When an insolvent business is sold, the contracts of existing employees do not automatically transfer under the European Acquired Rights Directive to the buyer. In Federatie Nederlandse Vakvereniging and ors v Smallsteps BV, the Court of Justice of the European Union (CJEU) held that this exception in the directive did not apply in a “pre-pack” sale.
When a business is sold, Articles 3 and 4 of the European Acquired Rights Directive state that the employees’ contracts automatically transfer over to the new owner. However, article 5 disapplies these provisions in a transfer where the seller is subject to “bankruptcy proceedings or any analogous insolvency proceedings” with the aim of liquidating the seller’s assets.
A “pre-pack” administration is an insolvency procedure which involves a business selling all or some of its assets to a buyer before appointing an administrator, allowing it to be sold as a “going concern”.
Until its insolvency, Estro Groep BV (EG) was the largest childcare company in the Netherlands with almost 380 childcare centres and approximately 3,600 workers.
In November 2013, it became clear that it needed financial support but when it failed to raise sufficient capital, it decided to restructure the business keeping 243 of the centres and retaining about 2,500 employees. During this time, it only contacted one other company which was connected to its principal shareholder – HIGC - as a potential buyer.
On 5 June 2014 it applied to the district court for a prospective insolvency administrator to be appointed, which was granted on 10 June. On 20 June it created Smallsteps as a relaunch undertaking. On 5 July, EG was declared insolvent. On the same day, the insolvency administrator and Smallsteps signed a “pre-pack”, under which Smallsteps bought about 250 of the childcare centres and offered employment to almost 2, 600 EG employees. This meant, however, that about 1000 lost their jobs.
Four of those workers sought a declaration that articles 3 and 4 of the directive still apply to a “pre-pack” and that therefore their employment had automatically transferred over to Smallsteps. The court asked the CJEU to decide whether Article 5 applied to a “pre-pack” or not, particularly when the aim was to secure both the continuation of the undertaking as well as the maximisation of proceeds for the creditors.
Although the situation potentially fell within Article 5, in the sense that EG was the subject of insolvency proceedings, the CJEU held that it did not apply to a procedure aimed at ensuring the continuation of the undertaking.
It was clear from this case that the aim of the “pre-pack” procedure was to enable a swift relaunch of the viable units once the insolvency has been declared and to safeguard the value of the undertaking and the employment posts. It could not, therefore, be deemed to be an insolvency procedure within the meaning of article 5.
Although there was some overlap in this case, the primary objective was to safeguard the business, rather than liquidate the seller’s assets in order to satisfy the demands of creditors. As such, the “pre-pack” did not satisfy the requirement in article 5 and the employees’ contracts automatically transferred over.