16 Jun The Heiploeg ruling: the pre-pack appears to have made a come-back
What is a pre-pack?
A pre-pack is a transfer of assets prepared before the time of a bankruptcy that is implemented by the trustee immediately after the bankruptcy is declared. The idea behind a pre-pack is to prevent the company from losing too much of its value. The value of the assets to be sold is usually higher if they are sold as a going concern. In the event of a bankruptcy, little time and information is usually available to sell the bankrupt company’s assets for the highest possible proceeds and, moreover, the bankruptcy itself already impairs the company’s value. In the case of a transaction prepared before the bankruptcy (i.e. a pre-pack), more time and information are available, which can prevent a reduction in the company’s value.
The pre-pack subject to a great deal of criticism in employment law practice. Critical commentators note that there is no legal basis for the pre-pack, that the developments are not transparent and, most importantly, that the protection of employees against dismissal is disregarded, because the rules for the protection of employees in the event of a transfer of undertaking do not apply in the case of bankruptcy. In a pre-pack procedure, the company is formally sold out of bankruptcy after all its employees have been dismissed. The operations are continued debt-free, as it were, while the employees are left empty-handed. According to the critics, a pre-pack increases the value of the company at the expense of the employees. A pre-pack is therefore not aimed at bankruptcy, but is in fact a transfer of undertaking aimed at saving costs, according to the critics, who therefore believe that the employees’ protection against dismissal must apply in full in the case of a pre-pack. In the event of a transfer of undertaking, the employees are usually transferred to the transferee by operation of law.
The Estro ruling
In 2017, the ECJ rallied behind the critics in its Estro ruling and ruled that the protective provisions for employees continue to apply if the transfer of an undertaking takes place within the framework of an acquisition that was prepared entirely during the pre-pack and was implemented immediately after the bankruptcy was declared. That was the case in the Estro situation, according to the ECJ. That appeared to put an end to the pre-pack practice, as became apparent in practice after the Estro ruling, when hardly any more pre-packs occurred.
The most important question that the ECJ had to answer was whether a pre-pack procedure could be regarded as bankruptcy proceedings and whether, as it were, that also made cherry picking among the employees possible, because all the employees were first dismissed and the buyer could then select the employees it wanted out of the bankruptcy: the pre-pack as an exception to the principal rule of the transfer of undertaking. The Estro case demonstrated that the exception that no transfer of undertaking has taken place must be interpreted strictly and that that exception applies only if the following conditions are met:
- the transferor is the subject of bankruptcy proceedings or any analogous insolvency proceedings;
- those proceedings must have been instituted with a view to the liquidation of the assets of the transferor; and
- the proceedings must be conducted under the supervision of a competent public authority.
According to the ECJ in the Estro case, the pre-pack procedure was not instituted with a view to liquidation, but rather with a view to the continuation of the business, and there was insufficient judicial supervision. The exception therefore did not apply and the employees should therefore have been transferred by law to Smallsteps, the buyer of the bankrupt estate.
The Heiploeg ruling
The ECJ recently ruled in the Heiploeg case that the pre-pack procedure is indeed aimed at liquidating the debtor’s assets and therefore constitutes insolvency proceedings, and, moreover, that adequate safeguards were in place in the procedure. The ECJ ruled that the regular protection of employees in the event of a transfer of undertaking does not apply if the pre-pack is carried out under the supervision of a supervisory judge with the aim of obtaining the highest possible recovery proceeds for the joint creditors.
In sum, the pre-pack appears to have made a come-back and to be possible once again (subject to conditions). The ECJ case law is still somewhat casuistic, however, so it is not (yet) a hard and fast rule that the pre-pack is permitted in all cases. A bill to properly regulate the pre-pack has been on the table for some time already. That bill should be revived and the pre-pack should be regulated by law, so that the rights of employees in particular are also regulated, since they appear to be the victims of this ECJ ruling.
Do you have any questions about this subject? Please contact Bart de Vroe (+316 203 662 43).
This article was published in the Newsletter Vestius of June 2022