In Federatie Nederlanse Vakvereniging and others v Smallsteps BV C-126/16, the European Court of Justice (ECJ) had to decide whether the Acquired Rights Directive (ARD) applied to a "pre-pack" sale aimed at rescuing part or all of an insolvent business.
The purpose of the ARD is to safeguard the rights of employees on the transfer of their employer's business to another entity. The key provisions are:
- Article 3 automatically transfers the employees' employment (including existing rights and obligations) to the transferee.
- Article 4 states that the transfer shall not provide a valid reason for dismissal.
- Article 5 provides that Articles 3 and 4 shall not apply to any transfer where the transferor is the subject of bankruptcy proceedings or any analogous insolvency proceedings which have been instituted with a view to the liquidation of the assets of the transferor, and which are under the supervision of a competent public authority.
The ARD is implemented in the UK by the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE).
Estro Groep BV was, until its insolvency, the biggest childcare provider in the Netherlands, employing around 3,600 workers in approximately 380 childcare centres. When the company experienced financial difficulties it contacted HIG Capital, a sister company of Estro's principal shareholder, Bayside Capital, as a potential buyer. HIG set up a new limited company, Smallsteps BV, to purchase a large part of the business of Estro consisting of some 250 of the centres.
On 5 July 2014 an application to declare Estro insolvent was granted by the court and, on the same day, the court-appointed insolvency administrator concluded an agreement to sell to Smallsteps an undertaking comprising 250 of Estro's nurseries (which employed 2,500 employees). The insolvency administrator then dismissed all 3,600 employees of Estro and Smallsteps offered new employment to nearly 2,600 of them.
A Dutch trade union and four employees who were not offered contracts sought a declaration that all the employees working at the 250 centres had transferred automatically to Smallsteps on their existing terms as of right. Smallsteps relied on a provision of the Netherlands Civil Code that employees will not automatically transfer where the employer is declared insolvent and the undertaking belongs to the insolvent estate. The District Court, Central Netherlands decided to stay the proceedings and refer a number of questions to the ECJ on the application or not of the ARD to pre-pack sales.
Advocate General's opinion
The Advocate General's opinion, given in March 2017, was that the ARD would apply to a pre-pack sale where the purpose of the sale was to save part or all of the business as a going concern.
In the Advocate General's view, the procedure adopted in the Netherlands leading up to a pre-pack sale could not be regarded as a bankruptcy procedure or analogous insolvency proceedings instituted with a view to the liquidation of the transferor's assets and under the supervision of a competent public authority. Therefore, the exception in Article 5 of the ARD did not apply and the employees were protected by Articles 3 and 4.
European Court of Justice decision
The ECJ followed the Advocate General's opinion, holding that a pre-pack agreement was outside the scope of Article 5 of the ARD and that the claimants were entitled to the full protection of the ARD, which has at its heart the protection of employees by ensuring that their rights are safeguarded in the event of a change of employer.
Although Estro was declared insolvent on 5 July 2014, the pre-pack had already been prepared with a view to enabling the transfer of assets to Smallsteps to occur immediately after that declaration, which enabled a swift relaunch so that disruption could be avoided. The fact that this had the aim of maximising the proceeds of transfer for the creditors should be disregarded. Under these circumstances, the ECJ held that a pre-pack procedure was not aimed at liquidating the assets of the undertaking, but rather that its purpose was actually to safeguard the business as a going concern to ensure minimal disruption, and was therefore outside the scope of Article 5.
The ECJ stated that while the pre-pack procedure in the Netherlands is carried out by a court-appointed administrator, the court procedure is essentially a formality and as such, the procedure does not represent true supervision by a competent public authority, and it cannot therefore satisfy this aspect of Article 5.
The ECJ held that the automatic transfer of employees under the ARD will apply in the event of a "pre-pack" sale aimed at rescuing all or part of an insolvent undertaking.
Although pre-pack procedures in the Netherlands and Great Britain are not identical, this decision helpfully confirms that there are sufficient similarities to conclude that the approach taken by the Court of Appeal in Key2Law (Surrey) LLP v De'Antiquis (2011) is correct as a matter of EU law. In the Key2Law case, the Court of Appeal decided that all forms of administration, including pre-pack sales, fall into the definition of 'relevant insolvency proceedings' (being non-terminal proceedings) under TUPE as opposed to 'bankruptcy or any analogous proceedings' (being terminal proceedings with the sole purpose of liquidating assets) so that TUPE applies to pre-pack sales.