On 29 March 2017, Advocate General Mengozzi rendered his opinion to the EU Court of Justice in the landmark case regarding the Estro pre-packed bankruptcy. Advocate General Mengozzi opines that a pre-pack does not fall under the exception to the EU Directive on transfer of undertakings, so that all rights and obligations of employees of the bankrupt transferor of an undertaking are automatically transferred to the transferee in case of a sale through a pre-pack. If the EU Court of Justice follows this opinion, this would probably mean the end of pre-packs as we currently know them.

In summary, a pre-pack occurs when a District Court appoints an “envisaged bankruptcy trustee” at the request of the company for an initial period of two weeks, known as the “silent period”. The purpose is to allow the company to prepare and negotiate an asset sale prior to bankruptcy, i.e. to “pre-pack” matters as much as possible in a structured way. After this two week period, the company will normally enter into formal bankruptcy proceedings, the envisaged bankruptcy trustee will normally be appointed as bankruptcy trustee and he will execute the prepared asset sale.

The Dutch Bankruptcy Act does not yet contain any provision for the pre-pack, but new legislation, the Wet Continuïteit Ondernemingen I is expected to enter into force in 2017. Since 2013, 8 out of 11 Dutch District Courts have been experimenting with pre-packs in an ongoing “pilot program”.

The Dutch childcare company Estro went into bankruptcy following a pre-pack and its business was sold to Smallsteps, which offered new employment agreements to some of Estro’s personnel on less favourable terms. The Dutch union FNV opposed this and started litigation together with several employees.

The Dutch Court dealing with the case posed preliminary questions to the EU Court of Justice on whether a sale through a pre-packed insolvency falls within the scope of the EU Directive on transfer of undertakings (also known as the Acquired Rights Directive). In summary, if the Directive applies this would mean that the relevant Estro employees who previously worked at the locations acquired by Smallsteps will automatically be transferred to Smallsteps and so will be Estro’s rights and obligations towards such employees. Pursuant to Article 5 of the EU Directive on transfer of undertakings, the automatic transfer shall not apply to any transfer of an undertaking where the transferor is the subject of bankruptcy proceedings or any analogous insolvency proceedings which have been instituted with a view to the liquidation of the assets of the transferor and are under the supervision of a competent public authority. The key question is whether this exception also applies to pre-packs.

Advocate General Mengozzi rendered his opinion in this case. In his opinion:

” In view of the objective which it pursues and of the form in which it is applied, and although it may, in part, be conducted as part of an insolvency procedure, a procedure such as that developed in the Netherlands leading to the conclusion of a pre-pack could 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 and as being under the supervision of a competent public authority, for the purposes of Article 5(1) of Council Directive 2001/23/EC of 12 March 2001 on the approximation of the laws of the Member States relating to the safeguarding of employees’ rights in the event of transfers of undertakings, businesses or parts of undertakings or businesses Accordingly, such a procedure does not come under the exception laid down in that provision, so that the protection scheme laid down in Articles 3 and 4 of Directive 2001/23 applies to a transfer of an undertaking, or its still viable parts, as part of such a pre-pack. (…)

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 Articles 3 and 4 of Directive 2001/23, that procedure is not consistent with that 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 Directive 2001/23 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.”

If the EU Court of Justice will take over this view, this will significantly deteriorate the usability of pre-packs. This is due to the fact that in many bankruptcies, the number of employees is one of the key drivers for losses. For a successful restructuring of such undertakings, it is key to be able to take over only some of the employees of the bankrupt entity. This will no longer be possible in case of a pre-pack if the EU Court of Justice follows the Advocate General’s opinion.