Pre-pack: what about employees?
January 2023 – In a pre-pack, the healthy parts of a near-bankrupt company are sold under the supervision of the court. A relaunch for part of the company certainly has advantages. But what about the employees?
Pre-pack insolvency of silent bankruptcy
'Silent bankruptcy', better known by its English name pre-pack insolvency, was introduced into Belgian law at the end of March 2021. It is a procedure whereby a company in difficulty holds secret discussions with its main creditors to prepare or prevent the company's bankruptcy. With that agreement, they can then go to court to move on to court proceedings to reorganise the company.
The troubled company can initiate pre-pack proceedings through a petition to the president of the competent corporate court. The application must be substantiated, after which the president decides whether or not to go ahead with the pre-pack.
If the court agrees, a judicial administrator will be appointed to assist the debtor in negotiating an amicable agreement or collective restructuring plan with all, or part, of the creditors.
Thanks to this negotiation phase, a judicial agreement to allow the company to restart can be reached more quickly.
Sale of components
But pre packs are also used to split off the better parts of a company and let them restart in better conditions. In that case, only the old vehicle is left to be dissolved. The old company then does go bankrupt, but because of the pre-bankruptcy transfer, part of the company continues anyway.
Employees in bankruptcy
European rules state that when a business is transferred, the rights and obligations of employees and employers arising from employment contracts 'pass automatically to the transferee of the business'.
There is an exception to this, namely in case the company is in bankruptcy proceedings. In that case, 2 additional conditions must be met:
the proceedings were initiated with a view to dissolving the company; and
the proceedings take place under the supervision of a public authority.
So the key question is whether a transfer of some parts of a company as part of a pre-pack (and therefore before the actual bankruptcy) should also be considered a bankruptcy, because then - at least according to the European directives - the terms of employment can be reviewed.
Evolution
As is often the case with European regulations, the European Court of Justice had to tie the knot. In 2017, the ECJ ruled in a Dutch case that the conditions for bankruptcy were not met. In this case, the pre-pack procedure did lead to the bankruptcy of a childcare centre, but instead of dissolving the transferor's assets, the business was fully transferred on the day of the bankruptcy with a view to continuing to provide services. Transferee and transferor were, in fact, related companies. Moreover, the court ruled that the intervention of a receiver and supervisory judge was not sufficient to constitute "supervision by a public authority".
A Belgian case was settled in 2019. There too, the Court concluded that in that case, the judicial reorganisation procedure was not a bankruptcy procedure as referred to in the exception.
Turnaround in 2022
But in a recent (again Dutch) case, the Court ruled that the conditions for the exception were all met. In that specific case, parts of the bankrupt Groningen shrimp processing company Heiploeg were sold to a third party via a pre-pack transaction shortly after the bankruptcy. That third party also took over 2/3rds of the staff, at less favourable terms of employment.
Via the trade union, the case came back to the court, which concluded in a judgment of 28 April 2022 that:
the pre-pack is a bankruptcy procedure;
that procedure is aimed at dissolving the assets of the transferor (which was the main purpose of the pre-pack this time); and
the appointment of a receiver and supervisory judge in a pre-pack procedure does have to be considered government supervision.
Thus, a pre-pack falls under the exception and the rights and obligations of employees and employers arising from employment contracts do not pass to the acquirer of the company by operation of law. Specialists assess this ruling as a turning point in case law. Those taking over a company in difficulty will find it easier to realise savings this way. But these will then mainly be realised at the expense of the remaining staff.
