In 2014, Ovidius Law represented 4 medical specialists in their case against the company that had taken over their former employer, a hospital, by means of a pre-pack arrangement. In this case, we argued that the exception rule for transfer of undertaking (‘TUPE’) in insolvency proceedings was not applicable here, since the pre-pack arrangement was aimed at safeguarding the value of the hospital and its relaunch, rather than at the hospital’s insolvency. We pointed out that the exception rule (Article 7:666 of the Dutch Civil Code) is not compatible with Directive 2001/23/EC, the directive on the transfers of undertakings. Although the Health Care Tribunal did not agree with us then, a recent ruling by the European Court of Justice in a Dutch case validated our argument.
What is TUPE?
From an employment law perspective, when a company changes owner, this can sometimes be qualified as ‘transfer of undertaking (protection of employment)’, TUPE. The effect of TUPE is that all employees and any rights, duties and liabilities associated with them are transferred from the old employer to the new employer by operation of law. The new employer cannot choose which employees he wants to keep, nor can he offer the employees poorer employment conditions than they enjoyed with their former employer. TUPE therefore protects employees affected by a company takeover against both dismissal and other possible adverse effects.
No TUPE in case of relaunch after insolvency proceedings
According to Dutch law, TUPE does not apply when a business relaunches after insolvency proceedings. After insolvency proceedings, the company acquirer is free in his choice of employees and in his decision which employment conditions to offer them. This is to make an insolvent company more attractive for potential acquirers, which is ultimately to the benefit of its creditors. If an insolvent company is not taken over, the trustee must sell the assets of the company separately, which usually yields much less revenue than an ongoing business does.
TUPE in case of pre-packs?
Since 2012, several Dutch courts have shown to cooperate with so-called ‘pre-packs’. In a pre-pack, the sale of an insolvent company is arranged prior to the insolvency proceedings. In fact, no actual insolvency proceedings take place: the company is formally declared insolvent and sold to the acquirer almost simultaneously. This is different from a relaunch, in which case the insolvent company is sold after insolvency proceedings. A pre-pack is generally arranged as follows. First, a so-called ‘intended trustee’ is appointed to investigate whether there is a potential acquirer for the insolvent company. After the intended trustee has found an acquirer, a takeover is planned in silence after which the company’s insolvency is declared. Immediately after this, the pre-arranged sale is formalized. Then, the intended trustee, who is then generally appointed as the trustee, dismisses all the employees, after which the acquirer is free to offer some of these employees an employment contract, regularly against poorer employment conditions.
Small Steps case
Dutch pre-packs have advantages: the company’s activities are not ceased because of insolvency proceedings, some employees keep their jobs and creditors of the company are reimbursed more than in a general insolvency situation. However, what happens to the employees who are not taken over by the acquirer? This was the subject of a recent case between 4 employees of the insolvent child care company Estro and child care organization Small Steps, which had taken over Estro by means of a pre-pack. The question at hand was: “
European Court of Justice: TUPE applicable in pre-packs
The European Court of Justice has answered this question in the negative. They argued that TUPE does apply in Dutch pre-packs, despite of the company having been formally declared insolvent, as the purpose of insolvency in Dutch pre-packs is continuation of the viable parts of the company. This is in contrast to ‘regular’ insolvency proceedings, where the main purpose is to sell the company’s assets at the highest possible price. As pre-pack qualifies more like a reorganization method than an insolvency, the Court of Justice decided that the statutory exception of applying TUPE in case of insolvency proceedings is not meant for pre-packs.
Conclusion
The pre-pack, in which a takeover is planned in silence after which the company’s insolvency is declared, does not fall under the exception rule for applying TUPE, as we already argued in 2014. This ruling can be considered yet another victory for employees of an insolvent employer. Last month, Ovidius
Sources: European Court of Justice 22 June 2017, Case C 126/16, Health Care Tribunal 25 February 2015, Case 14/17 (Dutch only)
