Pre-pack continues to be a hotly discussed topic. The term refers to when entrepreneurs who expect to go bankrupt request the courts to appoint a receiver to look into the possibility of a restart following bankruptcy. Courts vary as to their standpoint concerning the acceptability of applying the pre-pack method. The purpose of the proposed Continuity of Businesses Act I (WCO I) is to put an end to such uncertainty and to enshrine pre-pack in law.

The WCO I was passed by the Lower House on 21 June 2016. Until recently, all the signs were that there was a green light for the legislation to be enacted into law, and that its passage by the Upper House on 4 April 2017 would be a mere formality. However, on the day, due to the emphatic opinion of the Advocate General at the European Court of Justice (HCJ) regarding Smallsteps (29 March 2017), the Upper House wound up abstaining from voting on the act.

What now?

From the very start, the proposed legislation elicited (labour law) reservations. Roughly speaking, the criticisms can be divided into two categories: (a lack of) co-determination within the pre-pack procedure, and the question as to whether the exclusion of the rules regarding transfer of undertaking (‘TOU’) is in fact desirable and juristically correct.

More co-determination?

In a previous blog we already reported that the Lower House had approved an amendment to the WCO I, by virtue of which the receiver is required (actively) to involve the works council in the silent preparatory phase of pre-pack. However, although the amendment signifies a partial accommodation of the first point of criticism, it is open to debate whether, as a result of it, the desired co-determination is sufficiently delineated.

Transfer of undertaking nevertheless?

At the same time, the Lower House rejected an amendment which would have declared TOU applicable where a bankruptcy restart takes place within three months of the appointment of a receiver, provided the restarting entrepreneur is also a connected party. Crucial in this regard had been the standpoint of the government that a pre-pack procedure falls within the scope of the exception under Art. 5 §1 of Directive 2001/23/EC (‘the Directive’), namely that the rules concerning TOU are not applicable where “bankruptcy proceedings or similar proceedings with a view to the liquidation of assets of the alienator under the supervision of an authorised government agency” are involved.

From the start, sceptics had doubted whether this standpoint of the government’s would stand up to scrutiny. Their main argument was that the purpose of pre-pack is not the liquidation of such a business, but rather, its continuity, an argument in line with years of European case law, where the reasoning – in a nutshell – is as follows: where the continuity and operation of the business are paramount, the principle of employee protection does not, in the event of a transfer of undertaking, justify taking away from employees the rights they derive from the Directive.

And what about Heiploeg and Estro?

The trade unions involved in these cases asserted that the restart of these businesses was contrary to the object of both the Directive and Art. 7:662 et seq. Netherlands Civil Code, as the pre-pack procedure is intended for the continuity of businesses. Correspondingly, in the Heiploeg case, the production process was not even stopped, the same premises were taken over and, following restart, the organisation was hardly changed, if at all. In addition, the sale of the company’s assets had already taken place prior to bankruptcy. In the case of Estro (hereinafter: ‘Smallsteps’), it was additionally the case that the restart was carried out by a connected party.

In the Heiploeg case, the trade unions drew the shorter straw. In the Smallsteps case, the subdistrict court decided to refer questions to the Court of Justice for a preliminary ruling.

An initial standpoint?

And so it came to pass. Although the Court of Justice has not yet ruled on the matter, the Advocate General has already delivered his opinion, namely that the Dutch pre-pack procedure is neither a bankruptcy procedure nor a procedure for the purpose of liquidation. Thus, it does not fall within the scope of the exception under Art. 5 §1 of the Directive. The TOU provisions therefore apply fully to pre-pack.

Pre-pack: a sinking ship?

There can be no doubt that, if it is determined that the TOU rules fully apply in the context of the pre-pack procedure, the procedure will promptly start to diminish in popularity. Potential purchasers will think twice about taking over a business with financial troubles if they risk being ‘saddled’ with all of its employees. The Advocate General is aware of this, but at the same time points to the fact that the HCJ has on several occasions already rejected such arguments out of hand.

Put succinctly, a ruling on the Smallsteps case can probably first be expected a year from now. What the Upper House will now do is difficult to predict – all in all, reason enough for all eyes to be on Luxemburg.

You can real the full rulings in the Heiploeg case and the Estro case (both in Dutch) here and here.