Employee protection during pre-pack

On 22 June 2017, the European Court of Justice (hereinafter “ECJ”) clarified the uncertainty around protection of employees against dismissal during a pre-pack. The ECJ has ruled that the EU Directive on Transfer of Undertakings (Directive 2001/23/EC) also applies in case of a relaunch of a company due to a pre-pack. As a result of this the employees are transferred to the restarting company by operation of law upon retention of their terms and conditions of employment.

In short, the pre-pack is a procedure whereby prior to the bankruptcy order a restructuring plan is prepared  in silence, under the supervision of a court-appointed prospective insolvency administrator,  which  facilitates a relaunch after the bankruptcy order. During the bankruptcy the regulations regarding a so-called  ‘transfer of an undertaking’ do not apply. As a result of which the acquirer, in his capacity as ‘restarter’,  can ‘pick and choose’ which employees he will employ.

This is what happened in the Estro-case whereby, following the bankruptcy of Estro Group and its subsidiaries, Smallsteps acquired 251 branches and 2,600 employees. About 1000 employees lost their jobs, since they were not offered employment by Smallsteps. The trade union organization FNV and 4 employees, who were not offered new contracts of employment, turned to the court and requested a declaratory decision that the Directive 2001/23/EC is applicable on the relaunch of 251 childcare facilities of the Estro Group, as a result of which all employees are employed by Smallsteps by operation of law. The court in turn posed preliminary questions to the ECJ as to whether a pre-pack falls within the scope of the Directive 2001/23/EC.

The ECJ ruled in favor of FNV and the 4 employees and considered that the Directive 2001/23/EC is applicable in a situation whereby (i) the transfer of an undertaking takes place following a bankruptcy order; (ii) the transfer of an undertaking takes place in the context of a ‘pre-pack’ when that ‘pre-pack’ is prepared before the bankruptcy order and executed immediately after that bankruptcy order, (iii) in connection with which, in particular, a court-appointed prospective insolvency administrator, investigates the possibilities for a continuation of activities of that undertaking by a third party and (iv) this insolvency administrator prepares for acts which must be carried out shortly after the bankruptcy to enable such continuation to take place. This ruling by the ECJ would seem to imply that in the event of a pre-pack employees retain the employment protection laid down in Directive 2001/23/EC. As such this ECJ ruling marks the end of the pre-pack as an effective reorganization tool.