For the first time, the European Court has been called on to examine the concept of `pre-pack' insolvency sales and the application of the Acquired Rights Directive. Advocate General Mengozzi has given his preliminary opinion in Federatie Nederlandse Vakvereniging v Smallsteps BV (Case C-126/16).

A pre-pack insolvency sale is basically a sale organised prior to an administration of an insolvent company, with an expectation that, once appointed, the administrator will promptly implement the sale. It first developed as a concept in the US and the UK and then spread to a number of EU Member States, for example in Germany, France and the Netherlands. This case originated from the courts in the Netherlands.

In Article 5(1) of the Acquired Rights Directive 2001/23/EC it is provided that, unless Member States stipulate otherwise, Article 3 and 4 (the transfer of the employment contract and protection against dismissal) do 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 (which may be an insolvency practitioner authorised by a competent public authority)".

This is the pattern followed by the UK TUPE Regulations. Regulation 8(7) of TUPE provides that regulations 4 (transfer of employment contracts) and regulation 7 (control of dismissals because of the relevant transfer) do not "apply to any relevant transfer 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 an insolvency practitioner".

In the UK, the Court of Appeal, in De'Antiquis v Key2Law (Surrey) LLP [2000] EWCA (Civ) 1567, adopted an absolute approach to the question of whether sales from by an administrator of an insolvent company are covered by TUPE. It held that regulation 8(7) can never apply to purchases from administrators. This is because the purpose of UK administration proceedings is not to liquidate the assets of the transferor but to ensure, if possible, its rescue. Upon an insolvency sale following administration in the UK, the full protection of TUPE therefore applies to the transferring employees of the transferor. This is so even though this is a "pre-pack" insolvency sale (see OTG Limited v Barke UKEAT/0320/09 and De'Antiquis).

In the Netherlands pre-pack procedures have not been regulated by statute but are, rather, a product of insolvency practice. In the present case the AG recognised that in dealing with the applicability of the Acquired Rights Directive to a pre-pack insolvency sale, it must strive to find a fair balance between, on the one hand, the imperative not to undermine the use of legal instruments such as the pre-pack, which in its opinion pursued the "laudable" aim of saving units which are still economically viable, and, on the other, the requirement not to circumvent the protection of employees, whose rights are guaranteed by EU law.

The Advocate General confirmed that in considering whether the Directive is applicable to a transfer taking place in these circumstances, the Court must consider two criteria, that is to say the objective of the procedure in question and the form of that procedure, whilst always having regard to the purpose of the Directive. He noted that the aim of the structure of the pre-pack procedure is to avoid the disruption that would result from the sudden cessation of the undertaking's activities at the point of declaration of insolvency, which would lead to a significant loss in the value of the undertaking or viable parts being assigned. That is why, the Advocate General pointed out, these the preparatory steps towards a pre-pack sale are generally held in secret. There was no doubt that the objective for this procedure was aimed at transferring the undertaking (or its still viable units) in order to restart the business without interruption. The Advocate General regarded this purpose as commendable. The aim was not therefore to liquidate the assets of the insolvent company but to ensure its continuance. So the procedure did not fall under the exception laid down in Article 5(1) and the full protection of the Directive and articles 3 and 4 applied. The domestic courts in the Netherlands (and in other Member States) should apply interpretative methods to achieve an outcome consistent with the objective perceived by Directive 2001/23 and therefore to ensure that, in the event of a transfer as part of a pre-pack, the protection scheme laid down in the Acquired Rights Directive is applied for the benefit of of the employees of the relevant parts of the undertaking.