The ECJ considered the application of the Directive to pre-pack administrations. Four employees and their trade union brought proceedings after the employees were dismissed following a pre-pack.
Article 5(1) of the Directive provides that the automatic transfer provisions under Art. 3 and Art. 4 of the Directive; shall not apply to any transfer… where the transferor is the subject of bankruptcy proceedings or any analogous insolvency proceedings which have been instituted with a view to the liquidation of the assets of the transferor and are under the supervision of a competent public authority (which may be an insolvency practioner authorised by a competent public authority).
This is replicated in Reg. 8(7) of TUPE.
The Estro Group operated 380 nurseries and employed 3,600 workers. It became insolvent and an arrangement was made whereby it would transfer a substantial proportion of its business to a newly created company, Smallsteps. An administrator was appointed on the 10 June 2014. A declaration of insolvency was made by the Court under Dutch law on the 5 July 2014 and on the same day the business, consisting of 250 of the 380 nurseries, was transferred to Smallsteps. The claimants worked in nurseries taken over by Smallsteps and were not offered contracts. They sought a declaration that their employment had transferred.
The Dutch court referred a number of questions to the ECJ but the principal issue was whether Art. 5(1) applied to pre-pack whereby the arrangement for the transfer of the business was made before the declaration of insolvency and carried out immediately after that. I.e. where there never any intention to enter liquidation.
The ECJ stressed that Art. 5(1) only applies to insolvency proceedings where they have been instituted with a view to the liquidation of assets of the transferor and they under the supervision of an insolvency practitioner. This has to be construed strictly as it deprives workers of the rights on transfer. This exclusion does not extend to the process of preparing for insolvency. Whilst in this case there was an insolvency procedure and the transfer did not take place until after the declaration of insolvency, the procedure was aimed at the continuation of the undertaking and not its liquidation. Therefore, Art. 5(1) did not apply.
A pre-pack procedure may be aimed both at maximising the return for creditors and ensuring the continuation of the undertaking, its operational character or the viability of its business. The ECJ held that although there may be some overlap of those two objectives within the aims of any given procedure, the primary objective of the procedure in this case was to ensure the continuation of the undertaking and therefore Art. 5(1) did not apply as the procedure was not instituted with a view to the liquidation of assets.
English case law has taken an absolutist approach looking at the character of the insolvency proceedings rather than the underlying intention (see Key2Law). It is possible, that this case may lead to a challenge to that approach, although that us unlikely because Key2Law held that Reg 8(7) will never apply to administration proceedings.