According to a recent judgment by the Limburg District Court, a pre-pack procedure, or pre-pack, may no longer be used to dismiss employees or re-employ them on different terms of employment.

What is a pre-pack?

A pre-pack is a relaunch that is prepared in the background ahead of a bankruptcy, with the aim of getting a business restarted free of debts and employees’ rights. Immediately after the bankruptcy, often even the same day, the business is transferred and continued. For a long time, it was unclear whether the rules on transfers of undertaking applied to a pre-pack.

Smallsteps judgment

Last year, we put together a blog on the Smallsteps judgment. In that case, the European Court decided that the Dutch pre-pack was not a bankruptcy procedure or a procedure aimed at liquidation, but rather a procedure aimed at continuing the business. This means that the rules on transfers of undertaking apply in full, so that employees enjoy protection in the case of a pre-pack.

Limburg District Court

Despite the clear pronouncement by the European Court, the Dutch courts have so far failed to observe the ruling. But a sub-district judge at the Limburg District Court has finally done so.

The subject of the dispute was a transport company that had not moved all its employees to the new business in 2015, after a pre-pack arrangement. Old employees and those with any ‘mark’ against them were dumped. FNV and a number of the dismissed employees filed objections against the bankruptcy and opposed the termination of their employment contracts.

FNV lost its case against the insolvent limited company, but the sub-district judge in this case (that was initiated against the new, relaunched limited company) held that one of the motivations behind the bankruptcy procedure had been the relaunch of the insolvent business and not (simply) a liquidation of the assets. This meant that the protective rules under transfers of undertaking were applicable. As a result, the employees transferred to the new limited company, retaining their terms of employment.

As it happens, the employees in question derived little benefit from their victory, as the trustee in bankruptcy had already terminated their employment contracts before the relaunch and the employees at that point failed to claim (in good time) that these terminations were voidable. Consequently, they only transferred to the new company for the remainder of their notice periods.

What are the consequences of this judgment?

This judgment puts employees in a stronger position in the case of a pre-pack. Whether this actually represents any advantage for the employees of companies that become insolvent in the future remains to be seen, because a relaunch after a bankruptcy is less attractive if all of the employees have to be taken on again.