CJEU: Bringing employee protection to the forefront in business transfers implemented in the form of a “pre-pack”

If the form of a corporate restructuring includes a “pre-pack”, so that the transfer of an undertaking is prepared prior to the commencement of insolvency and completed immediately thereafter with the assistance of a prospective insolvency administrator appointed by the court, the legal provisions protecting employees still apply to the business transfer.

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Elisa Fiona Freund
Attorney at Law in Germany
Master Droit Européen – spécialité juriste franco-allemand

 

Elisa Fiona Freund

Estro Groep BV (Estro Group) used to be the largest childcare company in the Netherlands. It had approximately 380 facilities and about 3,600 employees. When it became clear that Estro Group would soon face illiquidity, a plan was drawn up to relaunch a key part of the Group. The relaunch would take place on the basis that 342 facilities out of the 380 would reopen, approximately 2,500 jobs would be kept and the services in all facilities continued in July 2014. With this objective in mind, Estro Group approached H.I.G. Capital, the sister company of its main shareholder, as a potential buyer.

On 5 June 2014, Estro Group applied to the Rechtbank Amsterdam (district court) for the appointment of a preliminary insolvency administrator, which took place on 10 June 2014. In preparation for the sale, the preliminary insolvency administrator founded Smallsteps on 20 June 2014, which was to take on a majority of Estro Group’s nurseries on behalf of H.I.G. Capital. Insolvency proceedings relating to the assets of Estro Group commenced on 5 July 2014. On the same day a sale agreement (pre-pack) was signed between the insolvency administrator and Smallsteps, in which the latter acquired the company with approximately 250 facilities of Estro Group and undertook to offer jobs to approximately 2,600 of its employees. The insolvency administrator laid off all Estro Group employees on 7 July 2014. Approximately 2,600 employees were offered a new employment contract by Smallsteps; more than 1,000 were ultimately made redundant.

The Federatie Nederlandse Vakvereniging, a Dutch trade union association, and four other co-plaintiffs employed in the facilities taken over by Smallsteps but who had not been offered new employment contracts after the insolvency, subsequently brought legal proceedings. They primarily sought a declaration that Directive 2001/23/EC was applicable to the pre-pack agreed between Estro Group and Smallsteps and therefore it must be presumed that the aforementioned co-plaintiffs had automatically joined the employment of Smallsteps on the same employment terms and conditions.

The Rechtbank Amsterdam stayed the proceedings and sent the CJEU a number of questions regarding the interpretation of Directive 2001/23/EC. In particular, the referring court asked whether the protection afforded in Articles 3 and 4 of Directive 2001/23/EC to employees in the case of business transfers is provided in a procedure such as the pre-pack procedure or whether the exception of Article 5(1) of Directive 2001/23/EC is activated instead.

The CJEU considers that the protective provisions of Directive 2001/23/EC apply to the facts of the case as presented since the pre-pack is not an exception within the meaning of the Directive. The CJEU first finds that Directive 2001/23/EC is essentially aimed at the protection of employees during business transfers, in particular by ensuring that their rights are safeguarded in the event of a change of employer. Article 4(1) of Directive 2001/23/EC protects employees from dismissal solely on the basis of the transfer by either the transferor or transferee.

By way of derogation, Article 5(1) of Directive 2001/23/EC lays down that this protection scheme does not apply to transfers of undertakings carried out in the following circumstances: the transferor must be the subject of bankruptcy proceedings instituted with a view to the liquidation of the assets of the transferor under the supervision of a competent public authority.

In its interpretation the CJEU indeed reaches the conclusion that the pre-pack at issue considered as a uniform procedure may be subsumed under the concept of “bankruptcy proceedings”. However, the Court considers that the other conditions have not been satisfied.

Article 5(1) of Directive 2001/23/EC requires that bankruptcy proceedings have been instituted with a view to the liquidation of the assets of the transferor. This was to be separated from the aim of  continuation of the undertaking. In effect, the pre-pack serves to prepare the transfer of an undertaking in order to enable a swift relaunch of its viable units and also safeguard the value of the undertaking and the jobs. Finally, the primary objective of the pre-pack is not liquidation, even though maximising satisfaction of creditors’ collective claims is pursued as a secondary aim, but continuation of the business. Therefore, depriving the affected employees of their legal status cannot be justified either on economic or social grounds.

Furthermore, in this case the third condition is not present either, since the preliminary insolvency administrator, for whom there is no basis for this in Dutch law, is not under the supervision of a competent public authority. While the preliminary insolvency administrator is appointed by the court at the request of the insolvent undertaking, he nonetheless has no formal powers. This is particularly the case since the prospective insolvency administrator mainly prepares the sale of the undertaking before commencement of the insolvency.

The judgment of the CJEU reinforces employee protection in business transfers. This is in line with the development observable in previous rulings by the CJEU. For companies in insolvency, however, this means that strict conditions must be observed during a restructuring. This is because in the case of a pre-pack employees must now be taken over by the new entity.

The pre-pack procedure is not in itself without controversy. On the one hand, it is seen as an attractive solution for maintaining a certain amount of business assets and jobs. On the other hand, it is precisely employment and insolvency legal practitioners who consider it contains the risk of bypassing the protective provisions for creditors and employees. Moreover, there is no legal basis for this procedure in the Netherlands. Unlike Germany, however, the Netherlands has enacted into law the exception for the application of the protective provisions for employee protection in business transfers in the case of insolvency.

The decision by the Dutch court to refer the matter for a preliminary ruling gave the CJEU the opportunity to bring to the forefront employee protection in the context of the pre-pack. However, it is doubtful whether this will create legal clarity. It is not possible to predict due to the extremely specific facts in this case whether this decision by the CJEU constitutes a decision on principles regarding the pre-pack. Furthermore, the question arises of when the exception provided for in Article 5(1) of Directive 2001/23/EC is ever activated. Second, the judgment leaves open how to appraise whether the primary objective of a pre-pack is the continuation of the undertaking or liquidation, or rather maximising proceeds, or whether the latter may be the primary objective at all. Given the Opinion of the Advocate General, however, the CJEU will uphold its position regarding employee protection if the aim is liquidation. This is because the criterion for the application of Directive 2001/23/EC is not just the objective of the procedure but also its form. Provided that the form of the overall concept is aimed at preserving the continuation of the business, both the Advocate General and the CJEU argue in favour of employee protection.

Elisa Fiona Freund, Attorney at Law in Germany, Master Droit Européen – spécialité juriste franco-allemand


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