The issue in this case is whether a Dutch pre-pack insolvency process came within Art. 5(1) of the Acquired Rights Directive such that the automatic transfer provisions in Arts. 3 and 4 do not apply and the transferee was not bound to honour the contracts of transferring employees.
Art. 5(1) provides that these provisions shall not apply: “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 practitioner authorised by a competent public authority)”. In the UK Art. 5 is implemented in Reg. 8(7) of TUPE.
The H Group suffered significant financial losses in 2011 to 2013. In addition, in November 2013, the European Commission imposed a fine of EUR 27 million on four companies in that group for having participated in a cartel. Because of this no bank agreed to finance the payment of that fine. Thus, as soon as the fine was imposed, the possibility of using a pre-pack was examined. To that end, several independent companies were invited to submit an offer for the assets of the H Group. A potential buyer, P, emerged. Insolvency practitioners were appointed and were tasked with monitoring, obtaining information and being informed, giving their opinion and, where appropriate, giving advice. They were to be guided by the interests of all the creditors, as if the insolvency had already been declared and, in the event of subsequent insolvency proceedings, to report on the pre-pack procedure in public reports. On 27 January 2014 an insolvency order was made by the Dutch court. A transfer of assets and a transfer of about two-thirds of the workers occurred on 29 January 2014. Those workers who were transferred were required to accept less favourable terms and conditions.
The trade union FNV challenged this in the Dutch courts on the basis that, the liquidation exception in Art. 5(1) did not apply to pre-pack administrations.
There was no dispute that the H Group was subject to insolvency proceedings. At issue was whether the pre-pack procedure complied with the two further requirements of Art. 5(1) namely whether it was instituted with a view to the liquidation of the assets of H Group and, secondly, whether it was under the supervision of a competent public authority. Questions on these two issues were referred to the ECJ by the Dutch Supreme Court. The Dutch Court noted, in relation to the first question, that the insolvency of the transferor was inevitable and that under Dutch law the objective of the insolvency proceedings was to secure the highest possible return for the joint creditors by liquidating the debtor’s assets. In relation to the second question, it noted that the supervising administrators, despite not being appointed by the court until the insolvency order was made, were required to have regard to the interests of all creditors and their duties did not change after appointment.
The Judgment of the ECJ
This was the second recent occasion that the ECJ had been required to consider Dutch pre-pack administrations. In the Smallsteps case, it had considered and rejected the argument that Art. 5(1) applied to pre packs.
The ECJ noted at  that the first question involved factual and procedural matters which were either not raised or not in issue in Smallsteps and therefore that case was not binding on it. It also noted at  that, by contrast with Smallsteps, when the pre-pack procedure at issue was initiated, the insolvency of the transferor was inevitable and both the insolvency proceedings and the pre-pack procedure which preceded them were aimed at liquidating the assets of the transferor, which was, moreover, declared insolvent.
It held at  “Accordingly, where the main purpose of a pre-pack procedure followed by insolvency proceedings is to obtain, following the declaration of insolvency of the transferor and its liquidation, the highest possible reimbursement of all its creditors, those procedures, taken together, satisfy, in principle, the second condition laid down [in Art. 5(1)]”.
On the second question, the ECJ held that the proceedings were under the supervision of a competent public authority. This was because the ‘prospective insolvency administrator’ and the ‘prospective supervisory judge’ are appointed by the competent court for the pre-pack procedure and that court not only defines their duties but also reviews the exercise of those duties when the insolvency proceedings are subsequently opened. In deciding whether or not to appoint the same persons as insolvency administrator and supervisory judge, there is already, as a result, supervision of the ‘prospective insolvency administrator’ and the ‘prospective supervisory judge’ by a competent public authority.
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 is unlikely because Key2Law held that Reg 8(7) will never apply to administration proceedings. In addition, this decision to a significant degree depends on the intricacies of Dutch insolvency law and of course, ECJ cases post-dating the end of the translon period following Brexit are not binding