Getting the Dutch pre-pack done: The options after Heiploeg
Together with the emergence of the Dutch pre-packaged bankruptcy practice came the call for a legal basis to set a framework for the pre-pack. Establishing a legal basis for pre-packaged bankruptcy seemed over time to become like flogging a dead horse.
Decisions from the Court of Justice of the European Union (CJEU) have sobered the understanding of the bankruptcy exception in a transfer of undertaking. Enthusiasm for pre-packs has diminished and has complicated the pending legislative efforts. As a result, in 2020, a legislative proposal has been pending with the Senate for nearly four years, and a draft bill on transfer of undertaking in bankruptcy already seems incongruent with a recent CJEU decision. However, the Dutch Supreme Court’s decision in the Heiploeg case may shed new light and bring new perspectives on the matter. With the Supreme Court referring preliminary questions to the CJEU, this could signal the end to the saga on what room exists for pre-packaged bankruptcies in the Netherlands.
In the slipstream of the turmoil created by the previous economic downturn, Dutch practitioners and courts in several judicial districts developed a practice of pre-packaged bankruptcy.
When the legislature announced the recalibration of Dutch insolvency law in 2012, this included codification of the Dutch pre-packaged bankruptcy in the Wet continuïteit ondernemingen I (Act on business continuation I, WCO I). At the same time, applications for pre-packaged bankruptcies were disputed in court, ultimately resulting in the case of FNV/Smallsteps. Labour Unions disputed the Dutch approach where the transferee was not obliged to take over all employees in a pre-pack. This was based on Article 5(1) of the EU Directive 2001/23/EC on Transfer of Undertakings (Directive) which provides the bankruptcy exception. In bankruptcy, the main rule that all employees are automatically transferred to the transferee in a transfer of undertakings (Articles 3 and 4 of the Directive) does not apply. The CJEU decided that the exception of Article 5(1) of the Directive did not apply to the Dutch pre-packaged bankruptcy as applied in the FNV/Smallsteps case. This brought legal uncertainty on the position of employees in pre-packaged bankruptcies.
In the meantime, the legislative process of the WCO I was effectively put on hold. To solve the legal uncertainty caused by FNV/Smallsteps, the legislature presented the draft bill Wet overgang van onderneming in faillissement (Act on transfer of undertaking in bankruptcy, WOVO) for public consultation in May 2019. It presents a new framework for transfer of undertakings in bankruptcy.
If you can’t beat it, join it
The WOVO amends Article 7:666 DCC (which implements Article 5(1) of the Directive) and introduces a new Article 7:666b DCC. These amendments aim to provide that in principle, also in bankruptcy proceedings, employees receive protection in the case of a transfer of undertaking.
This approach applies to both employees who have and have not been dismissed by the liquidator. Where employees have not been dismissed, the ordinary rule for transfer of undertaking applies. Where employees have been dismissed by the liquidator on the basis of Article 40 of the Dutch Bankruptcy Act (DBA), the transferee should offer them an employment contract. The transferee can refuse to do so only on the basis of economic, technological or organisational reasons which the transferee foresees in the 26 weeks following the transfer. These economic, technical or organisational reasons, so-called ETO reasons, are derived from Article 4 of the Directive.
What the WOVO won’t solve
Where the WOVO can solve certain issues, it also brings new issues. We highlight two points of concern below.
First, the ETO reasons play a pivotal role in the WOVO. However, it is not sufficiently clear what the ETO reasons entail and how they should be applied in a specific case. According to the CJEU, when assessing ETO reasons, it is necessary to take into consideration the objective circumstances in which the dismissal took place. The fact that in a pre-pack the dismissal of employees takes place at almost the same time as the transfer may be a strong indication that ETO reasons are involved. Moreover, one could easily argue that ETO reasons are, in fact, always present in a reorganisation context.
For convenience, the Dutch legislature translated the ETO reasons in the WOVO into ‘business economic reasons’. Based on two cases, the legislature considers them to be the same concepts. Business economic reasons is preferred since it is already a term that is familiar in Dutch law.
However, the two examples from CJEU case law have fallen short in this regard. They have shown that ETO reasons can be coloured by the concept of 'business economic reasons’. These concepts, however, are not necessarily equal, as also observed by the Dutch Commission on Insolvency Law.
Second, the new WOVO exception to the Directive cannot be based on ETO reasons, as was highlighted by the CJEU in the 2019 Belgian Plessers case. Here, a procedure including a transfer of undertaking in insolvency was challenged in light of the Directive. This Belgian procedure provided a choice for the transferee to select which employees to take over in the transfer. Derived from Article 4 of the Directive, the selection was based on ETO reasons. The CJEU ruled that Belgian law providing the transferee a choice to select employees is incompatible with the principal objective of the Directive, namely the protection of employees against unjustified dismissal in the event of a transfer of undertaking. As observed by De Leo, the Dutch WOVO seems to be heading in the same direction and may therefore not be in full conformity with the Directive.
Heiploeg and the quest for value maximisation
On 17 April 2020, the Supreme Court gave its Heiploeg interlocutory decision. Contrary to the Opinion of the Advocate General, the Supreme Court held that there is room for pre-packaged bankruptcy practice in the Netherlands within the scope of the Directive’s bankruptcy exception.
The Supreme Court first considered that a pre-packaged bankruptcy can meet the conditions of the exception of Article 5(1) of the Directive. The pre-pack can be qualified as bankruptcy proceedings, because the debtor has been declared bankrupt. Also, it qualifies as proceedings instituted with a view to liquidation of the assets of the transferor. The provisional liquidator – similar to a liquidator – is tasked with pursuing the interests of the general body of creditors. These efforts also include room for societal interests, such as employment retention. Also, the criterion to hold a provisional liquidator liable is the same criterion that applies to a liquidator in a bankruptcy. In this respect, the Supreme Court built on a prior decision from 2019.
Furthermore, the proceedings fall under the supervision of a competent public authority. The Supreme Court considered that the current provisions in the DBA already aim to prevent erosion of supervision of the bankruptcy proceedings by means of a pre-pack. The preliminary liquidator is supervised by a preliminary supervisory judge. Also, upon their appointment as liquidator and supervisory judge in a bankruptcy, they were duty bound to refuse the going-concern sale if it did not serve the interest of the general body of creditors.
Nevertheless, there is a caveat. However confident the Supreme Court seems in its argumentation with respect to the Dutch pre-pack and also in the case of Heiploeg, the Supreme Court is seeking a preliminary ruling from the CJEU before making its decision. The CJEU’s decision in FNV/Smallsteps still raised doubts which warranted this step.
The recent Supreme Court’s interlocutory decision may change the prospect of pre-packaged bankruptcies. The Supreme Court is clear that the pre-pack should be considered in its entirety in view of the Dutch Bankruptcy Act. As such, answers to the preliminary questions will have to address whether the case of FNV/Smallsteps was an exception to a (Dutch) practice which can fall within the scope of Article 5 of the Directive, or whether the FNV/Smallsteps decision provides the main rule. This leaves us with several options after the CJEU’s ruling in Heiploeg, three of which are mentioned below.
First, if the CJEU decides that the Dutch pre-packaged bankruptcy as applied in Heiploeg is not in line with Article 5 of the Directive, this will likely close the door for the pre-packaged bankruptcy practice in the Netherlands. The Supreme Court has coherently set out the practice of Dutch pre-packed bankruptcy and has formulated its preliminary questions unambiguously for the CJEU to come with a clear ruling on the Dutch pre-pack. Because of this, there will be little room to get the pre-pack done within the scope of the Article 5-exception in the Netherlands if a pre-pack such as in Heiploeg is disapproved.
Second, the ruling by the CJEU in Heiploeg could also be unsatisfactory in the sense that it does not offer a definitive answer to the question whether the Dutch pre-packaged bankruptcy is in line with Article 5(1) of the Directive. The essence of the preliminary questions relate to whether the Dutch pre-pack has been instituted with a view to the liquidation of the assets and whether there is supervision by a competent public authority. In the absence of unequivocal answers to these questions, legal uncertainty will remain (or even increase), necessitating legislative action.
Third, the CJEU can rule that the pre-packaged bankruptcy in Heiploeg falls within the scope of Article 5(1) of the Directive. The CJEU’s considerations will be pivotal in deciding how much room there would be for a pre-pack. Still, the Dutch legislature should catalyse the current legislative efforts. This could be achieved by amending Article 7:666 DCC so that all criteria of Article 5(1) of the Directive are incorporated. In addition, a legal basis should still be established for pre-packaged bankruptcies, as envisaged in WCO I.
For now, the Dutch legislature should wait for the CJEU’s decision in Heiploeg before taking the next steps with both the WCO I and WOVO. The WOVO already brings uncertainty and we have doubts about its full conformity with Plessers, meaning that the WOVO should not be implemented in its current form. Also, the WCO I bill may need amendments in Articles 363 and 364 on the role and task of the provisional liquidator, considering that the WCO I was drafted before both the 2019 Supreme Court decision on the task and liability of the provisional liquidator, and the recent interlocutory decision of the Supreme Court in Heiploeg.
The Opinion of the Advocate General and the decision of the CJEU will certainly be followed with great interest in the Netherlands and beyond. But, it is clear that as yet the Dutch pre-pack is no done deal.