On 28 April 2022, the Court of Justice of the European Union (CJEU) delivered its long-awaited decision on preliminary questions raised by the Dutch Supreme Court in the Heiploeg case. The Dutch Supreme Court’s preliminary question regarded whether the Dutch pre-pack meets the requirements to fall under the exception of Article 5(1) of the Transfer of Undertakings Directive (EU Directive 2001/23/EC, TOU). The judgment differs from Advocate General Pitruzzella’s Opinion of 29 December 2021 and marks a departure from prior case law of the CJEU on the matter.

Pre-packing the Dutch way

To refresh the memory, in a Dutch pre-pack the debtor will – prior to filing for a bankruptcy proceeding (faillissement) – explore the possibilities to secure a going-concern sale of its assets to a third party. This is carried out under the supervision of a preliminary liquidator (beoogd curator) and a preliminary supervisory judge (beoogd rechter-commissaris). The pre-negotiated going-concern sale is to be executed – after the debtor is declared bankrupt – by the now formally appointed liquidator.

The aim of a pre-pack is to prepare for formal insolvency in a relatively calm and confidential manner, to ensure that there is a better chance that a company’s viable parts can be sold to the highest bidder. This should limit the disruption for the company and its activities, and create value for the involved stakeholders. Preliminary liquidators and preliminary supervisory judges are typically appointed as the liquidator and supervisory judge upon commencement of a bankruptcy proceeding. A well-prepared pre-negotiated deal – under the supervision of a preliminary liquidator – has the advantage that later, the liquidator is typically able to swiftly approve and execute the deal.

FNV/Smallsteps: No ‘bankruptcy exception’ for Dutch pre-packs

The legislature has taken steps to provide a statutory basis with the Continuity of Enterprises Act I (Wet continuïteit ondernemingen I, WCO I), which is pending before the Dutch Senate (Eerste Kamer). However, the legislative process has come to a halt. Employees will maintain their rights in a transfer of undertaking (Articles 3 and 4 TOU), when there is a so-called ‘bankruptcy exception’. When the requirements of Article 5(1) TOU are fulfilled, the main rule is applicable. This entails that (i) the transferor is the subject of bankruptcy proceedings or any analogous insolvency proceedings, (ii) which have been instituted with a view to the liquidation of the assets of the transferor, and (iii) are under the supervision of a competent public authority. For several years, the position was held that the Dutch implementation of Article 5(1) TOU was applicable in case of a pre-pack. However, in the FNV/Smallsteps decision, the CJEU concluded that the latter two requirements of Article 5(1) TOU had not been fulfilled and the exception was not applicable in this case. This decision was reiterated a year later in the Plessers case.

New perspectives in the Heiploeg case?

A similar case to FNV/Smallsteps is the pre-pack in the Heiploeg case. Again, trade unions objected to the application of the Dutch implementation of Article 5(1) TOU. The first instance court, court of appeal, and the Supreme Court took the position that the Dutch pre-pack met the conditions for the application of the bankruptcy exception. However, acknowledging the uncertainty brought by the CJEU’s decision in FNV/Smallsteps, the Supreme Court raised preliminary questions on the applicability of Article 5(1) TOU to Dutch pre-packs with the CJEU before handling down its judgment.

In his Opinion, Advocate General Pitruzzella firmly reiterated that the Dutch pre-pack in Heiploeg was not a liquidation-oriented proceeding within the meaning of Article 5(1) TOU. He emphasised that a Dutch pre-pack may involve liquidation of the debtor after the bankruptcy proceeding has commenced. However, the objective of maximisation of value of the estate is achieved only by pursuing a going-concern sale in which the business continues. Therefore, he concluded that a Dutch pre-pack is mostly geared towards the continuation of the business.

This Opinion fits the CJEU’s prior case law, and it would not have been surprising if the CJEU had followed the Advocate General’s Opinion. The question remains whether this serves the interests of employees that the TOU aims to safeguard. This may be questioned, as prior research suggests that Dutch pre-packs have preserved more jobs than ordinary going-concern sales in bankruptcy proceedings. The Advocate General seems to be aware of the issue, but sees no room for flexibility in applying Article 5(1) TOU. He emphasised that the Dutch legislator can use unused legislative room within the TOU.

A never-ending story: Legal (un)certainty for the Dutch pre-pack?

The CJEU took a different turn and decided that Articles 3 and 4 TOU are not applicable to the transfer of an undertaking where the requirements of Article 5(1) TOU are met. Moreover, prior to the institution of insolvency proceedings the transfer of an undertaking has to be prepared with a view to the liquidation of the assets of the transferor. In addition, the claims of all creditors should be satisfied to the greatest extent possible. Also employment should be preserved as far as possible. Most important, the CJEU prescribes that a pre-pack procedure must be governed by statutory or regulatory provisions.

The pre-pack procedure – currently governed solely by rules derived from case law – has not been applied uniformly by Dutch courts. The resulting legal uncertainty was also pointed out in the Advocate General’s Opinion. The CJEU agrees with the Advocate General that this is undesirable. The CJEU stated that the pre-pack procedure set out in Dutch case law cannot be regarded as providing a framework for the implementation of the exception contained in Article 5(1) TOU and does not meet the requirement of legal certainty.

The CJEU seems to be imposing a new requirement to secure legal certainty: the pre-pack must be regulated by statutory or regulatory provisions, although this is not prescribed by Article 5(1) TOU. It has not been clearly defined what this may comprise. Currently, the WCO I bill is pending before the Dutch Senate. If the legislature steps up, it could be adopted in the short run and would promptly create this legal basis for future pre-packs. Nevertheless, this new requirement also leaves some uncertainty as to how this relates to prior pre-packs, such as the Heiploeg case.