In order to promote a "rescue culture", TUPE says that where the transferring business is the subject of bankruptcy or insolvency proceedings instituted "with a view to the liquidation of the assets of the transferor", the employees will not transfer and any dismissals connected with the transfer are not automatically unfair.

The wording of this insolvency exemption is contained in the European Acquired Rights Directive from which TUPE is derived. In Federatie Nederlandse Vakvereniging v Smallsteps BV the European Court was asked to decide if a pre-pack sale – designed to prepare the business transfer in advance so as to allow a swift re-launch once the insolvency had been declared – fell within this exemption.

The background to the case was:

  • 10 June 2014 – an insolvency administrator was appointed by a Dutch court for Estro Groep, a Netherlands childcare company.
  • 20 June – Smallsteps was created as a re-launch company to take over a large part of Estro Groep's business.
  • 5 July 2014 – Estro Groep was declared insolvent and the same day a "pre-pack" was signed between the insolvency administrator and Smallsteps.
  • 7 July 2014 – the insolvency administrator dismissed all the Estro Groep employees.
  • Smallsteps offered new contracts of employment to about two thirds of the staff.

A Dutch trade union and some of the dismissed employees applied to court for a declaration that all the employees had transferred automatically to Smallsteps. The Dutch court referred the issue to the European Court of Justice.

The European Court has now decided that the declaration of insolvency in the context of a pre-pack did not satisfy all the conditions for the exemption from the Acquired Rights Directive for insolvencies; in particular because the pre-pack procedure was not ultimately aimed at liquidating the assets.

In broad terms, this decision confirms the approach taken in the UK. In Key2Law (Surrey) LLP v De'Antiquis the Court of Appeal decided that administration proceedings are not capable of coming within the insolvency exception and therefore the employees in a pre-pack sale by an administrator automatically transfer to the buyer under TUPE and are protected against unfair dismissal as a result of the transfer.