1.
In the direction of a European pre-pack
The European Fee has offered a Proposal for the harmonisation of guidelines on pre-packs.[1] A pre-pack is a ready insolvency process through which the sale of the enterprise to a brand new proprietor is organized previous to the opening of insolvency proceedings. As soon as insolvency has been declared by the courtroom, the sale is executed. The corporate because the authorized proprietor will stop to exist, however the enterprise will proceed. The Fee’s ambition is to have this Proposal for a European pre-pack adopted as a Directive already by January 2026.[2]
The Proposal states in its Preamble in clear and unambiguous phrases that staff’ rights ought to not be prejudiced by the enactment of a European pre-pack:
“The pre-pack mechanism needs to be with out prejudice to staff’ rights beneath Union and nationwide legislation, together with the involvement of staff’ representatives.”[3]
The Proposal as at present drafted, nonetheless, does precisely the alternative of what it says it will likely be doing. The Proposal successfully abolishes a very powerful European guidelines defending staff throughout the switch of enterprise through which they’re employed, contained within the Switch of Undertakings and Companies Directive,[4] by making it doable to bypass this safety when the shareholder continues the enterprise in a slimmed-down model utilizing a pre-pack. The Switch of Undertakings and Companies Directive gives as a common rule that staff switch together with a switch of the enterprise. Case legislation of the Court docket of Justice of the European Union gives staff safety beneath the Switch of Undertakings and Companies Directive in case an working enterprise is being transferred out of a pre-pack process to an outdated shareholder. Underneath the Proposal, this European rule of worker safety will probably be revoked facilitating pre-packs with outdated shareholders and associated events and leaving staff with none safety. The adoption of this Proposal would mark a chilling regression within the safety of employees’ rights throughout Europe.
In chapter, the trustee can usually dismiss all staff. As a consequence, staff don’t essentially switch if an exterior celebration acquires an working enterprise out of chapter, whether or not the continuing is a pre-packaged chapter or not. Such a switch, additionally out of a pre-packaged insolvency process to an exterior celebration can qualify as a continuing geared toward liquidation. Article 5 of the Switch of Undertakings and Companies Directive requires the insolvency proceedings to be geared toward liquidation to ensure that staff not to switch together with the enterprise. [5] If the insolvency proceedings should not geared toward liquidation and the enterprise is transferred out of insolvency, the workers will switch together with the enterprise and can, by purpose of this switch, mechanically enter into an employment relation with the acquirer. From the CJEU case legislation on the applying of the Switch of Undertakings and Companies Directive, it follows that the previous shareholder of a bankrupt firm can not purchase the enterprise via pre-packaged chapter proceedings as a way to proceed it in a slimmed-down kind with out all staff transferring together with the enterprise. Such a process, ensuing within the former shareholder persevering with the enterprise in a brand new authorized entity, can’t be deemed to represent an insolvency continuing ‘geared toward liquidation’.
The Proposal will merely disable the applying of the Switch of Undertakings and Companies Directive to all prepacks – each these involving a former shareholder of the bankrupt firm and people involving an acquirer unrelated to that shareholder- and thereby render irrelevant the case legislation of the CJEU on the Directive’s utility within the context of pre-packs.[6] The Proposal bluntly states that each pre-pack is geared toward liquidation.[7] That is odds with actuality. A considerable share of pre-packs is undertaken to allow shareholders of an organization to proceed the enterprise in a brand new authorized entity, free from outdated money owed and with out the duty of the corporate in direction of its staff. In these so-called related-party pre-packs, the enterprise is actually continued by the identical proprietor via a brand new firm. The Proposal gives that, within the case of such pre-packs, staff will not be protected by European guidelines within the context of enterprise transfers.
The Proposal gives that it’s as much as the Member States to resolve whether or not, in such related-party pre-packs, the acquirer should honour current labour obligations. At first sight, this shift might seem trivial. A European rule defending staff is abolished, but when Members States worth the prevailing rule, they might nonetheless select to implement nationwide provisions to that impact. The Proposal, nonetheless, merely boils right down to abolishing necessary European guidelines of worker safety. Furthermore, the legislative technique pursued by the European Fee is quite peculiar. Whereas the Fee claims to be harmonising insolvency legislation, it’s in actual fact de-harmonising European insolvency legislation with respect to staff’ rights in insolvency. The general impact is a major step backward in within the safety of worker rights within the context of enterprise transfers throughout Europe. Workers of an organization whose shareholder deploys a pre-pack technique to reorganise and easily to proceed operations via a brand new authorized entity will find yourself with the identical weak or non-existent safety as staff of an organization that genuinely goes bankrupt and whose enterprise ceases to exist. In different phrases, this Proposal for a European pre-pack undermines the safety of staff in circumstances of enterprise transfers involving a pre-pack. In mild of the European and world competitors for insolvency circumstances, such fragmentation is regrettable and can diminish, quite than safeguard staff’ safety.
Under we talk about the functioning of a pre-pack (§ 2), adopted by a high-level evaluation of the varied pursuits at stake (§ 3). We then present a extra detailed examination of the present European authorized framework and supply a sturdy interpretation of the case legislation of the Court docket of Justice of the European Union (§ 4). Subsequent, we deal with the present Proposal for a European pre-pack in relation to staff’ rights (§ 5). In § 6, we conclude that beneath current legislation, solely in case of a pre-pack involving a real outdoors acquirer staff might be dismissed. In pre-packs involving former shareholders, staff merely switch to the acquirer by operation of a sound European rule. It is a rule that shouldn’t be abolished. To state, because the European Fee does, that staff’ rights won’t be prejudiced by the European pre-pack is so as to add insult to damage.
2.
The working and function of pre-packs and potential for opportunistic habits
A pre-pack is a pre-arranged sale of property executed instantly upon the graduation of insolvency proceedings. A potential purchaser is recognized in secret previous to the opening of the insolvency continuing and as soon as the courtroom declares chapter, the sale is executed. The corporate is said bancrupt and will probably be liquidated, whereas the enterprise continues to function beneath new possession. A pre-pack thus compels stakeholders to make a pointy distinction between the corporate as a authorized entity and the enterprise that’s being operated.
The acknowledged goal of pre-pack procedures is to maximise worth for collectors whereas making certain the continuation of operations. The extra beneficial interpretation of a pre-pack is that it may well function an instrument for the good thing about collectors by promoting the property at the next value than can be realised in regular unprepared insolvency proceedings. In a pre-pack, there will probably be much less of a reduction on the asset value since in normal liquidation proceedings patrons know that there’s little time obtainable to the trustee. Right here the metaphor of a melting ice dice is commonly used to explain the predicament a courtroom appointed trustee finds itself in. Amidst chaos, the trustee has to promote rapidly and patrons will exploit this urgency.
Within the case of a pre-pack, collectors will stay unpaid to a sure and sometimes to a really giant extent. Though offered as a instrument to guard collectors, collectors themselves are ceaselessly extremely suspicious of pre-packs. Issues are significantly robust when former shareholders are the acquirers out of pre-packs. In England the state of affairs developed to some extent the place two-thirds of pre-pack gross sales concerned related-party pre-packs.[8] Equally, within the Netherlands, in roughly 40% of circumstances the acquirers have been former shareholders or different associated events.[9]
The pre-pack ‘playbook’ is filled with methods that enable former shareholders to ensure that they would be the ones in a position to make the best bid for the property. A standard technique is to take away key property, corresponding to manufacturers, IP-rights and actual property beforehand.[10] The trustee in chapter is then left attempting to promote a puzzle with a number of items are lacking, since these are already within the palms of the shareholder in search of to accumulate the property at because the lowest doable value. Belgium appears to be distinctive on this respect, offering a constructive instance by introducing guidelines in opposition to such aggressive asset partitioning adopted by try and revenue from it.[11] One other technique arises when the shareholder can be a creditor, or perhaps a secured creditor. As a substitute of truly paying with new cash for the property, the shareholder can merely bid as much as the quantity of its secured declare. This observe, generally known as ‘credit score bidding’, typically scares off different potential bidders and is known as the chilling impact of a credit score bid. Briefly, there are ample causes to be suspicious of pre-packaged gross sales to former shareholders, not least due to their detrimental impression on collectors whose claims are sometimes worn out. Whereas pre-packs involving exterior real exterior events depart little room for opportunistic behaviour by shareholders, these involving former shareholders are rife with it.
The European expertise up to now exhibits that collectors, court-appointed trustees, courts and legislators have up to now been unable to adequately defend collectors in opposition to the opportunistic use of pre-packs by former shareholders.
3.
Pursuits at stake and the balancing act
A number of pursuits are at stake within the course of of building clear guidelines on the place of staff within the context of pre-packs and these pursuits can conflict in numerous methods. The competing pursuits will probably be mentioned in opposition to the background of the overarching query whether or not staff ought to switch together with the enterprise when the enterprise is offered out of an insolvency process through which the previous proprietor, as an organization, is liquidated and ceases to exist.
A primary conflict of pursuits arises between the pursuits of collectors and people of staff. If all staff have been to switch whereas retaining their current phrases and situations of employment, no matter their expertise and efficiency document, this might considerably cut back the value a purchaser is prepared to pay for the enterprise. In such a case, worker safety might come on the expense of collectors. Since insolvency legislation is mostly thought to be a physique of legislation geared toward defending collectors, imposing an obligation that each one staff switch together with the enterprise would represent a major exception as to general working of insolvency legislation.[12]
If one needs to offer extra weight to staff’ safety, the query is how this needs to be achieved. It’s clear that one thing has gone mistaken with an organization coming into chapter. An celebration could also be prepared to purchase the corporate out of insolvency from the trustee in chapter, however might decline to take action if the acquirer is required to tackle all staff. The Court docket of Justice of the European Union confronted this dilemma within the Abels-case. Varied governments offered their views. The Danish authorities argued that the perfect safety for workers can be to require that each one staff switch together with the enterprise, whereas the Dutch authorities argued that higher safety was to permit the acquirer to ‘decide and select’, believing that this strategy would finally protect extra jobs than compelling the acquirer to take over all staff. Within the Abels-case, the CJEU primarily left the problem unresolved and delegated the choice to the Member States. In a later modification to the Switch of Undertakings and Companies Directive, this margin of discretion for Member States was explicitly launched to the Directive, generally known as ‘insolvency legislation exception’. Underneath the present Switch of Undertakings and Companies Directive, Member States might subsequently present that the switch guidelines don’t apply the place a enterprise is transferred out of insolvency proceedings, topic to sure situations (see additional beneath).
Different pursuits are additionally at stake. In observe, the previous shareholder can also have an curiosity in a pre-pack. Notably provided that within the UK nearly all of pre-packs have been performed with the previous shareholders,[13] it’s clear that their place can’t be ignored. We don’t, nonetheless, consider that the pursuits of former shareholders needs to be given any direct weight in relation to both collectors or staff. The fundamental rule of company finance, in addition to of company and insolvency legislation, is that fairness is worn out first. Shareholders run the corporate at their very own threat. This implies shareholders stand to profit probably the most via entitlement to earnings, however are additionally the primary to soak up losses. This reasoning gives the elemental justification for shareholders’ rights to revenue and management. Due to this fact, the pursuits of shareholders in case of insolvency are essentially subordinated to the pursuits of collectors. One may nonetheless argue that shareholders have succeeded in establishing a de facto place as stakeholders, and that such a place might even be thought-about fascinating. One may purpose {that a} shareholder needs to be permitted to make a bid for the corporate’s property, thereby driving up the sale value which might be useful for collectors. The European proposal for a harmonised European pre-pack regime requires Member States to allow linked events to accumulate the enterprise.[14] We’re, nonetheless, sceptical about recognising shareholders as stakeholders in their very own proper. Even when one permits shareholders a seat on the desk to extend the variety of bidders, thereby probably enhancing collectors’ outcomes not directly, such participation needs to be approached with nice warning and topic to strict safeguards. Examples of such safeguards embody (i) requiring shareholders to position key property corresponding to manufacturers, IP-rights and actual property on the desk earlier than being permitted to bid. (ii) prohibiting credit score bids by shareholders and (iii) treating any final result through which the previous shareholder emerges as the perfect bidder as inherently suspect and fewer fascinating than the enterprise being acquired by a completely new proprietor. Extra checks and balances are additionally wanted with respect to the closed bidding course of that’s intrinsic to pre-packs. At the same time as to outdoors, non-related bidders the closed nature of the method already raises issues. In america this has led to the event of the ‘stalking horse’ process, beneath which new bidders are allowed to submit the next bid after the preliminary closed bidding course of with a break-up price compensating the primary bidder. The Proposal additionally seeks to permit for such mechanisms.[15] With respect to shareholders, additional checks and balances are nonetheless wanted, corresponding to introducing an identical precept beneath which outdoors bidders might purchase the enterprise on the identical value provided by the shareholder.[16]
There’s additionally the curiosity of the insolvency business itself, which warrants essential examination. Not essentially as a stakeholder, however as a gaggle with important affect over the legislative course of. Within the United Staes, the insolvency business is thought to be probably the most important actor in shaping insolvency legal guidelines. It is usually thought-about to be far more practical in advancing its personal pursuits than comparable teams in different areas of legislation.[17] It subsequently appears prudent to ask whether or not the introduction of recent guidelines, and even completely new authorized devices, may also profit the career as a complete as effectively. Within the case of a European pre-pack, this seems fairly more likely to be the case. Extra pre-packs imply extra enterprise for the insolvency business. Introducing a European Pre-pack would considerably broaden the scope of insolvency legislation. Notably if, for some purpose, the European Fee have been to require Member States to permit associated events to accumulate the enterprise it might not be doable to find out whether or not various measures may also have helped to avoid wasting the enterprise at decrease prices to collectors and staff, corresponding to a easy infusion of recent funds. If the Proposal for a European pre-pack will probably be adopted, pre-packs will merely turn into considered one of a number of enterprise methods. See critically as to this impact of pre-packs usually, Van Andel:
“A chapter process isn’t one thing which simply occurs to a celebration. Typically chapter is a deliberate alternative: are we going to pay for a restructuring of the collectors and the workers, or ought to we put the corporate out of business and purchase the enterprise and proceed in a brand new authorized entity?“[18]
Permitting broad availability of pre-packs involving associated events additionally diminishes the disciplinary operate of insolvency and weakens incentives in opposition to extreme indebtedness. Facilitating simple pre-packs with associated events, whereas concurrently eradicating protections from staff, is extra more likely to profit the insolvency business than to advertise a good and resilient European financial system.
4.
Present European authorized framework
The Switch of Undertakings Directive protects staff in opposition to dismissal or the deterioration of their employment situations when a enterprise is transferred. Underneath Article 3 of the Switch of Undertakings and Companies Directive, staff will by purpose of this switch, mechanically switch to the acquirer with the preservation of all their phrases and situations of employment. Nevertheless, Article 5 permits Member States to derogate from this rule in circumstances of formal insolvency proceedings, known as the insolvency legislation exception. If the exception applies, because of this however the switch of an working enterprise, the workers don’t switch together with it. The Netherlands has used this insolvency legislation exception in Article 7:666 of the Dutch Civil Code, thereby fully excluding the switch rule in bankruptcies, different Member States corresponding to Germany didn’t.
For the insolvency legislation exception to use, the insolvency proceedings in query should meet three cumulative necessities: (i) they have to be statutory insolvency proceedings, (ii) initiated with a view to the liquidation of the property of the transferor, and (iii) topic to the management of a reliable public authority.
Case legislation from the CJEU has supplied additional steering on the insolvency legislation exception and its three standards. As to the requirement that the proceedings have to be statutory, the CJEU has held that the pre-pack itself should even have a statutory foundation. It’s subsequently not adequate that the insolvency proceedings, as soon as opened, are regulated by legislation. The preparatory pre-pack section itself should likewise have a statutory basis.[19]
The a lot greater query that was raised, was learn how to interpret the requirement that insolvency continuing should have been instituted with a view to the liquidation of the transferor’s property. What does this imply? Doesn’t each liquidation continuing end result within the liquidation of the transferor’s property? The important thing problem is what precisely must be liquidated. Though the CJEU itself additionally appears to have struggled with the applying of the Switch of Undertakings and Companies Directive, the contours at the moment are sufficiently clear.
Within the Smallsteps judgment of the CJEU (2017), Estro, a childcare chain, was offered via a pre-pack to Smallsteps, a purchaser carefully linked to the identical shareholder.[20] The CJEU held that this pre-pack didn’t qualify for the insolvency exception within the Switch of Undertakings and Companies Directive, because it was not genuinely geared toward liquidation. As well as, the pre-pack itself additionally lacked a authorized foundation within the Member State involved (the Netherlands). The end result was that each one staff ought to have mechanically transferred to the acquirer Smallsteps beneath the foundations of the Switch of Undertakings and Companies Directive.
Within the Heiploeg judgment of the CJEU (2022), the pre-pack involved a sale to an exterior purchaser.[21] Right here the CJEU took a extra accommodating strategy to the pre-pack, ruling that preparatory steps alone don’t disqualify a pre-pack from being thought to be geared toward liquidation. Offered that the pre-pack process has a authorized foundation in nationwide legislation, in a state of affairs corresponding to that in Heiploeg, the insolvency exception within the Switch of Undertakings and Companies Directive might apply, that means that the workers wouldn’t mechanically switch to acquirer.
Many debates have adopted on the right understanding of those two separate circumstances, which can seem like quite comparable as to the information however have a totally totally different final result as to the applying of the insolvency legislation exception. Authorized students have argued that the questions posed to the CJEU have been phrased radically totally different and that this would possibly clarify the distinction in final result. In Smallsteps the pre-pack was portrayed because the Evil Queen from Snow White, whereas in Heiploeg the pre-pack was offered as Snow White herself, based on such students.[22]
Any unclarity as to the precise scope of the safety provided ought to after all not be constructed as to imply that it’s unclear whether or not staff derive important safety from the Switch of Undertakings and Companies Directive. Though one would possibly argue that the precise boundary between a pre-pack to which the insolvency legislation exception doesn’t apply and one to which it does apply isn’t completely clear, it’s evident that staff take pleasure in very important safety in opposition to being dismissed within the context of a pre-pack at a European stage from the Switch of Undertakings and Companies Directive. It must also be borne in thoughts that pre-packs should not, in essence, a instrument to shed extra staff, however quite an instrument to maximise worth for collectors. There could also be many causes to conduct a pre-pack with none intention of decreasing the variety of staff. On the identical time, in Dutch observe, the Smallsteps ruling by the CJEU virtually introduced pre-packs to a whole standstill within the Netherlands. At current, the Netherlands faces extra of a labour scarcity than a surplus of staff. Nonetheless, it’s clear that beneath the present European Guidelines employees take pleasure in robust safety. Though within the present financial local weather firms don’t face strain to downsize as to their variety of staff, this example may change virtually in a single day, whether or not attributable to a sudden financial downturn or the disruptive impression of Synthetic Intelligence. Ought to the financial tide flip, employee safety will as soon as once more turn into way more related and sure be probably the most necessary European political matters. The European guidelines are additionally wanted for such occasions and needs to be drafted with such an outward financial tide in thoughts.
Moreover, the fundamental ideas of the Switch of Undertakings and Companies Directive and its utility to pre-packs are a lot clearer than is typically recommended. We consider that rather more is at play right here than merely the phrasing of the questions put to the CJEU or the way in which the Smallsteps and Heiploeg circumstances have been offered to the CJEU. Briefly, we consider that the pre-pack in Smallsteps was in actuality way more just like the Evil Queen from Snow White, whereas the pre-pack in Heiploeg, so far as the pre-pack itself was involved, was like Snow White herself.
We return to the information of the circumstances as offered by the CJEU itself. In Smallsteps the pre-pack was performed not directly with the outdated shareholder, whereas in Heiploeg the pre-pack was performed with an outdoor (non-related) celebration.[23] We consider this not solely explains the distinction in final result within the CJEU’s judgements, but additionally that this strategy with a distinction based on the identification of the acquirer is the right one, taking into consideration the background and rationale of defending staff’ positions beneath the Switch of Undertakings and Companies Directive. Furthermore, it affords a easy and really workable strategy. The place the unique capital supplier remained the shareholder all through, each earlier than and after a pre-packaged insolvency process, the process can’t be stated to have been geared toward liquidation.
The CJEU makes use of totally different formulations when referring to the requirement that the proceedings should have been geared toward liquidation. The English-language model of the Switch of Undertakings and Companies Directive itself refers to proceedings ‘instituted with a view to the liquidation of the property of the transferor’. The CJEU, nonetheless, makes use of totally different wording in its English-language judgements. In Smallsteps, the CJEU refers solely to the ‘liquidation of the property of the transferor’.[24] In Heiploeg, the CJEU alternates between describing the liquidation requirement as ‘a liquidation of the property’ and, on a number of events, as a ‘liquidation of the endeavor’.[25] Within the authentic Dutch model of the case, the next phrases are used: ‘liquidatie van het vermogen van de vervreemder’ , which interprets as ‘liquidation of the patrimony of the transferor’ and, 3 times, ‘liquidatie van de onderneming’, which interprets as ‘liquidation of the enterprise’.[26]
There stays room for debate as to what precisely must be liquidated. It’s evident {that a} pre-pack process ends in the liquidation of the firm as a authorized entity proudly owning the enterprise. It is usually clear that the property are transferred to a brand new proprietor, the acquirer. It should equally be clear that one thing identifiable as an ‘endeavor’ or a ‘enterprise’ should stay. If all the things is offered off in fragments (as bits and items), there isn’t any endeavor or enterprise for the workers to accompany. So the liquidation should contain one thing extra. We consider that the perfect formulation is discovered within the Dutch model of the judgement, which states that the enterprise needs to be liquidated.
An enterprise is to be understood as a union of capital and labour. It is a frequent approach of conceptualising what an enterprise is and can be mirrored in Dutch Tax legislation.[27] Utilized to pre-packs, this could imply that if the enterprise is genuinely damaged up, in order that the previous shareholder as capital supplier is not in place, staff because the aspect labour additionally doesn’t want to stay in place. A constant utility of this precept would indicate that when, after a prepack, the unique capital supplier stays in place, then so ought to the workers. Conversely, if the unique capital supplier doesn’t stay in place, there are not any compelling causes to guard the workers, taking into consideration the background and rationale of defending employees’ positions beneath the Switch of Undertakings and Companies Directive. This strategy additionally aligns effectively with the reasoning of the CJEU within the Abels judgement.[28] Within the case of pre-packs involving exterior (non-related) events, it might be doable to protect extra jobs by permitting some staff to be dismissed. Within the case of pre-packs involving associated events (the previous shareholders), nonetheless, staff are left defenceless and thereby lowered to sitting geese, and all labour legislation protections can simply be circumvented by orchestrating a pre-pack.
5.
The European proposal in stealth mode
The Proposal for a European pre-pack seeks to fully remove any safety granted to staff beneath the Switch of Undertakings and Companies Directive within the case of a pre-pack, together with one involving a associated celebration. That is quite outstanding, given the reassuring language within the Preamble’s opening assertion relating to the consequences on staff.
The proposal gives the next in recital 22a of the Preamble:
“The pre-pack mechanism needs to be with out prejudice to staff’ rights beneath Union and nationwide legislation, together with the involvement of staff’ representatives. Particularly, it needs to be ruled by statutory or regulatory provisions and needs to be construed in a approach the place the switch of all or a part of an endeavor is ready with the help of a monitor beneath the supervision of the courtroom or competent authority, previous to the establishment of formal insolvency proceedings which can be instituted with a view to the liquidation of the property of the debtor. Whereas the first purpose of the pre-pack mechanism is to allow, within the pursuits of collectors, within the insolvency proceedings, a liquidation of the debtor’s property by the switch of all or a part of the endeavor as a going concern which satisfies to the best extent doable the claims of all of the collectors, it may well additionally serve employment preservation.
Consequently, when it takes place in proceedings which may finish within the liquidation of the debtor, the liquidation section of the pre-pack mechanism on this Directive is an eligible process for the needs of article 5(1) of Council Directive 2001/23/EC.”
The precise abolishment of staff’ safety is about out in Article 20(2) of the draft Directive, which gives as follows:
For the needs of Article 5(1) of Council Directive 2001/23/EC16, when it takes place in proceedings which may finish within the liquidation of the debtor, the liquidation section shall be thought-about to be chapter proceedings or any analogous insolvency proceedings instituted with a view to the liquidation of the property of the transferor beneath the supervision of a reliable public authority.
It’s quite stunning that the preamble asserts that the pre-pack needs to be with out prejudice to collectors’ rights and can also serve to protect employment, and that, subsequently, all pre-packs ought to qualify as being geared toward liquidation. On this approach, the pre-pack mechanism does in actual fact take away labour safety in circumstances of transfers of undertakings involving a pre-pack, safety which has been recognised and affirmed by the CJEU.
Elsewhere, in recital 28e of the preamble of the Proposal for a European pre-pack – apparently a brand new clause in comparison with an earlier draft – Member States are given the choice to introduce necessities obliging related-party acquirers to keep up current employment contracts.
“The place the supply made by a celebration carefully associated to the debtor is taken into account as the perfect supply, Member States ought to have the ability to introduce further safeguards for the authorisation and execution of the sale of the debtor’s enterprise or half thereof. Such safeguards can embody, for instance, the duty for the acquirer to make sure enterprise continuity for a minimal time period, or the upkeep of pending employment contracts.”
This may occasionally seem like a minor shift, delegating legislative discretion from the EU stage to the extent of Member States. In actuality, the shift is very important. Underneath present EU legislation, pre-packs involving the previous shareholder don’t allow the dismissal of staff. Underneath the envisaged EU legislation, such dismissals can be allowed, except Member States resolve to supply safety themselves. The European pre-pack would subsequently dismantle long-established safety on the European stage.
One may be sympathetic to this strategy of leaving tough points to Members States in areas the place harmonisation proves unfeasible. On this subject, nonetheless, a harmonised rule already exists and is now liable to being abolished. Furthermore, staff are the weaker celebration, whereas the place of capital suppliers is being strengthened.
6.
Conclusion
The European Fee is in search of to harmonise the pre-pack on the European stage. Though it begins by stating that the European pre-pack mustn’t prejudice staff’ rights, in observe it does hurt staff.
At current, staff are protected by the Transfers of Undertakings and Enterprise Directive. Whereas it’s doable to exclude the operation of those provisions in case of insolvency proceedings, that is solely permitted if sure situations are happy. An important situation is that the insolvency proceedings have to be geared toward liquidation. In circumstances introduced earlier than the CJEU, it has turn into clear that staff derive necessary safety from these guidelines within the context of pre-packs. Underneath current European insolvency legislation, staff switch together with the enterprise in a pre-pack if the pre-pack isn’t geared toward liquidation. Though one would possibly argue that the exact scope of the foundations isn’t completely clear, it’s past doubt that staff at present take pleasure in very important safety. The Fee’s assertion that the European pre-pack mustn’t prejudice staff’ rights is subsequently tough to simply accept as real, and seems little greater than a doubtful try and divert consideration from what the Fee is definitely doing.
As well as, we don’t share the view held by some students that the fundamental guidelines are unclear. If one appears to be like on the circumstances determined by the CJEU, the next ideas relating to pre-packs might be derived:
- The place there’s an exterior acquirer (i.e. not a associated celebration), the insolvency exception applies and staff don’t switch mechanically.
- The place there’s a associated acquirer (a direct or oblique shareholder), the insolvency exception doesn’t apply and all staff will, by purpose of this switch, mechanically switch to the acquirer with the preservation of all their phrases and situations of employment.
The central notion right here is that it needs to be assessed whether or not the enterprise is definitely being liquidated. An enterprise is to be understood as a union of capital and labour. If the capital supplier stays in place, the enterprise has not actually been liquidated and the workers must also stay in place. Solely in case of a pre-pack involving an exterior acquirer, it may be held that the union between capital and labour has been damaged up and may or not it’s justified that the insolvency exception applies.
Rolef de Weijs and Johan Zwemmer
Prof. dr. R.J. de Weijs is professor of Insolvency Regulation on the College of Amsterdam and an legal professional at a legislation agency in Amsterdam. Dr. J.P.H. Zwemmer is researcher on the College of Amsterdam and an legal professional at a legislation agency In Amsterdam.
[1] See Proposal for a Directive of the European Parliament and of the Council harmonising sure elements of insolvency legislation, 23 Might 2025, 2022/0408 (COD), (https://information.consilium.europa.eu/doc/doc/ST-9257-2025-INIT/en/pdf) (hereafter ‘The Proposal’). The Proposal for a European pre-pack is a part of a broader initiative to harmonise European insolvency legislation, which additionally consists of proposed harmonisation of guidelines on administrators’ legal responsibility and the responsibility to file, guidelines on avoidance of transactions, and guidelines on creditor committees.
[2] See https://transactions.freshfields.com/put up/102kswv/eu-insolvency-law-momentum-builds-as-european-parliament-comments-on-the-draft-d “Remaining adoption may happen by early 2026, relying on the tempo of compromise.” See additionally https://bobwessels.nl/weblog/2025-04-doc1-the-european-pre-pack-is-slowly-being-unpacked/.
[3] Proposal, preamble, nr. 22a.
[4] Council Directive 2001/23/EC of 12 March 2001 on the Approximation of the Legal guidelines of the Member States Regarding the Safeguarding of Workers’ Rights within the Occasion of Transfers of Undertakings, Companies or components of Undertakings or Companies.
[5] The English model refers to ‘instituted with a view to the liquidation of the property of the transferor’. The Dutch model refers to ‘process met het oog op de liquidatie van het vermogen van de vervreemder’, the French model to ‘d’une procédure d’insolvabilité analogue ouverte en vue de la liquidation des biens du cédant’, the Spanish model to ‘procedimiento de insolvencia análogo abierto con vistas a la liquidación de los bienes del cedente’ and the German model refers to ‘mit dem Ziel der Auflösung des Vermögens des Veräußerer’.
[6] See for a distinct perspective, Bob Wessels (https://bobwessels.nl/weblog/2025-04-doc1-the-european-pre-pack-is-slowly-being-unpacked/), who writes the next: “In doing so, the proposed directive codifies case legislation of the Court docket of Justice of the EU, in order that there needs to be little question that the ‘chapter exception’ of Directive 2001/23 applies to this process.” We consider {that a} extra correct description is that the Proposal renders all current case legislation and the safety provided thereby to staff out of date.
[7] See article 20-2 Proposal: “For the needs of Article 5(1) of Council Directive 2001/23/EC16, when it takes place in proceedings which may finish within the liquidation of the debtor, the liquidation section shall be thought-about to be chapter proceedings or any analogous insolvency proceedings instituted with a view to the liquidation of the property of the transferor beneath the supervision of a reliable public authority.”
[8] T. Graham, Graham Evaluate into Pre-pack Administration, June 2014, web page 37.
[9] See J.R. Hurenkamp, ‘Failliet of quick ahead? Een analyse van de pre-pack in de praktijk’, TvI 2015/20. Within the Nederlands within the interval 2012-2014 in 15 out of 39 pre-packs, the sale was to a associated celebration.
[10] Within the chapter of Mexx (clothes firm) it emerged that the shareholder held a proper of pledge over the IP rights (See first Public Report Mexx Europe BV, 22 February 2015, no. 5.4). See additionally the dispute between the trustees within the bankrupty of D-reizen (journey company) and the founder, who was additionally a former director of D-reizen, the place the IP-rights have been positioned in a bankruptcy-remote entity and, as well as, pledged to the shareholder (See Court docket of Noord-Holland, 28 Might 2021, ECLI:NL:RBNHO:2021:4344(Tekstra q.q. en Willemse q.q./Selten). Additionally see the second chapter of Scotch & Soda, the place the trustees didn’t have management over the model Scotch & Soda (https://www.bnr.nl/nieuws/economie/10550458/koopjesjagers-hoeven-niet-te-rekenen-op-goedkope-deals-na-faillissement-scotch-soda).
[11] The Belgian legislator has recognised this threat. Belgian legislation gives {that a} shareholder might solely make a bid if it additionally makes obtainable on the market any property it controls, in order that an outsider can purchase the whole enterprise. See J. Vananroye, A. Van Hoe and G. Lindeman, Curb Your Opportunism: Limits to Group Constructions and Asset Partitioning in Insolvency in Belgium, NACIIL Annual Report 2018, obtainable at https://nvrii.nl/wp-content/uploads/2021/07/preadviezen-2018.pdf. So as to counterbalance strategic benefit of insiders, Article XX.87, § 2 (translation taken from J. Vananroye, A. Van Hoe and G. Lindeman) incorporates the next rule: In case a bid is made by individuals who management the endeavor (or managed it throughout six months previous to the initiation of the judicial reorganization) and who both immediately or not directly management any rights that are essential to proceed the actions, the supply can solely be taken under consideration if such rights are made accessible to different bidders beneath the identical phrases and situations. (Unique Dutch model): Ingeval een offerte uitgaat van personen die controle op de onderneming uitoefenen of hebben uitgeoefend gedurende zes maanden voorafgaand aan de opening van de process, en die rechtstreeks of onrechtstreeks de controle hebben over rechten die noodzakelijk zijn voor de voortzetting van haar activiteiten, kan die offerte slechts in aanmerking worden genomen op voorwaarde dat die rechten onder dezelfde voorwaarden toegankelijk zijn voor de andere bieders.”
[12] On the identical time, one can and will query the fundamental mannequin of creditor wealth maximisation as the only function of insolvency legislation, simply as one can and will query the mannequin of company legislation that treats shareholder worth maximisation as its solely goal.
[13] T. Graham, Graham Evaluate into Pre-pack Administration June 2014, web page 37.
[14] See Article 32: Events carefully associated to the debtor within the sale course of:
1. Member States shall be sure that events carefully associated to the debtor are eligible to accumulate the debtor’s enterprise or half thereof, supplied that the entire following situations are met: (a) the events carefully associated to the debtor they disclose within the bid in a well timed method to the monitor and to the courtroom their relation to the debtor; (b) different events apart from these referred in level (a) to the sale course of obtain sufficient data on the existence of events carefully associated to the debtor and their relation to the latter;. (ba) within the case beneath article 26(1), level (a), a valuation of the enterprise as a going concern is carried out for the needs of the assertion of the monitor referred to in Article 22a(2), level (c). (d) events not carefully associated to the debtor are granted adequate time to make a proposal. Member States might present that, the place it’s confirmed {that a} celebration carefully associated to the debtor didn’t adjust to the situations the disclosure responsibility referred to beneath the primary subparagraph, level (a), was breached, the courtroom or competent authority revokes the advantages referred to in Article 28(1). 2. The place the supply made by a celebration carefully associated to the debtor is the one thought-about as the perfect current supply, Member States might introduce further safeguards for the authorisation and execution of the sale of the debtor’s enterprise or half thereof.”
[15] See Preamble, nr. 27: If a Member State opts to require {that a} public public sale is run previous to or after the opening of the liquidation section, the supply chosen by the monitor throughout the preparation section needs to be used as an preliminary bid (‘stalking horse bid’) for the needs of the public sale (…).
[16] Right here we deal with worker rights and the way worker safety is abolished at a European stage. There are lots of extra issues which needs to be addressed adequately if the European Union needs to introduce at a European stage pre-packs with associated events.
[17] See David A. Skeel, ‘Chapter Attorneys and the Form of American Chapter Regulation’, https://ir.lawnet.fordham.edu/cgi/viewcontent.cgi?article=3511&context=flr, 1998, web page 521 and 522: “chapter attorneys exert important affect over the form of the chapter course of, and so they have a robust incentive to maximise using chapter. (…) Chapter attorneys are solely considered one of many teams which have a big stake within the contours of chapter legislation. However no different group has had practically so far-reaching an affect as chapter attorneys (…).” And Adler, Polak & Schwartz, ‘Regulating Client Chapter: A Theoretical Inquiry’, https://depot.som.yale.edu/icf/papers/fileuploads/2425/authentic/99-99.pdfpercent5D October 1999: “The present enterprise and client chapter programs thus considerably profit: the chapter bar, the chapter judges, and the lecturers whose consulting earnings will increase with the fee, complexity, and courtroom centeredness of the system. These teams have dominated the present reform debate and previous debates as effectively. Casual hypothesis plausibly means that we’ve the patron chapter system that the attorneys need. ”
[18] See W.J. van Andel, ‘Cease de pre-pack’, TvI 2014/37. Within the authentic Dutch language: “Een faillissement is niet iets wat een partij alleen maar overkomt. Vaak is het ook een bewuste keuze: gaan we nog betalen voor een sanering van het werknemers- en crediteurenbestand of kunnen we de vennootschap beter laten failleren en dan doorstarten met een nieuw opgerichte vennootschap?” and in English, this comes right down to: ‘Chapter isn’t merely one thing that occurs to a celebration. Typically, it’s also a acutely aware alternative: can we proceed to pay for a restructuring of the workforce and collectors, or is it higher to let the corporate go bankrupt after which make a recent begin with a newly established entity?’
[19] CJEU, 22 June 2017, Case C-126/16 (Smallsteps).
[20] CJEU, 22 June 2017, Case C-126/16 (Smallsteps), nr, 20.
[21] CJEU, 28 April 2022, Case C-237/20 (Heiploeg), nr. 26.
[22] See F.M.J. Verstijlen in his case notice to CJEU 28 April 2022, NJ 2022/272 (Heiploeg).
[23] For Smallsteps see CJEU, 22 June 2017, Case C-126/16 (Smallsteps), nr, 20, the place the CJEU describes the underlying information as follows: “Through the implementation of Challenge Butterfly, Estro Groep contacted solely H. I. G. Capital — a sister firm of its principal shareholder, Bayside Capital — as a possible purchaser. No different potential possibility was explored.” And for Heiploeg see CJEU, 28 April 2022, Case C-237/20 (Heiploeg), nr. 26 the place the CJEU describes the underlying information as follows: ‘In view of the intense monetary difficulties confronted by Heiploeg-former, no financial institution agreed to finance the fee of that high-quality. Thus, as quickly because the high-quality was imposed, the potential of utilizing a pre-pack was examined. To that finish, a number of unbiased firms in relation to the Heiploeg group have been invited to submit a proposal for the property of Heiploeg-former.’
[24] Judgment of the Court docket (Third Chamber) of twenty-two June 2017, Case C-126/16 (Federatie Nederlandse Vakvereniging and Others v Smallsteps BV).
[25] See CJEU Heiploeg, nr. 53, the place the courts causes: “It’s obligatory in that respect to confirm, in every state of affairs, whether or not the pre-pack process and the insolvency proceedings at problem have been carried out with a view to the liquidation of the endeavor on account of the established insolvency of the transferor and never with a view to the mere reorganisation of that endeavor.” And once more in an analogous approach in nr. 53 and 67.
[26] See CJEU Heiploeg, nr. 53, the place the courts causes in full: “In dit verband dient in elke afzonderlijke situatie te worden nagegaan of de betrokken pre-packprocedure en faillissementsprocedure gericht zijn op de liquidatie van de onderneming nadat is huge komen te staan dat de vervreemder bancrupt is, en niet enkel op een reorganisatie van die onderneming.” And once more in an analogous approach in nr 53 and 67.
[27] Extra particularly, for Dutch Company Revenue Tax functions, it’s required that there’s an enterprise, which entails an enduring organisational union of capital and labour. In full (translation by authors): “An enterprise is deemed to exist if 1) via a sturdy organisation of capital and labour 2) participation happens in financial transactions 3) with the intention of producing a revenue, which revenue can also be moderately anticipated.” See Modification of the Dutch Company Revenue Tax Act 1969 and sure different legal guidelines in reference to the modernisation of the company earnings tax obligation for public enterprises (Moist modernisering Vpb-plicht overheidsondernemingen). See https://zoek.officielebekendmakingen.nl/kst-34003-3.pdf.
[28] This strategy additionally aligns effectively with the Directive itself and with the CJEU judgement of 25 July 1991, d’Urso and Others, C‑362/89. The Switch of Undertakings Directive protects staff when the ‘entrepreneurial head’ is changed. It’s fairly clear that, within the case of a pre-pack involving the previous shareholder, this entrepreneurial head doesn’t even change.
