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Do you intend to take over (part of) a business by means of a pre-pack? If so, do you have to take over the employees too?

Roos Inklaar, LL.M.
Russell Advocaten, B.V.
Amsterdam, Netherlands

Transfer of Undertaking

In a transfer of undertaking all rights and duties of the employees arising from the employment contracts with the disposing company will automatically be transferred to the acquiring company. The new owner of the company will then automatically become the new employer of all employees. Consequently, it is prohibited to dismiss employees due to or for the purpose of the transfer.

Exception of Prohibition To Dismissal: Re-Launch After Bankruptcy

The regulation of transfer of undertaking does not apply if the business was declared bankrupt and is re-launched by the acquirer. Therefore, the relaunching company does not have to take over all the rights of the employees. 

Does the Exception Also Apply to Pre-Packs?

In a pre-pack regime an administrator will be appointed before bankruptcy proceedings start to prepare a potential relaunch of the company as soon as it is officially declared bankrupt. This will improve the chances of a successful relaunch. When it is clear that a relaunch of a company is possible, the company will formally go bankrupt and the relaunch will then be performed. Due to the bankruptcy there will be no transfer of undertaking. Therefore, the “new” company is often a leaner version of the original company.

According to employee organisations, pre-packs can be misused as a cheaper and quicker way to reorganise a company without having to take into account employees’ rights and without having to rely on the permission from the UWV (Employee Insurance Agency). Therefore, they are of the opinion that the regulation for transfer of undertaking should also apply to a pre-packaged relaunch. 

Dutch courts brought the question as to whether the regulation on transfer of undertaking does also apply in the event of pre-packs before the Court of Justice of the European Union. The regulation for transfer of undertaking is based on a European directive. The Advocate General of the Court of Justice of the European Union has recently rendered a decision. The Advocate General comes to the conclusion that the regulations regarding the transfer of undertaking also apply to pre-packs because:

  • Pre-packs intend a relaunch of the company, not its liquidation. The bankruptcy is in fact a means to realize this.
  • The pre-pack regime does not have the same safeguards as the “classic” bankruptcy proceedings. The trustee and bankruptcy judge concerned have far less influence.

If this conclusion will be adopted by the European Court of Justice - which is common - there would be significant consequences for the practice. In that case, a company could not use the pre-pack scheme for reorganisation, without having to take into account the employees’ rights. This would make pre-packs less attractive for entrepreneurs.

In response to the conclusion of the Advocate General, the Dutch Senate has removed the Bill dealing with pre-packs from the agenda.

More Information

Naturally, we will keep you informed about the latest developments. Would you like to learn more about the regulations applying to transfer of undertaking? Or do you have any other questions about employment law. Please contact us.