The pre-pack in the Netherlands may very shortly revive

Since the judgment of the European Court of Justice in the Estro case in 2017, the use of pre-packs had almost completely disappeared in the Netherlands. While looking ahead in the Q4 2021 issue of our International Restructuring Newswire, two of the authors of this article expressed their view that the highly anticipated judgment of the European Court of Justice in the Heiploeg case potentially offered reason for optimism for the revival of Dutch pre-packs. On 28 April 2022, the European Court of Justice handed down its judgment in the Heiploeg case which confirmed this view—the Dutch pre-pack indeed lives. 

Introduction

The pre-pack was widely used as a restructuring tool in the Netherlands in the aftermath of the global financial crisis. In a Dutch pre-pack process, a debtor in financial distress will negotiate and prepare an asset deal. The debtor will request the court to appoint a prospective bankruptcy trustee and prospective supervisory judge. The prospective bankruptcy trustee and prospective supervisory judge, while formally having no basis or formal tasks under the Dutch Bankruptcy Act, will closely monitor the process. Once the negotiations with a potential purchaser are close to being finalised, the debtor will file for bankruptcy, the court will appoint the prospective bankruptcy trustee and prospective supervisory judge as the actual bankruptcy trustee and supervisory judge, respectively. The bankruptcy trustee will then sign and close the transaction that was prepared prior to the bankruptcy. The aim of using a pre-pack is to avoid the negative impact on the value of the business when pursuing a sale of a distressed business through a bankruptcy process. By using a pre-pack, enterprise value is preserved as much as possible, and the business (or parts of it) may be sold as a going concern for the maximum value.

In 2017, the use of pre-packs in the Netherlands was halted as a consequence of the judgment of the European Court of Justice (ECJ) in the Estro case.¹ Estro was the largest childcare company in the Netherlands with close to 380 childcare centres throughout the Netherlands and with around 3600 employees. When it suffered financial distress, the business was sold using a pre-pack in an attempt to rescue the business. In the context of that transaction, approximately 250 childcare centres were purchased by Smallsteps. It should be noted that Smallsteps, as the purchaser of part of the business of Estro, was affiliated with (the shareholder of) Estro. Estro’s bankruptcy trustee terminated all employees of Estro, following which almost 2600 of those (former) employees were offered a new employment contract by Smallsteps.

In the Estro case, the question was whether the (former) employees of Estro were transferred to Smallsteps by operation of law based on the principles of the European Directive on 'Transfer of Undertakings and Protection of Employees' (TUPE),² or whether these principles did not apply to the Estro pre-pack on the basis of the exception in bankruptcy (the bankruptcy exception). The bankruptcy exception to the automatic transfer of employment contracts is applicable to a transfer of an undertaking, business, or part of an undertaking or business, if:

• the transferor is the subject of bankruptcy proceedings (or any analogous proceedings);

• such proceedings have been instituted with a view to the liquidation of the assets of the transferor; and
• the transfer is under the supervision of a competent public authority (which may be an insolvency practitioner authorised by a competent public authority).³

The ECJ considered that, in the given circumstances, it was apparent that the pre-pack was "aimed at ensuring the continuation of the undertaking where that procedure is designed to preserve the operational character of the undertaking or its viable units". As such, the ECJ held that the pre-pack proceedings were not instituted with a view to the liquidation of the assets of Estro. The ECJ further considered that this view is not altered by the possibility that a pre-pack also maximises satisfaction of the creditors’ collective claims.

In addition, the ECJ held that the pre-pack procedure had no basis in Dutch national legislation, that the prospective bankruptcy trustee and prospective supervisory judge had no formal powers, and accordingly, the pre-pack procedure was not supervised by a public authority.

The ECJ concluded that the pre-pack for Estro, therefore, did not meet the requirements of the bankruptcy exception under TUPE or its implementation in Dutch law.

As a result of this ruling, pre-packs were no longer considered a feasible tool in Dutch restructurings where the workforce needed reshaping.

Heiploeg case: The Dutch Supreme Court

The judgment of the ECJ in the Estro case effectively ended the use of the pre-pack in the Netherlands, leaving exceptional cases aside. With the Heiploeg case, however, the Dutch Supreme Court had the chance to request the ECJ to—in essence—reconsider its decision on Dutch pre-packs. In that request, the Dutch Supreme Court indicated that (in its preliminary view) the bankruptcy exception did in fact apply to the Heiploeg pre-pack on the basis that, contrary to what the ECJ ruled in the Estro case, the Heiploeg pre-pack was instituted with the purpose of liquidating assets of the transferor, as well as the fact that the pre-pack was conducted under the supervision of a competent public authority.

The Dutch Supreme Court found that the purpose of the pre-pack was to liquidate the assets of the bankrupt debtor, given that the bankruptcy of Heiploeg was inevitable absent the going concern sale, the purchaser of the business was not affiliated with Heiploeg and the District Court had appointed a prospective bankruptcy trustee and prospective supervisory judge with the aim to achieve the highest possible return for the creditors of the potentially (soon to be) bankrupt company.

The Dutch Supreme Court further concluded that pre-packs involve actual supervision by a competent authority because the pre-pack is monitored by a prospective bankruptcy trustee and prospective supervisory judge who, although being appointed by the court without any legal powers when carrying out their tasks, have duties that do not differ from the duties of the bankruptcy trustee and supervisory judge in insolvency proceedings. Furthermore, the prospective bankruptcy trustee should act in the interest of the collective creditors and other societal interests, such as preservation of employment, under supervision of the prospective supervisory judge. In addition, the Dutch Supreme Court concluded that the deal that is negotiated pre-bankruptcy is actually signed and closed by the bankruptcy trustee, with approval of the supervisory judge in bankruptcy, and that the court may appoint a different bankruptcy trustee and supervisory judge if the prospective bankruptcy trustee and the prospective supervisory judge have not taken the interests of the creditors into account. Finally, the Dutch Supreme Court found that the prospective bankruptcy trustee may be held liable in the same way as a bankruptcy trustee in insolvency proceedings.

Advocate General: No bankruptcy exception

In his conclusion of 9 December 2021,⁴ which was published shortly after the Q4 2021 issue of our International Restructuring Newswire, Advocate General Pitruzzella at the ECJ nonetheless concluded that the Heiploeg pre-pack was not instituted with a view to the liquidation of the assets of the transferor since the primary objective of a procedure aimed at continuation of the undertaking is the safeguarding of the undertaking concerned. Further, the Advocate General considered that there is no space for an untethered case-by-case approach to a determination of the primary objective of a pre-pack, given the legal uncertainty and ambiguities this would cause due to the absence of statutory or regulatory provisions governing the pre-pack procedure in the Netherlands. Therefore, the Advocate General found that the circumstances raised by the Dutch Supreme Court were irrelevant to the question of whether a pre-pack is instituted with a view to the liquidation of the assets of the transferor or with a view to continuation of the undertaking. The Advocate General further concluded that the prospective bankruptcy trustee and prospective supervisory judge do not have any formal statutory powers, which meant that the third condition for the bankruptcy exception also was not met.

ECJ: Bankruptcy exception may apply

Contrary to the conclusion of the Advocate General, on 28 April 2022 the ECJ found the circumstances raised by the Dutch Supreme Court were relevant . The ECJ considered that, with the information provided by the Dutch Supreme Court in the context of the presented preliminary questions, it was necessary to verify in each particular case and situation, whether the pre-pack and insolvency proceedings at issue were being carried out with a view to the liquidation of the business instead of with a view to the reorganisation of that undertaking.⁵ The ECJ furthermore held that it was necessary to establish not only that the primary objective of those proceedings was to satisfy, to the greatest extent possible, the claims of all creditors generally, but also that such primary objective would be achieved in the relevant proceedings.

The ECJ found that there was supervision by a competent public authority since the prospective bankruptcy trustee and prospective supervisory judge were appointed by a competent court, which not only defines their duties—such duties not being substantially different from the duties of the actual bankruptcy trustee and the supervisory judge in insolvency proceedings—but also reviews the exercise of those duties when the insolvency proceedings are subsequently opened. This review includes the court deciding whether or not the same persons should be appointed as the actual bankruptcy trustee and supervisory judge, and is further supported by the fact that the prospective bankruptcy trustee may be held liable in the same way as a bankruptcy trustee in insolvency proceedings.

The ECJ did however agree with the Advocate General that the lack of a legal framework for the pre-pack is the source of legal uncertainty, which is also evidenced by the fact that not all Dutch courts have granted requests for pre-packs in the absence of such a legal framework.

In sum, based on the further information provided by the Dutch Supreme Court, the ECJ held that the pre-pack proceedings at issue were carried out with a view to the liquidation of the assets of the transferor and under the supervision of a competent public authority if the following exist:

• the transfer of (part of) the undertaking has been prepared prior to the institution of insolvency (or analogous) proceedings with which the liquidation of assets is envisaged and during which the transfer is carried out;
• this transfer is carried out in the context of a pre-pack that has as its primary objective to facilitate a liquidation of the undertaking as a going concern during the insolvency (or analogous) proceedings that satisfies a maximum disbursement to the creditors of the debtor and preserves employment to the extent possible; and
• the pre-pack procedure is governed by statutory or regulatory provisions.

Impact

The ECJ therefore clarified that the bankruptcy exception may be applicable if a pre-pack has in fact been instituted with a view to liquidation of the assets of the undertaking as a going concern for the purpose of maximising returns for the creditors’ collective claims (which, in turn, may be substantiated through the circumstances raised by the Dutch Supreme Court).

However, the ECJ set forth an important prerequisite: the pre-pack must be governed by statutory or regulatory provisions. This should not be viewed as a radical change of direction from the ECJ, but rather as a further nuance to the Estro judgment. This means that the time has come for the Dutch legislature to pick up the gauntlet (again). The condition introduced by the ECJ requires that the Dutch pre-pack have a basis in law. It is now up to the Dutch legislature to introduce statutory or regulatory provisions governing the pre-pack procedure in the Dutch Bankruptcy Act.

In the Q4 2021 issue of our International Restructuring Newswire, we discussed various legislative initiatives that are relevant in the context of pre-packs, being:

• the draft bill 'Act on Continuity of Enterprises I' (Wet Continuïteit Ondernemingen I; "WCO I");
• the legislative amendment (novelle) to the WCO I published on 25 May 2021; and
• the draft bill 'Act on Transfer of Undertaking in Bankruptcy' (Wet overgang van onderneming in faillissement; "WOVO").

These legislative initiatives had been paused in anticipation of the judgment of the ECJ in the Heiploeg case. It is expected that the Dutch government will resume working on these draft bills with a sense of urgency now that the ECJ has handed down its judgment.

WCO I was in fact the legislative proposal to codify the pre-pack into the Dutch Bankruptcy Act. However, a legislative amendment to WCO I sought to allow for a phased approach to the enactment of the pre-pack in the Netherlands, whereby the pre-pack framework would be made available only for enterprises with activities that serve social interests (such as companies active in the healthcare, education, energy, waste processing, internet and telecom sectors), and—depending on the outcome of the Heiploeg case—subsequently, for other debtors in general. Now that the ECJ has opened the door for pre-packs, we would expect and find it desirable that the Dutch legislature withdraws the legislative amendment to the WCO I and pursues the enactment of the WCO I for all businesses, in accordance with the initially proposed legislation.

Conclusion

The Heiploeg judgment opens the door for the use of pre-packs in the Netherlands (again). The ECJ clarified that the bankruptcy exception under TUPE may apply, if a pre-pack has in fact been instituted with a view to liquidation of the assets of the undertaking as a going concern and provided that the pre-pack is governed by statutory or regulatory provisions. If the bankruptcy exception applies, employees are not transferred to the purchaser of the business by operation of law. This allows for a restructuring of the workforce to realize maximum value for the creditors of a bankruptcy estate, which is a great addition to the Dutch restructuring toolkit along with the new Dutch scheme (the WHOA) which excludes employees from its application (restricting the ability to restructure employment liabilities under a WHOA proceeding).

In light of the ECJ’s requirement that the bankruptcy exception only applies if the pre-pack procedure has a statutory or regulatory basis, the Dutch government is expected to soon resume its work on the WCO I (and the WOVO) to create a legal framework for pre-pack procedures.