In a judgment of 22 June 2017, the European Court of Justice put an end to the practice of pre-pack/flash bankruptcies applied in the Netherlands.

What is a pre-pack/flash bankruptcy? The court describes it as follows:

In this case, a court appoints an „intended trustee” who, prior to the bankruptcy, helps prepare an asset transaction, which the trustee carries out immediately after the bankruptcy is declared.
In the context of this pre-pack, the court also appoints a prospective examining magistrate.

Examples of successful pre-packs include the Ruwaard van Putten hospital, Marlies Dekkers, and Prime Champ mushroom farm.
Less successful were the pre-packs of De Schoenenreus, De Harense Smid and now of course the Estro/Small Steps daycare centres, the pre-pack that led to this Court ruling.

The Court's ruling (a so-called. preliminary ruling) implies that also in the case of pre-pack the protection arrangements for employees within the framework of “transfer of undertaking” must be observed. In Dutch law, this concerns the provisions of Article 7:662 et seq. of the Dutch Civil Code.

In short, the legal arrangement implies that transfer of undertaking in principle, all employment contracts of the acquired company and the primary and secondary employment conditions included in those employment contracts will be continued by the acquiring party/purchaser.

In the (now former?) pre-pack practice, however, it was assumed that these statutory employee protection provisions did not apply to such a takeover, and on that basis, employment contracts were not continued/terminated, salaries were adjusted (reduced), and secondary employment conditions were reduced. All this to enable a restart after bankruptcy in a more or less streamlined form.

For the employees who were thus able to continue their jobs at the company that was thus continued (with or without a reduction in wages and/or secondary employment conditions), such a restart is '‘next best’' because otherwise they would have lost their jobs anyway due to the bankruptcy. It was, of course, a harsh blow for the employees who didn't participate in the restart, as they were sidelined.

The court has now ruled that in the case of a pre-pack, the relevant protection regulations (for the Netherlands, Articles 7:662 et seq. of the Dutch Civil Code) are 'simply' applicable. This means that employees retain their rights under a pre-pack, or their rights are by operation of law have been transferred to the acquirer/acquiring party. These implications are mandatory: no deviation is permitted.

What are the consequences of this ruling by the Court?

The consequences are still uncertain, as the Dutch court still has to rule on the matter. But the consequences appear to be far-reaching:

• Employees dismissed as part of a pre-pack: this may have been wrongfully done. These employees are likely entitled to compensation from the re-established company/acquirer.
• Employees who kept their jobs but had to give up their salary and/or benefits may have been wrongfully denied, and they may be entitled to their "old" salary and benefits from the re-established company/acquirer.
• Entrepreneurs who purchased a company in a pre-pack and are now faced with potential claims from (former) employees: they may be able to hold the selling party accountable, perhaps the advisors involved, and perhaps even the Dutch state, as they assumed in good faith that the structure was sound.

How all this will play out is impossible to predict. However, it's wise to seek advice about your potential rights and obligations. If you believe you have claims under a pre-pack, it's important to take action, as many of these claims expire after five years. It seems wise to interrupt this limitation as soon as possible.

Would you like to know more? Please contact w.groustra@wintertaling.nl