Filing for bankruptcy to dismiss an employee free of charge: abuse of Dutch bankruptcy law?

Employees enjoy dismissal protection under normal circumstances. They cannot simply be dismissed. Moreover, an employee who is not to blame for the dismissal is entitled to a transition payment. This protection is virtually absent in the event of the employer’s bankruptcy. This can lead to the abuse of bankruptcy law. Dutch insolvency law lawyer Marco Guit explains.

Termination of contract of employment by insolvency practitioner in the Netherlands

After a bankruptcy, an insolvency practitioner in the Netherlands may – and usually will – decide to terminate the employment contracts (with a short notice period). For this type of dismissal, the Employment Insurance Agency (UWV) does not require a severance payment, and there is no entitlement to a transition payment. The idea behind this in the Netherlands is that you cannot squeeze blood out of a stone, which means that employees are often left empty-handed.

Abuse of Dutch bankruptcy law

Under normal circumstances, the dismissal of (redundant) personnel is not easy in the Netherlands and often costly for the employer. Therefore, it is not surprising that some employers try to avoid the strict Dutch dismissal regulations by filing for bankruptcy. This is – justifiably – regarded as the abuse of bankruptcy law.

Indicators of the abuse of bankruptcy law

Abuse is usually assumed if the bankrupt orchestrated the inability to pay. There is also abuse if the following indicators – developed in case-law – occur:

1. the company files for bankruptcy;
2. the financial necessity – if any – arises (among other things) from a surplus of personnel;
3. filing for bankruptcy takes place shortly after dismissal permits or collective dismissals were refused or shortly after the withdrawal of requests for termination;
4. at the time of the declaration of bankruptcy, extensive restart plans were already in place;
5. the company’s business activities are continued in another legal entity or partnership by the directors or related legal entities, or there are other close links between the acquirer and the transferor;
6. the transferee wishes to take over the company albeit in a leaner form.

Director liable?

In a recent Court of Appeal ruling, an employee’s lawyer held an employer’s director liable for the abuse of bankruptcy law. In this case, the employer had applied for a dismissal permit for the employee, but this was refused. Subsequently, the employer negotiated with the employee about a company takeover. These negotiations broke down.

Filing for bankruptcy

The employer then filed for bankruptcy. A salient detail is that the main clients and the majority of the inventory of the employer were transferred to a new company (which was also managed by the director) before the bankruptcy.

Circumventing Dutch dismissal protection

According to the employee’s lawyer, there was a case of abuse because the employer only filed for bankruptcy to get rid of the employee and to be able to continue their business in the new company. The employer simply wanted to circumvent the dismissal regulations. The Court of Appeal agreed with this argument.

Bankruptcy Law Lawyer in the Netherlands

The Court of Appeal went through the above list and concluded that – more or less -all indicators were present. In particular, the fact that the employer’s business was already being continued in another company, but without the employee, was decisive. They were only trying to “get rid of” the employee. The director can be personally blamed for a serious instance of this action. In doing so, they acted unlawfully towards the employee and are liable for the damage suffered by him.