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Can the pre-pack pack its bags in the Netherlands?

Can the pre-pack pack its bags in the Netherlands?

After all the commotion caused by the ECJ's ruling in the FNV/Smallsteps case, everyone wants to know whether the pre-pack has any future at all. Is it game-over for the pre-pack or can it still play a meaningful role in Dutch insolvency practice?

Introduction

While the countries surrounding us adjusted their insolvency laws at the end of the twentieth century, the Dutch Bankruptcy Act has remained unchanged since 1896. Our insolvency law is based on the idea of liquidation of companies in order to pay off creditors, which leads to a maximum loss in terms of both economic activity and employment. If a company was able to restart its activities after bankruptcy, this would happen after the bankruptcy had already been settled (‘classical restart’). Meanwhile, in the Anglo-Saxon countries the so-called ‘pre-pack’ method was developed. This method entails the following: before (or immediately after) the company files for bankruptcy, a restructuring plan is agreed upon by an appointed silent trustee. As a result, bankrupt companies can resume their economic activities a lot sooner after bankruptcy in comparison to the situation in which the classical restart is applied. The shorter the period between the bankruptcy and the restart, the more successful the result will be after bankruptcy.

Case law in the Netherlands after the FNV/Smallsteps case

The Dutch Law of Dismissal contains a provision (Art. 7:663 BW) that protects employees in the event of transfers of undertakings. Art. 7:666 BW contains an exception to this provision: employees are not protected in case of bankruptcy. This is an implementation of the provisions of the EU Directive 2001/23/EG.

However, in the FNV/Smallsteps case (2017) the European Court of Justice (ECJ) decided that the exception does not apply in case the transfer of an undertaking takes place through a pre-pack, immediately after bankruptcy. According to the ECJ, the main purpose of a pre-pack is the continuity of the company instead of liquidation. The fact that maximizing the revenue for the creditors is an aim as well, does not change this. This means that under a pre-pack arrangement employees are protected.

Though the ECJ’s reasoning in the FNV/Smallsteps case was clear, it was followed by several cases in which courts found there was no pre-pack in the first place, due to, for example, a lacking restructuring plan or the sole fact that the insolvency administrator had been dismissed only one day after his appointment. This meant that in these cases, the exception as referred to in Article 5(1) of the Directive was still applicable. Additionally, in the Heiploeg judgment (2018), the Court of Appeal Arnhem-Leeuwarden determined that the judgment of the ECJ in the FNV/Smallsteps case does not mean that every pre-pack constitutes an exception to the Directive. The court must examine, on a case-by-case basis, whether the criteria of Article 5(1) of the Directive have been met.

Thus, recent Dutch case law has not led to much certainty. As a result, it is unclear when employees, under a pre-pack arrangement are protected, and when they are not.

The pre-pack in the Netherlands

The pre-pack promised to be a huge success for the insolvency practice in the Netherlands. Empirical evidence points out that the average preservation of employment after a pre-pack is significantly higher than after a classical restart. The ECJ ruling in the FNV/Smallsteps case, however, has led to considerable uncertainty in respect to the future of the pre-pack. The Dutch legislature has tried to remove this uncertainty by presenting for consultation a draft bill on ‘the transfer of undertaking in the event of bankruptcy’ (in Dutch: ‘Wet overgang van onderneming in faillissement’). This draft includes the mitigating measures in Article 5(2) of the Directive. However, the proposed piece of legislation implies that in most cases, the transferee is ultimately obliged to take over all employees when using a pre-pack, unless the transferee can provide a well-founded ‘Economic, Technical or Organisational (ETO)’ reason that justifies changes to staff or terms and conditions, following a transfer of undertakings. On such grounds, the transferee can dismiss some employees while retaining others. The draft introduces a method to determine which employees the transferee can lay off, the so-called ‘mirror image method’ (in Dutch: ‘inspiegelingsmethode’). According to this method, groups of employees with interchangeable positions are formed. For each age group, the employee that would be last in line for dismissal outside bankruptcy, will be first in line for a job with the transferee. On condition that the court grants permission, the transferee can also use an ‘alternative selection method’, for which it should use objective selection criteria.

Rather than regulating possible transfers of undertakings in case of bankruptcies more effectively, it seems that the proposed piece of legislation will only result in more costs, time and uncertainty. This is because the works council and the trade unions will be given a prominent advisory role and their advice must be considered when drawing up the takeover plan. However, experience has shown that consultations of this sort take a lot of time. Moreover, the transferee will have no guarantee that he will be indemnified against claims from employees who were not made a job offer based on the selection method used by the transferee. As a result, the pre-pack method might not be as advantageous as it once promised to be.

Conclusion

Although the Dutch legislature has tried to somewhat secure the pre-pack’s future, it does not seem like it has a very bright future. While the rights of employees in the event of transfers of undertakings in bankruptcy would improve greatly with the new Dutch bill, the fact that the transferee as a result will be faced with more transferred employees, might just mean that passing the bill will lead to the pre-pack having to pack its bags. The question right now is whether, perhaps, the new bill should pack its bags instead.

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This blogpost was written subsequent to the very interesting master’s course Privatissimum Civil Law, taught by Associate Professor Jeroen van der Weide. During this course, students are challenged to study a civil law theme from different viewpoints and to critically reflect on these. We sincerely thank Jeroen van der Weide for his enthusiastic support and valuable feedback on this blogpost.

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