Pre-pack falls by the wayside

Thursday, June 22, 2017, the European Court of Justice issued a judgment in response to preliminary questions raised about the pre-pack at Estro daycare center. Estro went bankrupt. That bankruptcy had been prepared with a so-called pre-pack. Smallsteps restarted immediately after the declared bankruptcy. In the process, it offered employment contracts to 2,600 of the approximately 3,600 employees. 1,000 employees thus became unemployed. FNV and four employees of Estro who were not offered an employment contract filed a case against relauncher Smallsteps. In doing so, they invoked the protective provisions of the Transfer of Undertaking Act and thus wanted to be employed by 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.

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 signed to actually realize the restart. In the restart, often not all employees are offered a job. Partly for this reason, a pre-pack is controversial.

The transfer of undertaking

If a company is acquired by a party through an asset/liability transaction, the identity of the company may be preserved. If that is the case, the rights and obligations of all employees working for the enterprise at that time pass to the acquirer of the enterprise by operation of law, according to Section 7:663 of the Dutch Civil Code.
The rules on transfer of undertaking therefore imply that if an undertaking is taken over by another party and the identity of the undertaking is preserved during the transfer, then the rights and obligations of all employees - provided they work at (the acquired independent part of) the undertaking - pass to the acquirer of the undertaking by operation of law. These rules do not apply if there is a bankruptcy or similar procedure aimed at liquidating the enterprise

Excerpt

The European Court ruled that a pre-pack cannot be regarded as a procedure aimed at liquidating the company under the supervision of a competent public authority (i.e., bankruptcy), so the transfer of undertaking regulation does apply.

Impact on Smallsteps

The Dutch court is bound by the ruling of the European Court. This means that the Midden-Nederland court, which asked the preliminary questions that have now been answered, is likely to grant the claim of FNV and the four former employees. This would likely mean that at the time of the relaunch, they entered into Smallsteps' employment by operation of law.
Depending on the court's ruling, it could be the case that employees could file a claim for employment with the restarting company. In addition, it could be the case that the UWV will reclaim unemployment benefits provided. What the exact consequences are, however, depends on the ruling of the Central Netherlands court.

WCO I off the table?

p June 21, 2016, the Continuity of Enterprises Act I (WCO I) containing the pre-pack proposal was passed by the House of Representatives. With the ruling of the European Court, it can be concluded, to say the least, that the pre-pack does not have a bright future. Because of the European Court's ruling, it no longer seems possible for the pre-pack to be used if reorganization of the workforce is an important goal.

Relaunch from bankruptcy remains possible

Because a pre-pack will carry many risks in the future, it is expected to be used less in practice. The trend anyway was that the pre-pack was used less, from 37 known cases in 2014 to 25 in 2015, to 11 in 2016 and only 3 in 2017 (as far as publicly known). However, a relaunch from bankruptcy still remains possible.