The European Court of Justice has recently answered the preliminary questions of the Dutch Supreme Court in the Heiploeg case. The European Court of Justice held that a pre-pack can fall under the exception of transfer of an undertaking. We will explain the judgment below.
What is a pre-pack?
If an undertaking is threatened with bankruptcy, the court may appoint a prospective supervisory judge and a prospective insolvency administrator. When the bankruptcy is filed for, these persons are usually appointed supervisory judge and insolvency administrator. In a pre-pack, the prospective insolvency administrator has the option of being involved, before the bankruptcy commences, in the preparation of the sale of (a part of) the undertaking concerned. By this preparation, a relaunch can be realized relatively quickly after the commencement of the bankruptcy. The objective is that (a part of) the activities can be continued immediately or shortly after the bankruptcy. This way, the creditors can be compensated as much as possible, and employment can be preserved as much as possible. To date, there is no statutory basis in the Netherlands for this practice.
Background
In 2017, the European Court of Justice ruled in the Smallsteps judgement that the pre-pack is not excepted from European Transfer of Undertaking Directive 2001/23/EC (the “Directive”), because the pre-pack procedure in that case was not aimed at liquidation, but at continuation of the undertaking. The result was that after a relaunch following from a pre-pack as with Smallsteps, according to the Court of Justice the transfer of undertakings regulation does apply. The principle here is that all employees will automatically enter the employment of the relaunch undertaking, while retaining their employment conditions.
A lot of debate has arisen about the exact scope of the Smallsteps ruling in case law and literature. With the (draft) bill Transfer of Undertakings in Bankruptcy Act (Wet overgang van onderneming in faillissement, “WOVOF”), the Dutch legislator tried to put an end to the legal uncertainty that arose after this ruling. Besides, the bill Continuity of Undertakings Act I (Wet Continuïteit Ondernemingen, “WCO I”) should create a statutory basis for the pre-pack. However, these two bills have ended up in the drawer, in anticipation of the judgment of the European Court of Justice in the Heiploeg case.
Heiploeg case: the facts
Heiploeg, a wholesale trade in fish and seafood, was in serious financial difficulties. Because bankruptcy was imminent, in 2014 a pre-pack procedure was initiated: the Court of Noord-Nederland appointed two prospective insolvency administrators and a prospective supervisory judge. That same month Heiploeg was declared bankrupt and the same persons were appointed insolvency administrator and supervisory judge. Shortly afterwards, a relaunch took place. Two Dutch companies (“Heiploeg-new”) took over Heiploeg. The majority of the employees was transferred to Heiploeg-new, but under less favourable employment conditions.
The trade unions FNV and CNV initiated court proceedings. It was their opinion that the Directive applied and that the employees of Heiploeg had entered the employment of Heiploeg-new while retaining their employment conditions. Both the Court and the Court of Appeal disagreed to this and denied the claims of the trade unions. The trade union FNV then appealed to the Supreme Court. In 2020, the Supreme Court asked preliminary questions to the European Court of Justice.
Supreme Court: the preliminary questions
The preliminary questions of the Supreme Court concern Article 5 (1) of the Directive. The Directive intends to safeguard the rights of employees in case of a transfer of an undertaking. However, according to Article 5 (1) these employee-friendly provisions from the Directive do not apply if three conditions are met:
a) The transferor is the subject of bankruptcy proceedings or any analogous insolvency proceedings;
b) These proceedings must have been instituted with a view to the liquidation of the assets of the transferor; and
c) These proceedings are under the supervision of a competent public authority.
About conditions b) and c), the Supreme Court raised preliminary questions to the European Court of Justice:
- In summary, the first question is whether the condition under b) has been met if the bankruptcy was inevitable and the purpose of the pre-pack is to make liquidation possible in the subsequent insolvency procedure, in which (part of) the going concern belonging to the assets of the transferor is sold, so that the creditors can be compensated as well as possible.
- The second question is whether the pre-pack meets the condition under c).
Opinion of the Advocate General
Prior to the judgment of the Court of Justice the Advocate General concluded, in line with the Smallsteps ruling, that the pre-pack did not fall under the exception of Article 5 (1) of Directive 2001/23/EC. According to the Advocate General, a pre-pack is prepared in advance in detail and is therefore not aimed at the liquidation of the assets of the bankrupt undertaking. According to the Advocate General, employees should indeed keep their employment conditions after a pre-pack.
Judgment Court of Justice
The Court of Justice did not follow the line of the Advocate General and arrived at the following opinion.
As far as the first question is concerned, the Court of Justice observed that the insolvency of the transferor was inevitable, that both the insolvency proceedings and the pre-pack procedure that preceded it intended the liquidation of its assets and that the bankruptcy had meanwhile been declared. Besides, the transfer of the undertaking took place during these insolvency proceedings. In addition, the Court of Justice considered that the derogation from the safeguarding of employees’ rights is intended to eliminate the serious risk of a general deterioration of the value of the transferred undertaking or in the living and working conditions of the employees, whilst the pre-pack procedure is aimed to compensate the joint creditors as much as possible and to maintain employment as much as possible.
In short, the Court of Justice ruled that the pre-pack procedure and the insolvency proceedings together are deemed to intend the liquidation of the undertaking, provided that this pre-pack (i) is aimed at compensating the joint creditors as much as possible; (ii) is aimed at maintaining employment as much as possible; and (iii) is governed by statutory or regulatory provisions, so that it meets the requirement of legal certainty.
Regarding the second question, the Court of Justice observed that the pre-pack procedure as in these proceedings can be regarded to have been performed under the supervision of a competent public authority, provided that this procedure is governed by statutory or regulatory provisions.
Conclusion
After the Smallsteps judgment from 2017, the question was raised what this judgment meant for the pre-pack practice in general. The Court of Justice makes clear with the Heiploeg judgment that it will always have to be assessed on the basis of the circumstances of the case what the main purpose of the procedure concerned is, and that it is possible under circumstances that a pre-pack falls under the exception of a transfer of an undertaking. However, the pre-pack procedure must still be provided with a statutory basis in the Netherlands. The bill Continuity of Undertakings Act I is intended to arrange this, but this bill has not yet been adopted. In short, the legislator in the Netherlands will now have to make a move.
We will keep you posted of new developments.
