Case C-126/16, Federatie Nederlandse Vakvereniging – worker rights, failing firms and pre-pack administration

Economic recession sends many companies to the wall. Insolvency can result in workers losing their jobs and creditors losing most of their money. One solution to the problem has been the development of a ‘pre-pack administration’. A court-appointed administrator will sell the failing business at or soon after his appointment. Oddly, the buyers will often be the firm’s existing owners or directors. The novelty with a pre-pack is that all of the preparatory work is done prior to the sale happening. In other words, the work is done before the formal notice of administration order has been made, and it is done even before the creditors have been told about the firm’s failure. Although this insolvency solution has its roots in English law, it has recently been transplanted and adopted by some of the courts in Holland. However, a Dutch court faced with a Dutch pre-pack administration has decided to ask the CJEU whether this Dutch judicial practice is in conformity with the EU’s ‘transfer of undertakings’ Directive 2001/23/EC?

When firms get into economic difficulty, the value of workers’ rights can be traduced. The response of EU labour law to date has been to build some legal protection into situations where a firm has become insolvent or where a firm is taken over and transferred to a different company.

Of course, an insolvency order issued by a court comes relatively late in the process of corporate transition. Failing firms that are in really serious financial difficulty often know they are going to the wall long before they actually hit it. Hence, it is quite proper to ask why the law does not intervene prior to the courts issuing an insolvency order.

The question has generated a novel answer in some of Holland’s courts. Dubbed a ‘pre-pack’, the Dutch courts have given themselves the power to appoint a particular person to become a silent director in the failing firm. This person has the task of preparing the company’s assets so that they can be transferred to the court-appointed insolvency administrator immediately upon the court declaring the company to be insolvent. Curiously, the silent director then also becomes the court-appointed insolvency administrator.

This new shoot of Dutch labour law is rather fragile, however. To start with, only 7 of Holland’s many district courts are using this ‘pre-pack’. Consequently, coverage of the scheme does not extend to all firms (and workers) across the country. Furthermore, and this is a more serious problem, the pre-pack is a creation of the judges in those 7 Dutch courts but one that lacks any footing in Dutch legislation and the Dutch Civil Code.

It is against this rather peculiar backdrop that the present case has been played out. In 2014, Holland’s largest provider of crèche services, Estro, went bust and a court in Amsterdam declared the company to be insolvent.

Because Amsterdam is one of the courts using a pre-pack, it was decided that a new company should be built from the ruined (but remaining) assets belonging to Estro. The new company would trade as Smallsteps, and would take over 250 of Estro’s 350 former branches. From those figures, it became obvious that Smallsteps would not take on the remaining 100 branches of Estro.

Furthermore, Smallsteps would only employ 2600 people from Estro’s former workforce of 3600 employees. Therefore, as a result of the pre-pack, 1000 people lost their jobs.

Fortunately, some of Estro’s former-employees were also members of a union that is affiliated to the Dutch FNV trade union (the Federatie Nederlandse Vakvereniging). The FNV’s lawyers took the view that since the insolvency was a pre-pack, none of the 1000 people should have lost their jobs on Estro’s assets being transferred to Smallsteps. Equally, they took the view that none of the Estro workers who were transferred to Smallsteps under the pre-pack should have suffered any loss of their accrued social rights or changes to their existing terms and conditions of employment.

Smallstep’s lawyers rejected the union’s interpretation of the obligations arising from a pre-pack. Smallstep’s starting point was that after a firm has been declared insolvent, there is no legal obligation on the transferee to continue with Estro’s contracts of employment. Furthermore, where an insolvency has taken place with a view to liquidating the firm, then the EU’s transfer of undertakings Directive does not apply and so there is also no obligation on the transferee to take on all of the existing employees into the new firm.

In response, the FNV went to the local court in Utrecht and asked for a judicial declaration on the matter. In essence, the FNV claims that a pre-pack is not intended to be a complete liquidation of the company’s assets but rather the creation of a new viable company. Consequently, under the EU’s transfers of undertakings Directive 2001/23/EC – and the CJEU’s infamous judgments of C-135/83 Abels, C-472/93 Spano and C-319/94 Dethier – all of the employees that were transferred to Smallsteps should have had the terms of their employment continued.

The unions also pointed out that after the CJEU’s judgment in C-478/03 Celtec, EU law does not allow transferring parties to fiddle with the date of the transfer just to undermine workers’ rights.

Judge Berendsen of the court in Utrecht did not know how to interpret this raft of EU labour and insolvency law and therefore decided to make a preliminary reference to the CJEU.

Questions Referred
My unofficial translation of the questions asked by the Utrecht court reads:

1. When an insolvent company prior to its insolvency is transferred under a court-controlled ‘pre-pack’, is a Dutch insolvency procedure which has been expressly designed to maintain either parts or the whole of that insolvent company compatible with the aim and scope of Directive 2001/23/EC; and in that light does Article 666(1)(a) of Book 7 of the Dutch Civil Code (still) conform to the Directive?

2. Does Directive 2001/23/EC apply to a situation in which, prior to the insolvency, the court appoints an ‘intended administrator’ so that that person can ascertain the debtor’s situation and explore the possibilities of the company’s activities being continued by a third party and where that person also prepares for the steps that will need to take place shortly after the insolvency order for there to be a new company, by means of an assets transaction assigned at the date of the insolvency or shortly thereafter so that the debtor company continues (or part of it continues) its activities without interruption?

3. In that context, does it still matter whether the primary goal of the pre-pack is the continuation of the company or rather whether the (intended) administrator intends the pre-pack and the post-insolvency asset sale in the form of a ‘going concern’ in order to maximise the amount raised for the combined creditors or whether, in the framework of a pre-pack, a meeting of minds is achieved in respect of the transfer of the assets (and the company’s continuation) prior to insolvency but its execution is only formalised and or put into effect after the insolvency? And how should this be interpreted where the intention is not only to continue the company but also to maximise the amount for the creditors?

4. In light of the applicability of Directive 2001/23/EC and the implementing Article 662 et seq in Book 7 of the Dutch Civil Code, when is the time of the transfer of the company for a pre-pack prior to the company’s insolvency; is it when there is a factual meeting of minds to assign the company prior to the insolvency, or is the relevant time when the capacity of the entrepreneur running the entity concerned actually passes to the transferee?

Although childcare and crèches might be considered to be a social service, private equity companies are often in the background in Holland. In this case, the major shareholder in the Estro company was a private equity company known as KKR. Among Estro’s other investors, were yet more private equity companies and several major Dutch banks.

Readers should also be aware that prior to Estro’s insolvency, Estro shifted its corporate seat from Utrecht to Amsterdam. The two cities have a legal significance. The court in Utrecht does not operate with pre-packs. In contrast, the court in Amsterdam does use pre-packs. Estro’s move of its corporate seat was made with the pre-pack in mind. Indeed, two days after the move, Estro asked the court in Amsterdam to start the pre-pack.

Readers who are interested comparative law might also want to watch how this labour law/insolvency law case develops. This is because the referring order from the court in Utrecht also flags up that the concept of a pre-pack originates in what the Dutch judge calls ‘UK law’. He cites a ‘Graham Report’ into the operation of the pre-pack.

To help readers of EU Law Radar actually find this very interesting text, they should search for a document that was written by Teresa Graham CBE, someone who openly favours government regulation only as a last resort. The official title of her report is the “Graham Review into Pre-pack Administration”, and is dated June 2014.

The Graham Review was commissioned by the Rt Hon Vince Cable MP. He is a Liberal Democrat and at the time when the review was written, he was also the Secretary of State for Business, Innovation and Skills.

In the preface to the published report, Dr Cable noted that “Pre-pack administration has been much criticised in some quarters in recent years. Opponents of the process have said that it lacks transparency, with deals negotiated in secret behind closed doors. Allegations have been made that the process does not result in the best value being achieved for businesses. Equally it can be an important way of preserving value”.

The Graham Review also indicates the small scale of the phenomenon in the UK: “Every year some 250,000 businesses disappear from the Companies House register. Of those around 20,000 go through an insolvency procedure and about 600 to 700 of those are pre-packed. The pre-pack numbers are relatively small but the lack of transparency and trust in the process means that the “noise” surrounding them is far greater than should be the case”.

The report also provides a handy definition of a pre-pack: “A pre-pack administration occurs when an administrator sells the business at or soon after his or her appointment, often to the existing owners/directors. All of the preparatory work for the sale is carried out in advance of formal administration and before the creditors have been told about the failure of the business.”

Unfortunately, the report does not deal with the law surrounding the EU’s transfer of undertakings Directive. Indeed, the report does not really focus on workers’ rights at all other than to acknowledge that in the event of an insolvency, workers are considered to be preferred creditors and thus come before floating-charge creditors and before non-preferential creditors.

The report does however alert readers to concerns about the effect of a pre-pack on competition in a market where there are also economic actors who are in good economic health. The potential anti-competitive effects of a pre-pack were not raised by the parties in the current FNV reference to the CJEU.

Readers interested in EU law more generally might also recall that there are currently several preliminary references which concern the issue of conforming interpretation; see further, my comment on Case C-566/15, Erzberger – the extra-territorial application of German worker representation law.

Update – 7 March 2016
Pre-packs and the CJEU’s Spano case law have been discussed by the Court of Appeal of England and Wales in Key2Law (Surrey) LLP v De’ Antiquis [2011] EWCA Civ 1567 (20 December 2011).

Pre-packs have been the topic of several other pieces of litigation in the English courts, and more recently, in the Dutch courts too.

Update – 18 December 2016
The Third Chamber will hear this dispute on 18 January 2017.