The European Court of Justice (“ECJ”) has confirmed that, in the event of a “pre-pack” sale aimed at rescuing all or part of an insolvent undertaking as a going concern, EU transfer of undertakings law requires that the employees automatically transfer. This is consistent with the position in the UK under TUPE.

The ECJ was required to consider the application of the EU Acquired Rights Directive to a “pre-pack” insolvency sale of a childcare business in the Netherlands. Following substantially the same reasoning as the UK Court of Appeal ruling in Key2Law (Surrey) LLP v D’Antiquis [2012] IRLR 212, the ECJ concluded that a pre-pack sale was primarily concerned with facilitating the continuation rather than the liquidation of the undertaking. Accordingly, there was no basis for invoking the exemption in article 5 of the Directive to the normal transfer principle.

Article 5(1) disapplies the automatic transfer of employees in circumstances where the transferor is the subject of “bankruptcy” or “analogous insolvency proceedings” that have been “instituted with a view to liquidation of the assets… under the supervision of a competent public authority”. The central issue for the ECJ was whether the pre-pack sale of a business in question (Estro Groep) fell into that category.

Facts of the case

Estro Groep ran into difficulties and, by late 2013, it was clear the business would soon struggle to meet its financial obligations. The principal shareholder formed a plan to arrange a pre-pack sale under which a newly incorporated company (“Smallsteps”) would acquire the majority of Estro’s nurseries immediately after the business has been declared insolvent.

Following the administrator’s appointment, Estro was declared insolvent on 5 July 2014. On the same day, the administrator sold 250 of Estro’s 380 nurseries to Smallsteps. The sale had in effect been agreed and prepared at an earlier stage, ready to implement upon and take advantage of the insolvency declaration. The administrator then dismissed all of Estro’s 3,600 employees and Smallsteps offered new employment to approximately 2,600 of them.

Four affected employees and a trade union applied to the Dutch courts for a declaration that the sale to Smallsteps amounted to a transfer of an undertaking and that the employment of the employees working in the 250 nurseries had therefore automatically transferred to Smallsteps. The Dutch court referred various questions to the ECJ, essentially to determine whether this was a case to which the article 5(1) exemption should apply.

The ECJ’s judgment

The ECJ emphasised the need to interpret article 5(1) strictly, given the impact of this derogation on fundamental employment rights. Notwithstanding the declaration of insolvency, it was clear in this case that the procedure had not been initiated with a view to liquidating Estro’s assets. The pre-pack procedure was designed to facilitate the seamless transfer of the undertaking without the inevitable disruption that would otherwise result from an abrupt cessation of its activities on the declaration of insolvency, and in order to safeguard the value and viability of the undertaking. In that context, there could be no question of the article 5(1) derogation test being met.

The ECJ further ruled that it was irrelevant that a secondary aim or benefit of the pre-pack sale was to maximise the satisfaction of creditors’ claims. Where motives overlap, the focus is on the primary objective, which in this case had clearly been to safeguard the continuation of the undertaking (or at least a substantial part of it).

The Advocate General’s opinion in this case (which had also concluded article 5(1) did not apply) raised questions over whether the remaining part of the test would have been met in any event - that the liquidation of the assets must be done under the supervision of a competent public authority. In this case, both the administrator and the national judge had relatively limited powers and influence compared with a (terminal) insolvency process and the judge had been aware of the pre-pack plan before making the insolvency declaration. The Advocate General was sceptical that this went far enough properly to be considered supervision by a competent public authority.

Implications

The ECJ’s decision stands to reason. Where the undertaking will cease to operate and the insolvency practitioner’s role is simply to realise the best value from the assets for the benefit of creditors, there is no realistic prospect of continued employment and no role for the Acquired Rights Directive to play in promoting it. By contrast, in “non-terminal’” insolvency procedures such as administrations, and particularly pre-pack sales, the idea is very much to salvage the undertaking by selling it (or at least the viable parts of it) as a going concern.

There are differences between the facts of this case - and Dutch pre-pack arrangements in general - and similar UK cases. However, it is now clear that the approach currently adopted by UK courts and tribunals following Key2Law - that administrations should not be regarded as exempt insolvency proceedings under the equivalent provisions in regulation 8(7) of TUPE - is correct as a matter of principle.

Federatie Nederlandse Vakvereniging v Smallsteps BV [2017] IRLR 852 – judgment available here