Pre-pack bankruptcy is the transition of an enterprise in terms of employment law
The 22 June 2017 verdict by the European Court of Justice qualifies a pre-pack as the transition of an enterprise in terms of employment law. Because of this decision, the former employees of the childcare organisation Estro – including those employees who were not offered an employment contract – are automatically employed by the party making a new start. Dutch employment law attorney Lennard Noordzij expects this decision to have significant consequences.
What is a pre-pack?
A pre-pack is a re-start of an organisation that is prepared prior to bankruptcy and that is executed by the trustee immediately after the declaration of bankruptcy. A pre-pack generates more than a regular (unprepared) bankruptcy because there is more time to prepare the new start well and because bankruptcy has not yet been declared. In a pre-pack, a company in financial trouble asks the court to indicate which trustee will be appointed if the enterprise goes bankrupt, the so-called “silent trustee”.
Silent trustee prepares re-start after bankruptcy
The company with financial troubles approaches the silent trustee about preparing a re-start. Immediately after the declaration of bankruptcy, the (asset sale) agreement that has been prepared beforehand is concluded with the trustee who, in the meantime, has officially been designated by the court. Generally, the party performing the re-start resumes with only a portion of the employees from the bankruptcy. Familiar examples in which pre-packs were deployed include the bankruptcies of Royal Imtech, Schoenenreus, Heiploeg, Neckermann, Marlies Dekkers and McGregor.
What does a pre-pack mean for the employees?
In the event of the transition of an enterprise, employees are protected by law. If company A purchases (part of) company B and the entity of company B is retained, then the employees at company B automatically transition to company A. So they keep their jobs and their emoluments such as salary. However, the transition of the corporate regulations does not apply in the event of bankruptcy. So, in a bankruptcy, the employees do not automatically get transferred. Based on this exception, parties making a re-start to date only took some of the employees with them – and that may now change.
Pre-pack prior to the bankruptcy of childcare organisation Estro
Until its bankruptcy, the Estro Group ran approximately 380 childcare locations, which employed approximately 3600 people. In 2014, Estro was declared bankrupt. Estro’s bankruptcy was preceded by a pre-pack. The court appointed a silent trustee who negotiated a deal with a company (Smallsteps) whose major shareholder owned Estro. 250 of the 380 childcare locations were taken over by Smallsteps and 2600 of the 3600 employees were offered an employment contract.
Re-start: former employees demand continuance of employment contracts
With the assistance of an attorney, four former Estro employees initiated a lawsuit in which they stated that this involved a regular transition of a company and that they were therefore automatically employed by Smallsteps. The European Court of Justice agreed with this. The Dutch court has the final word and will likely adopt this decision. If the court does this, then the 1000 former employees of Estro will be automatically employed by Smallsteps. In that case, they can demand that they be re-employed and can also demand retroactive payment of salary. Furthermore, the 2600 employees who have received a new employment contract from Smallsteps can lodge a claim for their old terms of employment.
Consequences of the decision by the Court of Justice: employees’ claims
This decision by the court of justice also has consequences for other companies that have re-started using a pre-pack. Employees who have been dismissed unjustifiably can claim that they were automatically employed by the re-starting company at the time of the re-start. This may involve huge claims. For example, a former Estro employee can lodge a claim against Smallsteps for payment of salary retroactively to 5 July 2014.
Is the Dutch State liable? Liability lawsuits!
Improper implementation of European regulations by the Dutch State – which is the case here – can result in liability on the part of the Netherlands. Parties who have suffered damages by failure on the part of the Dutch government – consider the employees and the enterprises that have re-started – can initiate a liability lawsuit against the Dutch State for the damages they have suffered.