FNV v Smallsteps

In this Dutch case, the European Court of Justice has ruled that in a 'pre-pack' Administration, the employees transferred in accordance with TUPE regulations.

Prior to its insolvency, Estro Groep was the largest childcare company in the Netherlands, with almost 380 childcare centres and approximately 3,600 employees.

Estro Groep entered into a 'pre-pack' restructuring in which a new company, Smallsteps, purchased 243 of the 380 childcare centres and undertook to offer employment to almost 2,600 of Estro Groep's 3,600 employees. The Insolvency Administrator had dismissed all of the Estro Groep employees following the pre-pack and new contracts were issued to 2,600 staff, leaving 1,000 employees dismissed. An action was brought by Federatie Nederlandse Vakvereniging ("FNV"), a trade union, together with four individual former employees, seeking a declaration that their employment had transferred to Smallsteps in accordance with Council Directive 2001/23/EC ("the Directive"). The ECJ was asked to review the relevant provisions of the Directive to determine whether the Dutch Court approved pre-pack procedure was compatible with the objective of the Directive. 

The ECJ considered the timing of the transaction, as although the pre-pack was prepared prior to the insolvency process it was not put into effect until after the company had entered an insolvency process. As such, it could be covered by the exception of 'bankruptcy proceedings or analogous insolvency proceedings' within the meaning of the Directive, in that the employees would not transfer with their rights intact. 'Bankruptcy proceedings or analogous insolvency proceedings' apply when there is a view to Liquidation of the company. However, a procedure aimed at transferring the business as a going concern does not satisfy that requirement.

The ECJ found that the Directive must be interpreted as meaning that the protection of workers guaranteed by the Directive applies in a situation where the transfer of an undertaking takes place following insolvency, and is put into effect immediately on entering an insolvency process. This is particularly so in circumstances where a court-appointed prospective Administrator had investigated the possibility for continuation of the business by a third party and prepared for the deal to complete immediately on appointment. It is irrelevant in that regard that the 'pre-pack' is also aimed at maximising the proceeds of the transfer for all the creditors of the undertaking in question.

The ECJ have now referred the case back to the Midden-Nederland District Court to consider the original application given that the employees should have transferred to Smallsteps.

There are proposed changes pending to the Dutch Bankruptcy Act where a prospective receiver and delegated judge could look to sell the business and liquidate the assets, settling the liabilities in advance of the company entering an insolvency process, as well as protecting employees' rights. This is referred to as 'silent bankruptcy'. At present, 'pre-packs' are not regulated by statute but rather stem from practice.

In the UK, the Directive is enforced through the Transfer of Undertakings (Protection of Employment) Regulations 2006 ("TUPE") and this was reviewed in relation to pre-packs in the case of Oakland v Wellswood (Yorkshire) Ltd. In this case, the applicant was dismissed from the company ("NewCo"), which had purchased the business out of Administration. A claim for unfair dismissal was initially rejected as the Applicant had been employed by NewCo for less than a year and did not have sufficient continuity of employment. On appeal, the court held that OldCo had transferred its business to NewCo and pursuant to s.218 Employment Rights Act 1996, this did not break the continuity of employment. As such the Employment Tribunal had been wrong to find that the Applicant did not have sufficient continuity of employment to bring a claim for unfair dismissal. 

This article was written by Olivia Reader and Alan Bennett.

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