CJEU confirms UK view that TUPE can apply in pre-pack administrations

12 Jul 2017 By Sarah Ozanne

Lawyer Sarah Ozanne examines a recent case brought by a Dutch union

The facts in Federatie Nederlandse Vakvereniging and Others v Smallsteps BV relate to a Dutch union seeking a declaration that employees had transferred to the purchaser when their employer was acquired via a ‘pre-pack’ administration.

The seller and purchaser took the approach that the Dutch equivalent of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) did not apply to a pre-pack situation and that all of the seller’s employees were dismissed as a result. The purchaser was then able to offer employment to those staff it wished to retain. Claims were brought by several of the employees who were not offered employment by the purchaser – on the grounds that the Dutch equivalent of TUPE should have applied and that their employment should have automatically transferred to the purchaser.

The question to be determined by the Court of Justice of the European Union (CJEU) was whether Article 5 of the Acquired Rights Directive (ARD) precluded the application of the Dutch equivalent of TUPE in the context of an employer going into administration or liquidation. Particularly of interest was whether it is relevant that the objective of the pre-pack is the continuation of the activities of the undertaking concerned, and the maximisation of the proceeds of the transfer for the undertaking’s creditors.

Since 2012, several Dutch courts have adopted the practice of pre-packs. This is the transfer of assets prepared before the declaration of insolvency with the consent of a prospective insolvency administrator, and put into effect by the administrator immediately after the declaration of insolvency. Under Dutch law, as in the UK, neither the preparatory phase nor the pre-pack are regulated by statute, but arise from practice.

Article 5 provides that the ARD shall not apply to protect the employees, either by transferring their employment to the transferee or providing them with protection from dismissal, if the transferor is the subject of bankruptcy proceedings or any analogous insolvency proceedings. Furthermore, those proceedings must have been instituted with a view to the liquidation of the assets of the transferor and be under the supervision of a competent public authority.

The CJEU held that, while a pre-pack may satisfy the former of these conditions, it does not satisfy the latter, as a pre-pack is primarily designed to ensure the continuation of the undertaking. In fact, a pre-pack is aimed at preparing the transfer of the undertaking down to its last detail to enable a swift relaunch of the undertaking’s viable units once the insolvency has been declared, thereby “avoiding the disruption that would result from an abrupt cessation of the undertaking’s activities”. Therefore, in the circumstances of a pre-pack the CJEU held that the protection of employees must apply, despite the fact that the pre-pack is also intended to maximise the proceeds of the transfer for all creditors of the undertaking in question.

This case is useful clarification of the CJEU view on the impact of pre-pack administrations on the application of the ARD. It also broadly confirms the approach already adopted by the UK courts in relation to the potential application of TUPE in instances of pre-pack administrations between ‘non-terminal insolvency proceedings’, where employees will automatically transfer, and ‘terminal proceedings’, where employees will not transfer.

Sarah Ozanne is an employment lawyer at CMS

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