Employee protection around bankruptcy: a shot in the foot?

By definition, bankruptcy is an unpleasant situation for everyone involved. For example, creditors usually have to write off their claims, staff is laid off, and the bankrupt business owner sees his life's work go up in smoke.

Of all the bad scenarios in bankruptcy, the relaunch is the least bad. In a relaunch, the trustee sells all or part of the business to a third party, who continues the business at its own risk and expense. This generally yields the highest proceeds for the creditors. Moreover, usually (part of) the employment is maintained because the restart offers (part of) the dismissed employees a new employment contract.

In the recent period, the Supreme Court, the European Court of Justice and the Dutch legislature have taken three measures that make a relaunch - regular or from a prepack (a relaunch prepared shortly before bankruptcy after which signatures are signed immediately after the bankruptcy to formalize the relaunch) - less attractive.

Measure 1: new criterion of successive employment

When buying from restarts, the buyer should be aware that he may be qualified as a successor employer if he offers an employment contract to a staff member of the bankrupt entity. This has far-reaching consequences, for example, that the staff member in question will be employed for an indefinite period of time instead of a fixed term.

Following the introduction of the Work and Security Act (July 1, 2015), successive employership is more readily available. Unlike in the regulation before July 2015, it is no longer required that close ties exist between the old and new employer. This condition has been dropped.

It is sufficient that the employee performs comparable work. In that case, the new employer is seen of as successor to the old employer, even though there is no relationship between the old and new employer.

My assessment is that because of the aforementioned change in the law, buyers from restarts or prepackages will be more critical in offering employees of the bankrupt entity a new employment contract. This is because the risk of them being tied to an employee's employment history has become much greater since July 1, 2015.

Measure 2: Advisory right of works council applicable in bankruptcy

On June 2, 2017, the Supreme Court ruled that the works council's advisory right applies in bankruptcy (HR 2 June 2017, ECLI:NL:HR:2017:982). Previously, the Enterprise Chamber of the Amsterdam Court of Appeal had correctly ruled that the advisory right of the works council was, in principle, incompatible with the bankruptcy trustee's role focused on settling the estate (Amsterdam Court of Appeal 25 May 2016, ECLI :NL:HR:2017:982).

The Supreme Court's ruling means that in realizing a relaunch, the receiver will have to consistently seek advice from one specific body representing the interests of one specific group of stakeholders. This while the trustee has been appointed to represent the interests of all creditors - and not a specific group of stakeholders - and the realization of the maximum proceeds for creditors is leading.

On top of that, based on current case law, the trustee must actually already take the interests of the employees into account. In practice, the trustee will always have a meeting with the Works Council shortly after the bankruptcy is declared.

In short, the advisory right of the Works Council has little added value in my view and only delays and complicates the realization of a relaunch.

Measure 3: transfer of business applicable in the case of prepackage

On June 22, 2017, the European Court of Justice ruled that a prepack - also known as a flash bankruptcy - constitutes a transfer of undertaking (Court of Justice June 22, 2017, ECLI:EU:C:2017:489). My office colleague mr. Veerbeek already wrote a blog about this.

The ruling means that buyers from a prepack are likely to face claims from employees who were not taken over in the restart. In addition, it could be that the UWV will reclaim unemployment benefits provided from the buyer.

Therefore, my assessment is that the Court of Justice's ruling makes a prepack - which, in addition to maximizing returns, is also aimed at preserving jobs - much less attractive and that there are hardly any parties left who want to buy from a prepack.

Conclusion

The above measures all have in common that at the microeconomic level they benefit individual workers in individual bankruptcy. At the macroeconomic level, the measures are, in my view, counterproductive.

In my opinion, the measures also do not sit well with the premise that the primary purpose of bankruptcy should be to realize maximum proceeds for creditors. Employees are only one of the stakeholders in a bankruptcy - admittedly very important - which, moreover, the trustee already takes into account from a social perspective.

My estimation is that these measures will leave hardly any buyers willing to buy from prepack, while - under the right conditions - a well-executed prepack actually benefits employment. After all, an uncontrolled bankruptcy leads to lower proceeds where the relauncher will want to take on fewer employees.

My further expectation is that because of these measures, a buyer from a relaunch will offer fewer staff members a new employment contract given the risks involved. This also does not benefit employment.

Finally, these measures will give one party - the Works Council - an advisory right that in my view has no added value and only delays and complicates matters. Every trustee knows that time is the most important factor in realizing a relaunch. The longer the restart takes, the less likely it is to succeed. This also does not benefit employment.

In short, in my opinion, the workers - supported by the unions - have shot themselves in the foot. This is not a popular message, but nevertheless no reason not to say so.