Supreme Court clarifies the position of employees in the event of a restart
On 17 April 2020 the Supreme Court handed down an important interim judgment concerning the pre-pack bankruptcy of Heiploeg. In this judgment, the Supreme Court holds that the rules on the Transfer of Undertakings (as explained further below) do not apply to a restart following bankruptcy. In addition, the Supreme Court holds that the rules on the Transfer of Undertakings do not always apply in the case of a restart that has been prepared by means of a pre-pack. The Supreme Court takes the view that in the pre-pack bankruptcy of Heiploeg these rules do not apply. However, in view of the contents of the Smallsteps judgment, the Supreme Court will request a preliminary ruling from the Court of Justice of the European Union (CJEU).
Rules on the Transfer of Undertakings
Article 7:663 of the Dutch Civil Code (DCC) lays down that with the transfer of an undertaking (or part thereof), the rights and obligations arising at that moment for the employer in that undertaking from an employment contract between the employer and an employee working there are transferred by operation of law to the acquirer (the TUPE rules). Under Article 7:666, preamble and (a) DCC, however, these TUPE rules do not apply in the case of a bankruptcy. These TUPE rules form the implementation of Article 3(1) and Article 5(1) (and their predecessors) of Directive 2001/23/EC (the Directive) and for that reason must be interpreted according to the Directive.
In 2017 the CJEU gave its response to the request for a preliminary ruling that had been submitted by the Court of Midden-Nederland concerning the applicability of the TUPE rules in the bankruptcy of Estro. This bankruptcy was prepared by means of a pre-pack and resulted in a restart by Smallsteps (an undertaking affiliated to Estro), in which only some of the employees were offered an employment contract with Smallsteps. The FNV Trade Union Confederation and former employees took the view that all employees belonging to the childcare centres transferred were transferred on the grounds of the TUPE rules. Smallsteps disputed this and relied on the exception of Article 7:666 DCC/Article 5(1) of the Directive. In response to the request for a preliminary ruling submitted by the Court of Midden-Nederland, the CJEU judged that the exception of Article 5(1) must ‘necessarily be interpreted strictly’ and is only applicable if three cumulative criteria are met:
- The transferor is involved in liquidation proceedings or similar proceedings;
- The proceedings concerned have been instituted with a view to liquidating the assets of the transferor; and
- The proceedings concerned are being overseen by a competent government authority.
Briefly, the CJEU judged in the Smallsteps ruling that with a pre-pack as is the case in the main proceedings (i) the intention is not to liquidate the undertaking but to retain the main object of the insolvent undertaking, and therefore condition 2 is not met, and (ii) since the pre-pack is actually being largely prepared by the board and although an intended trustee in bankruptcy and an intended delegated judge have been appointed they do not possess any formal authority whatsoever, the proceedings are therefore not being overseen by a competent government authority and so condition 3 is not met either.
Continuity of Enterprises Act I and the transfer of an undertaking in liquidation
The Smallsteps judgment caused considerable disquiet and confusion: were the TUPE rules applicable to all restarts that had been prepared with a pre-pack, and what was the situation with the other restarts that took place after the bankruptcy? Was condition 2 of the Smallsteps judgment still met in those cases? In response, the bill that was designed to formalise the pre-pack bankruptcy (Continuity of Enterprises Act I) was deferred and a new bill was developed: the Transfer of Undertakings in bankruptcy. This bill aims to put an end to the uncertainty caused by the Smallsteps judgment and would make it possible to formalise the pre-pack bankruptcy. This bill no longer makes use of the exception of Article 5(1) of the Directive but – briefly – all employees are in principle transferred. However, the option exists for the acquirer not to take on all the employees for ETO (economic, technical or organisational) reasons (where the employer himself may not choose, but where the reverse reflection principle applies). The bill was submitted last summer for internet consultation. It contains many complications and was subject to much criticism.
In the meantime, the matter concerning the bankruptcy of Heiploeg was ongoing. Just as with Smallsteps, Heiploeg underwent a restart in 2014 following bankruptcy. The restart was also prepared in a pre-pack prior to bankruptcy. An important difference between Smallsteps and Heiploeg, according to the Supreme Court, is that at Heiploeg the restart did not take place with an affiliated partner but with a third party. On the basis of the facts, both the Court of Overijssel and the Appeal Court of Arnhem-Leeuwarden held that the exception of Article 7:666 DCC applies and therefore the TUPE rules do not apply. The FNV Dutch Trade Union Confederation has taken an appeal against this to the Supreme Court.
In the interim judgment published on 17 April 2020, the Supreme Court explains, amongst other things, how bankruptcy proceedings work in the Netherlands and are laid down in the Bankruptcy Act. The Supreme Court then concludes in ground 3.5.3 that ‘the starting point is that (i) Dutch bankruptcy proceedings are proceedings that aim to liquidate the assets of the debtor and (ii) these proceedings are overseen by a competent government authority. The question is whether this, as can be concluded from the Smallsteps judgment, is different in all cases where the bankruptcy is preceded by a pre-pack.”
The Supreme Court appears to say here that, as far as it is concerned, in all bankruptcy situations (with or without a restart) that do not make use of a pre-pack, the conditions of Article 5(1) of the Directive are met and therefore the TUPE rules do not apply. In view of the Smallsteps judgment, however, it is unclear what the situation is if the restart is prepared in a pre-pack. According to the Supreme Court, in the Smallsteps proceedings the CJEU was insufficiently informed of the pre-pack procedure and it takes the view that, depending on the circumstances of the case, all the conditions of Article 5(1) of the Directive can be met in a pre-pack situation too, and consequently the TUPE rules would not apply. The Supreme Court holds that in the Heiploeg case, all conditions have still been met despite the fact that a pre-pack has been used. However, since there is some reasonable doubt about the latter in view of the Smallsteps judgment, the Supreme Court will request a preliminary ruling from the CJEU, from which it must become clear whether the conditions of Article 5(1) of the Directive can also be met in a pre-pack situation.
In this interim judgment, the Supreme Court appears to give a clear opinion on the applicability of the TUPE rules in the event of a restart; these do not apply in the case of a restart following bankruptcy. Similarly, if a pre-pack is used, according to the Supreme Court the TUPE rules do not always need to apply. However, the Supreme Court will submit this to the CJEU with a request for a preliminary ruling. There is a considerable chance that this will mean that the Continuity of Enterprises I bill will be binned and, depending on the responses of the CJEU, the Transfer of Undertakings in Bankruptcy bill (formalising the pre-pack) will either be introduced or be binned too.
Maureen te PoelCounsel Attorney at law
Maureen te Poel, attorney at law, is a member of the Employment & Benefits practice group. She has over 21 years of experience as a lawyer, of which 8 years in the M&A department. The last 13 years she has been focusing on all-round employment law, with a particular focus on the employment aspects of M&A-deals and restructurings, co-determination procedures, remuneration structures and sector-specific regulations on remuneration.T: +31 20 578 54 64 E: email@example.com