Pre-pack and WCO I fall by the wayside

Thursday, June 22, 2017, the European Court of Justice ruled in response to preliminary questions raised about the pre-pack at Estro daycare center. FNV and four co-petitioners filed a case against restartor Smallsteps. Earlier, the Advocate General concluded that the Transfer of Undertaking Act (the Dutch codification of Directive 2001/23) should apply. This was confirmed by the European court on June 22.

So what is a pre-pack?

In a pre-pack, a prospective trustee is appointed who works with the business owner to look for opportunities to achieve a relaunch, after which the bankruptcy is filed. Immediately after the bankruptcy, the signatures are then placed to actually realize the restart. In the restart, often only some of the employees are offered jobs.

Excerpt

The European Court ruled that a pre-pack cannot be considered as a procedure aimed at liquidating the company under the supervision of a competent public authority, thus making the transfer of undertaking regulation applicable.
The question then, of course, is what does the transfer of undertaking regulation mean? If an enterprise is acquired by a party through an asset/liability transaction, the identity of the enterprise may be preserved. If that is the case, the rights and obligations of all employees working for the employer at that time pass to the acquirer of the enterprise by operation of law, according to Article 7:663 of the Dutch Civil Code.
These rules do not apply if there is bankruptcy or similar proceedings aimed at liquidating the company. The European Court ruled that a pre-pack is not a procedure aimed at liquidation, as a result of which the rules regarding the transfer of undertaking do apply.

Impact on Smallsteps

The Dutch court is bound by the ruling of the European Court. This means that the Midden-Nederland District Court, which asked the preliminary questions that have now been answered, is likely to grant FNV's claim. This would probably mean that the dismissal of hundreds of employees in Estro's bankruptcy was wrongly granted and they entered Smallsteps' employment by operation of law at the time of the relaunch.
Depending on the ruling of the Central Netherlands District Court, it could be the case that employees could file a claim with the restarting company. In addition, the UWV could claim back unemployment benefits. However, the exact consequences will depend on the court's ruling.

WCO I off the table?

On June 21, 2016, the Continuity of Enterprises Act containing the pre-pack proposal was passed by the House of Representatives. With this ruling, it can be concluded, to say the least, that the pre-pack does not have a bright future. It is expected that the possibility of the pre-pack will be used if reorganization of the workforce is an important goal. However, this no longer seems possible because of the European Court ruling.

Second victory for the FNV and the workers?

This seems to be the second victory for the FNV and the employees recently the Enterprise Chamber ruled that the advisory right of the works council is applicable when the sale of the assets takes place in the context of a continuation or relaunch of the company where there is a prospect of retaining jobs. However, the so-called formal requirements of the WOR do not apply in full insofar as they are not compatible with the bankruptcy, according to the Enterprise Chamber.
Because a pre-pack will involve many risks in the future, it is expected to be used less in practice. However, a relaunch from bankruptcy will still be possible. The FNV will consider this ruling, in addition to the Supreme Court ruling on the advisory right of the Works Council, a major victory.