking can also be invoked in the case of a pre-pack. In other words, they have the same rights as employees involved in a conventional takeover.

Details of the case

Until its bankruptcy, Estro Groep, with some 3,600 employees at 380 locations, was the largest day-care centre organisation in the Netherlands. On 5 June 2014, the company requested the Subdistrict Court of Amsterdam to appoint its prospective receiver, which request was approved on 10 June 2014. On 20 June 2014, the company, Smallsteps, was established, with the intention being that Smallsteps would, as a restart company, to take over a large portion of the existing day-care centres, this at the expense of a sister company of the main shareholder of Estro Groep. In turn, on 5 July 2014, Estro Groep was declared bankrupt. On the same date, a pre-pack agreement was agreed between the receiver and Smallsteps.

The receiver promptly sacked all of Estro’s employees, whilst at the same time offering an employment contract to a portion (ca. 2,600) of its former personnel. The FNV then demanded that Smallsteps also take on the remaining personnel with all of their rights intact, arguing that the new start was in contradiction of the purpose of the relevant European directive and its implementation in Netherlands law. The FNV then brought an action before the Midden-Nederland District Court, which in turn requested a judgement from the ECJ. The ECJ ruled that, such a ‘flash bankruptcy,’ where the intention is for a business to continue, may not be used to throw personnel out on the street.

In reaching its decision, the ECJ found that the pre-pack had been prepared before the bankruptcy order, but was first implemented subsequently. According to the ECJ such a transaction, which implies an actual bankruptcy, can thus fall within the definition of a ‘bankruptcy procedure’ as referred to in the directive. Such an arrangement does not however ultimately envisage the realisation of a liquidation of the company, such that its economic and social object can neither explain nor justify robbing personnel of the rights accorded them by the directive in the case of a transfer of the undertaking. In other words, the protection provided by the directive applies here, as well.

The ECJ also found that the directive requires bankruptcy procedures to take place under the supervision of a government body. It observed that the phase of a pre-pack procedure which precedes the bankruptcy order is without any basis in the relevant Dutch statutory regulation. The phase in question is not implemented under the supervision of the courts, but rather, the company management, who carry on the relevant negotiations and take the decisions for preparing the sale of the insolvent company.

What now?

Smallsteps must now await the ruling of the Midden-Nederland District Court in response to the judgement by the ECJ. The proposed Continuity of Companies Act I  (WCO I) is now under consideration by the Upper House of the Dutch parliament. The proposed legislation would make it possible, though a change to the Bankruptcy Act, for the courts to appoint a prospective receiver and prospective delegated judge, possibly in advance of a bankruptcy, with a view to liquidating the assets and settling the liabilities of the insolvent company, and improving the possibilities for continuing the company. The proposed legislation also includes guarantees for protecting the rights of employees. The Act would thus provide a statutory basis for the pre-pack procedure.

It is now a question of waiting to see how the situation develops: the decision of the ECJ and that of the Supreme Court (2 June 2017) concerning the right to be consulted in the event of a new start, will not fail to have an effect on the proposed legislation. No one could be faulted for expecting it not to be passed in its present form.

Wouter Engelsman (we@clintlegal.com / +31 20 820 0330)