How much longer will the so-called 'Pre-pack' last?

Tuesday, 4 April 2017

Introduction

By judgement of the 24th of February 2016, the District Court Midden-Nederland has asked preliminary questions to the European Court of Justice regarding -in short- the figure of the so-called ‘pre-pack’ (which has been introduced in the Netherlands) in relation to (European) Directive 2001/23/EG regarding the transfer of undertakings. Recently, Advocate General Mengozzi has rendered his opinion to the European Court of Justice. In case this opinion will be followed -which still needs to be waited for- the question is which consequences this will have for the pre-pack (in its current form).

Bankruptcy Estro

The Estro-group has been declared bankrupt on the 5th of July 2014. Until the date of the bankruptcy, the Estro-group was the largest childcare organization in the Netherlands with approximately 380 business locations and approximately 3600 employees. This bankruptcy followed after a so-called ‘pre-pack’. In case of a pre-pack, an asset transaction is prepared with the help of an at the request of the debtor by the District Court appointed ‘envisaged bankruptcy trustee’ befóre the bankruptcy, which asset transaction will be carried out by this envisaged bankruptcy trustee immediately after the judgement regarding the bankruptcy has been given. In case of the Estro-group, in this way a restart was realized immediately after the bankruptcy. However, not all business locations were included in this restart. A (significant) part of the employees was not included in this restart as well (approximately 1000 employees).

Pre-pack

Since some time and with some regularity, some District Courts in the Netherlands allow the use of the pre-pack. The purpose of the pre-pack is to involve an envisaged bankruptcy trustee in a company in (severe) financial trouble before this company is declared bankrupt. The aforementioned not only for the purpose of an efficient liquidation, but with a view to the acceleration of the restarting of the viable elements of the company after the bankruptcy as well (in order to make sure that the value of the company as well as the employment remain the same as much as possible). Until now, there is no legal basis for the pre-pack. However, a bill which needs to realize this legal basis now is pending.

Transfer of undertakings

Article 7:662 (et seq.)of the Dutch Civil Code states that, in case of a transfer of undertakings, employees change to the transferee of the company by law. This means that all rights and obligations arising from the employment agreements pass to the transferee as well. These protective provisions however do not apply in case of a bankruptcy (according to article 7:666 of the Dutch Civil Code). Before this provision was included in the law, the European Court of Justice ruled that in case of a restart of a company as part of bankruptcy proceedings, this is not considered a transfer of undertakings. The aforementioned among other things because of the fact that considering such a restart a transfer of undertakings might have a negative effect on employment.

Not only because of article 5 of Directive 2001/23 of the 12th of March 2001 (regarding the transfer of undertakings) but also because of several judgements of the European Court of Justice regarding -in short- the scope of the aforementioned Directive, since a considerable time the question whether or not this exception is applicable as well in case of a pre-pack, is topic of discussion in literature. In that context, it is argued that the pre-pack is not (only) aimed at the liquidation of assets, but more at (for example) the maintenance of the organizational connection.

Preliminary questions and Opinion Advocate General

By judgement of the 24th of February 2016, the District Court Midden-Nederland has asked preliminary questions to the European Court of Justice, which questions in essence come down to the question whether or not the pre-pack is compatible with the aim and purpose of the Directive regarding the transfer of undertakings and if the rules of this Directive do apply in case of a pre-pack (in which case all employees change to the transferee of the company by law).

On the 29th of March 2017, Advocate General Mengozzi has rendered his opinion regarding these preliminary questions to the European Court of Justice. He is of the opinion that, in view of the objective which it pursues and of the form in which it is applied, a procedure such as the pre-pack can not be regarded as a bankruptcy procedure or any analogous insolvency proceedings which have been instituted with a view to the liquidation of the assets of the transferor, despite the fact that the pre-pack in part may be conducted as part of an insolvency procedure. The pre-pack therefore does not come under the exception to the rules regarding the transfer of undertakings, reason why employees of the company concerned are entitled to the protection the rules regarding the transfer of undertakings do offer to employees.

The Advocate-General furthermore states that in the event of a transfer of an undertaking as part of a pre-pack, and inasmuch as the Netherlands Insolvency procedure (as applied by some courts in the Netherlands) does not provide for the application to the employees of the transferor undertaking (or of the parts being transferred) of the protection scheme laid down for their benefit (in the Directive), that procedure is not consistent with the Directive. It is for the referring court, taking the whole body of domestic law into consideration and applying the interpretative methods recognised by it, to achieve an outcome consistent with the objective pursued by the Directive and therefore to ensure that, in the event of a transfer of an undertaking or some of its parts, as part of a pre-pack, the protection scheme laid down in Directive 2001/23 is applied for the benefit of the employees of the assigned parts of the undertaking (in the opinion of the Advocate General).

Conclusion

The opinion of the Advocate-General is an advice to the European Court of Justice. It therefore still remains to be seen whether or not this opinion will be followed. In this context, it is to be mentioned that there (namely) are some arguments to state that the pre-pack can be regarded as a bankruptcy procedure which has been instituted with a view to the liquidation of the assets of the transferor as well (and therefore does come under the exception to the rules regarding the transfer of undertakings).

In case the European Court does follow the opinion of the Advocate-General, this might have some consequences for the pre-pack. Part of a successful restructuring (which is one of the main purposes of a prepack) namely is the benefit (as a transferee) of being able to choose which employees of the company in financial trouble he wants to offer a new employment agreement. It therefore is the question which consequences a judgement (in line with the opinion of the Advocate General) will have for the bill which is pending and, in case the pre-pack does get a legal basis in the Bankruptcy Act, the extent in which the pre-pack (nevertheless) can be used successfully. However, it is important to notice at this point that the pre-pack is not the only procedure which can be used to realize a successful restructuring; the Dutch proceedings ‘suspension of payment’ is a good alternative to prepare a prudent takeover.

In case you have any questions, please contact Matthijs Steenpoorte or Sanne Jansen (Insolvency Law and Restructuring) or Suzan Wolters (Employment Law).