1.
Towards a European pre-pack
The European Commission has presented a Proposal for the harmonisation of rules on pre-packs.[1] A pre-pack is a prepared insolvency procedure in which the sale of the business to a new owner is arranged prior to the opening of insolvency proceedings. Once insolvency has been declared by the court, the sale is executed. The company as the legal owner will cease to exist, but the business will continue. The Commission’s ambition is to have this Proposal for a European pre-pack adopted as a Directive already by January 2026.[2]
The Proposal states in its Preamble in clear and unambiguous terms that employees’ rights should not be prejudiced by the enactment of a European pre-pack:
“The pre-pack mechanism should be without prejudice to employees’ rights under Union and national law, including the involvement of employees’ representatives.”[3]
The Proposal as currently drafted, however, does exactly the opposite of what it says it will be doing. The Proposal effectively abolishes the most important European rules protecting employees during the transfer of business in which they are employed, contained in the Transfer of Undertakings and Businesses Directive,[4] by making it possible to circumvent this protection when the shareholder continues the business in a slimmed-down version using a pre-pack. The Transfer of Undertakings and Businesses Directive provides as a general rule that employees transfer along with a transfer of the business. Case law of the Court of Justice of the European Union provides employees protection under the Transfer of Undertakings and Businesses Directive in case an operating business is being transferred out of a pre-pack procedure to an old shareholder. Under the Proposal, this European rule of employee protection will be revoked facilitating pre-packs with old shareholders and related parties and leaving employees without any protection. The adoption of this Proposal would mark a chilling regression in the protection of workers’ rights across Europe.
In bankruptcy, the trustee can in general dismiss all employees. As a consequence, employees do not necessarily transfer if an external party acquires an operating business out of bankruptcy, whether the proceeding is a pre-packaged bankruptcy or not. Such a transfer, also out of a pre-packaged insolvency procedure to an external party can qualify as a proceeding aimed at liquidation. Article 5 of the Transfer of Undertakings and Businesses Directive requires the insolvency proceedings to be aimed at liquidation in order for employees not to transfer along with the business. [5] If the insolvency proceedings are not aimed at liquidation and the business is transferred out of insolvency, the employees will transfer along with the business and will, by reason of this transfer, automatically enter into an employment relation with the acquirer. From the CJEU case law on the application of the Transfer of Undertakings and Businesses Directive, it follows that the former shareholder of a bankrupt company cannot acquire the business through pre-packaged bankruptcy proceedings in order to continue it in a slimmed-down form without all employees transferring along with the business. Such a procedure, resulting in the former shareholder continuing the business in a new legal entity, cannot be deemed to constitute an insolvency proceeding ‘aimed at liquidation’.
The Proposal will simply disable the application of the Transfer of Undertakings and Businesses Directive to all prepacks – both those involving a former shareholder of the bankrupt company and those involving an acquirer unrelated to that shareholder- and thereby render irrelevant the case law of the CJEU on the Directive’s application in the context of pre-packs.[6] The Proposal bluntly states that each and every pre-pack is aimed at liquidation.[7] This is odds with reality. A substantial share of pre-packs is undertaken to enable shareholders of a company to continue the business in a new legal entity, free from old debts and without the obligation of the company towards its employees. In these so-called related-party pre-packs, the business is essentially continued by the same owner through a new company. The Proposal provides that, in the case of such pre-packs, employees will no longer be protected by European rules in the context of business transfers.
The Proposal provides that it is up to the Member States to decide whether, in such related-party pre-packs, the acquirer must honour existing labour obligations. At first sight, this shift may appear trivial. A European rule protecting employees is abolished, but if Members States value the existing rule, they may still choose to implement national provisions to that effect. The Proposal, however, simply boils down to abolishing important European rules of employee protection. Moreover, the legislative strategy pursued by the European Commission is rather peculiar. While the Commission claims to be harmonising insolvency law, it is in fact de-harmonising European insolvency law with respect to employees’ rights in insolvency. The overall effect is a significant step backward in in the protection of employee rights in the context of business transfers across Europe. Employees of a company whose shareholder deploys a pre-pack strategy to reorganise and simply to continue operations through a new legal entity will end up with the same weak or non-existent protection as employees of a company that genuinely goes bankrupt and whose business ceases to exist. In other words, this Proposal for a European pre-pack undermines the protection of employees in cases of business transfers involving a pre-pack. In light of the European and global competition for insolvency cases, such fragmentation is regrettable and will diminish, rather than safeguard employees’ protection.
Below we discuss the functioning of a pre-pack (§ 2), followed by a high-level analysis of the various interests at stake (§ 3). We then provide a more detailed examination of the current European legal framework and offer a robust interpretation of the case law of the Court of Justice of the European Union (§ 4). Next, we address the current Proposal for a European pre-pack in relation to employees’ rights (§ 5). In § 6, we conclude that under existing law, only in case of a pre-pack involving a genuine outside acquirer employees can be dismissed. In pre-packs involving former shareholders, employees simply transfer to the acquirer by operation of a sound European rule. This is a rule that should not be abolished. To state, as the European Commission does, that employees’ rights will not be prejudiced by the European pre-pack is to add insult to injury.
2.
The working and purpose of pre-packs and potential for opportunistic behavior
A pre-pack is a pre-arranged sale of assets executed immediately upon the commencement of insolvency proceedings. A prospective buyer is identified in secret prior to the opening of the insolvency proceeding and once the court declares bankruptcy, the sale is executed. The company is declared insolvent and will be liquidated, while the business continues to operate under new ownership. A pre-pack thus compels stakeholders to make a sharp distinction between the company as a legal entity and the business that is being operated.
The stated objective of pre-pack procedures is to maximise value for creditors while ensuring the continuation of operations. The more favourable interpretation of a pre-pack is that it can serve as an instrument for the benefit of creditors by selling the assets at a higher price than would be realised in normal unprepared insolvency proceedings. In a pre-pack, there will be less of a discount on the asset price since in standard liquidation proceedings buyers know that there is little time available to the trustee. Here the metaphor of a melting ice cube is often used to describe the predicament a court appointed trustee finds itself in. Amidst chaos, the trustee has to sell quickly and buyers will exploit this urgency.
In the case of a pre-pack, creditors will remain unpaid to a certain and often to a very large extent. Although presented as a tool to protect creditors, creditors themselves are frequently highly suspicious of pre-packs. Concerns are particularly strong when former shareholders are the acquirers out of pre-packs. In England the situation developed to a point where two-thirds of pre-pack sales involved related-party pre-packs.[8] Similarly, in the Netherlands, in approximately 40% of cases the acquirers have been former shareholders or other related parties.[9]
The pre-pack ‘playbook’ is full of tricks that allow former shareholders to guarantee that they will be the ones able to make the highest bid for the assets. A common strategy is to remove key assets, such as brands, IP-rights and real estate beforehand.[10] The trustee in bankruptcy is then left trying to sell a puzzle with several pieces are missing, since these are already in the hands of the shareholder seeking to acquire the assets at as the lowest possible price. Belgium seems to be exceptional in this respect, providing a positive example by introducing rules against such aggressive asset partitioning followed by attempt to profit from it.[11] Another strategy arises when the shareholder is also a creditor, or even a secured creditor. Instead of actually paying with new money for the assets, the shareholder can simply bid up to the amount of its secured claim. This practice, known as ‘credit bidding’, often scares off other potential bidders and is referred to as the chilling effect of a credit bid. In short, there are ample reasons to be suspicious of pre-packaged sales to former shareholders, not least because of their detrimental impact on creditors whose claims are typically wiped out. Whereas pre-packs involving external genuine external parties leave little room for opportunistic behaviour by shareholders, those involving former shareholders are rife with it.
The European experience to date shows that creditors, court-appointed trustees, courts and legislators have thus far been unable to adequately protect creditors against the opportunistic use of pre-packs by former shareholders.
3.
Interests at stake and the balancing act
Several interests are at stake in the process of establishing clear rules on the position of employees in the context of pre-packs and these interests can clash in various ways. The competing interests will be discussed against the background of the overarching question whether employees should transfer along with the business when the business is sold out of an insolvency procedure in which the former owner, as a company, is liquidated and ceases to exist.
A first clash of interests arises between the interests of creditors and those of employees. If all employees were to transfer while retaining their existing terms and conditions of employment, regardless of their skills and performance record, this could significantly reduce the price a purchaser is willing to pay for the business. In such a case, employee protection may come at the expense of creditors. Since insolvency law is generally regarded as a body of law aimed at protecting creditors, imposing an obligation that all employees transfer along with the business would constitute a significant exception as to overall working of insolvency law.[12]
If one wants to give more weight to employees’ protection, the question is how this should be achieved. It is clear that something has gone wrong with a company entering bankruptcy. An interested party may be willing to buy the company out of insolvency from the trustee in bankruptcy, but may decline to do so if the acquirer is required to take on all employees. The Court of Justice of the European Union faced this dilemma in the Abels-case. Various governments presented their views. The Danish government argued that the best protection for employees would be to require that all employees transfer along with the business, whereas the Dutch government argued that better protection was to allow the acquirer to ‘pick and choose’, believing that this approach would ultimately preserve more jobs than compelling the acquirer to take over all employees. In the Abels-case, the CJEU essentially left the issue unresolved and delegated the decision to the Member States. In a later amendment to the Transfer of Undertakings and Businesses Directive, this margin of discretion for Member States was explicitly introduced to the Directive, commonly referred to as ‘insolvency law exception’. Under the current Transfer of Undertakings and Businesses Directive, Member States may therefore provide that the transfer rules do not apply where a business is transferred out of insolvency proceedings, subject to certain conditions (see further below).
Other interests are also at stake. In practice, the former shareholder may also have an interest in a pre-pack. Particularly given that in the UK the majority of pre-packs were conducted with the former shareholders,[13] it is clear that their position cannot be ignored. We do not, however, believe that the interests of former shareholders should be given any direct weight in relation to either creditors or employees. The basic rule of corporate finance, as well as of corporate and insolvency law, is that equity is wiped out first. Shareholders run the company at their own risk. This means shareholders stand to benefit the most through entitlement to profits, but are also the first to absorb losses. This reasoning provides the fundamental justification for shareholders’ rights to profit and control. Therefore, the interests of shareholders in case of insolvency are fundamentally subordinated to the interests of creditors. One could nevertheless argue that shareholders have succeeded in establishing a de facto position as stakeholders, and that such a position may even be considered desirable. One could reason that a shareholder should be permitted to make a bid for the company’s assets, thereby driving up the sale price which would be beneficial for creditors. The European proposal for a harmonised European pre-pack regime requires Member States to permit connected parties to acquire the business.[14] We are, however, sceptical about recognising shareholders as stakeholders in their own right. Even if one allows shareholders a seat at the table to increase the number of bidders, thereby potentially improving creditors’ outcomes indirectly, such participation should be approached with great caution and subject to strict safeguards. Examples of such safeguards include (i) requiring shareholders to place key assets such as brands, IP-rights and real estate on the table before being permitted to bid. (ii) prohibiting credit bids by shareholders and (iii) treating any outcome in which the former shareholder emerges as the best bidder as inherently suspect and less desirable than the enterprise being acquired by an entirely new owner. Additional checks and balances are also needed with respect to the closed bidding process that is intrinsic to pre-packs. Even as to outside, non-related bidders the closed nature of the process already raises concerns. In the United States this has led to the development of the ‘stalking horse’ procedure, under which new bidders are allowed to submit a higher bid after the initial closed bidding process with a break-up fee compensating the first bidder. The Proposal also seeks to allow for such mechanisms.[15] With respect to shareholders, further checks and balances are however needed, such as introducing a matching principle under which outside bidders may acquire the enterprise at the same price offered by the shareholder.[16]
There is also the interest of the insolvency industry itself, which warrants critical examination. Not necessarily as a stakeholder, but as a group with significant influence over the legislative process. In the United Staes, the insolvency industry is regarded as the most significant actor in shaping insolvency laws. It is also considered to be far more effective in advancing its own interests than comparable groups in other areas of law.[17] It therefore seems prudent to ask whether the introduction of new rules, or even entirely new legal instruments, will also benefit the profession as a whole as well. In the case of a European pre-pack, this appears quite likely to be the case. More pre-packs mean more business for the insolvency industry. Introducing a European Pre-pack would significantly expand the scope of insolvency law. Particularly if, for some reason, the European Commission were to require Member States to allow related parties to acquire the business it would no longer be possible to determine whether alternative measures might also have helped to save the business at lower costs to creditors and employees, such as a simple infusion of new funds. If the Proposal for a European pre-pack will be adopted, pre-packs will simply become one of several business strategies. See critically as to this effect of pre-packs in general, Van Andel:
“A bankruptcy procedure is not something which just happens to a party. Often bankruptcy is a deliberate choice: are we going to pay for a restructuring of the creditors and the employees, or should we put the company into bankruptcy and acquire the business and continue in a new legal entity?“[18]
Allowing broad availability of pre-packs involving related parties also diminishes the disciplinary function of insolvency and weakens incentives against excessive indebtedness. Facilitating easy pre-packs with related parties, while simultaneously removing protections from employees, is more likely to benefit the insolvency industry than to promote a fair and resilient European economy.
4.
Current European legal framework
The Transfer of Undertakings Directive protects employees against dismissal or the deterioration of their employment conditions when a business is transferred. Under Article 3 of the Transfer of Undertakings and Businesses Directive, employees will by reason of this transfer, automatically transfer to the acquirer with the preservation of all their terms and conditions of employment. However, Article 5 allows Member States to derogate from this rule in cases of formal insolvency proceedings, referred to as the insolvency law exception. If the exception applies, this means that notwithstanding the transfer of an operating business, the employees do not transfer along with it. The Netherlands has used this insolvency law exception in Article 7:666 of the Dutch Civil Code, thereby completely excluding the transfer rule in bankruptcies, other Member States such as Germany did not.
For the insolvency law exception to apply, the insolvency proceedings in question must meet three cumulative requirements: (i) they must be statutory insolvency proceedings, (ii) initiated with a view to the liquidation of the assets of the transferor, and (iii) subject to the control of a competent public authority.
Case law from the CJEU has provided further guidance on the insolvency law exception and its three criteria. As to the requirement that the proceedings must be statutory, the CJEU has held that the pre-pack itself must also have a statutory basis. It is therefore not sufficient that the insolvency proceedings, once opened, are regulated by law. The preparatory pre-pack phase itself must likewise have a statutory foundation.[19]
The much bigger question that was raised, was how to interpret the requirement that insolvency proceeding must have been instituted with a view to the liquidation of the transferor’s assets. What does this mean? Does not every liquidation proceeding result in the liquidation of the transferor’s assets? The key issue is what exactly needs to be liquidated. Although the CJEU itself also seems to have struggled with the application of the Transfer of Undertakings and Businesses Directive, the contours are now sufficiently clear.
In the Smallsteps judgment of the CJEU (2017), Estro, a childcare chain, was sold through a pre-pack to Smallsteps, a buyer closely linked to the same shareholder.[20] The CJEU held that this pre-pack did not qualify for the insolvency exception in the Transfer of Undertakings and Businesses Directive, since it was not genuinely aimed at liquidation. In addition, the pre-pack itself also lacked a legal basis in the Member State concerned (the Netherlands). The result was that all employees should have automatically transferred to the acquirer Smallsteps under the rules of the Transfer of Undertakings and Businesses Directive.
In the Heiploeg judgment of the CJEU (2022), the pre-pack concerned a sale to an external buyer.[21] Here the CJEU took a more accommodating approach to the pre-pack, ruling that preparatory steps alone do not disqualify a pre-pack from being regarded as aimed at liquidation. Provided that the pre-pack procedure has a legal basis in national law, in a situation such as that in Heiploeg, the insolvency exception in the Transfer of Undertakings and Businesses Directive may apply, meaning that the employees would not automatically transfer to acquirer.
Many debates have followed on the correct understanding of these two separate cases, which may appear to be rather similar as to the facts but have a completely different outcome as to the application of the insolvency law exception. Legal scholars have argued that the questions posed to the CJEU were phrased radically different and that this might explain the difference in outcome. In Smallsteps the pre-pack was portrayed as the Evil Queen from Snow White, whereas in Heiploeg the pre-pack was presented as Snow White herself, according to such scholars.[22]
Any unclarity as to the exact scope of the protection offered should of course not be constructed as to mean that it is unclear whether employees derive significant protection from the Transfer of Undertakings and Businesses Directive. Although one might argue that the exact boundary between a pre-pack to which the insolvency law exception does not apply and one to which it does apply is not entirely clear, it is evident that employees enjoy very significant protection against being dismissed in the context of a pre-pack at a European level from the Transfer of Undertakings and Businesses Directive. It should also be borne in mind that pre-packs are not, in essence, a tool to shed excess employees, but rather an instrument to maximise value for creditors. There may be many reasons to conduct a pre-pack without any intention of reducing the number of employees. At the same time, in Dutch practice, the Smallsteps ruling by the CJEU almost brought pre-packs to a complete standstill in the Netherlands. At present, the Netherlands faces more of a labour shortage than a surplus of employees. Nonetheless, it is clear that under the current European Rules workers enjoy strong protection. Although in the current economic climate companies do not face pressure to downsize as to their number of employees, this situation could change almost overnight, whether due to a sudden economic downturn or the disruptive impact of Artificial Intelligence. Should the economic tide turn, worker protection will once again become far more relevant and likely be one of the most important European political topics. The European rules are also needed for such times and should be drafted with such an outward economic tide in mind.
Furthermore, the basic principles of the Transfer of Undertakings and Businesses Directive and its application to pre-packs are much clearer than is sometimes suggested. We believe that much more is at play here than merely the phrasing of the questions put to the CJEU or the way the Smallsteps and Heiploeg cases were presented to the CJEU. In short, we believe that the pre-pack in Smallsteps was in reality much more like the Evil Queen from Snow White, while the pre-pack in Heiploeg, as far as the pre-pack itself was concerned, was like Snow White herself.
We return to the facts of the cases as presented by the CJEU itself. In Smallsteps the pre-pack was conducted indirectly with the old shareholder, whereas in Heiploeg the pre-pack was conducted with an outside (non-related) party.[23] We believe this not only explains the difference in outcome in the CJEU’s judgements, but also that this approach with a distinction according to the identity of the acquirer is the correct one, taking into account the background and rationale of protecting employees’ positions under the Transfer of Undertakings and Businesses Directive. Moreover, it offers a simple and very workable approach. Where the original capital provider remained the shareholder throughout, both before and after a pre-packaged insolvency procedure, the procedure cannot be said to have been aimed at liquidation.
The CJEU uses different formulations when referring to the requirement that the proceedings must have been aimed at liquidation. The English-language version of the Transfer of Undertakings and Businesses Directive itself refers to proceedings ‘instituted with a view to the liquidation of the assets of the transferor’. The CJEU, however, uses different wording in its English-language judgements. In Smallsteps, the CJEU refers solely to the ‘liquidation of the assets of the transferor’.[24] In Heiploeg, the CJEU alternates between describing the liquidation requirement as ‘a liquidation of the assets’ and, on several occasions, as a ‘liquidation of the undertaking’.[25] In the original Dutch version of the case, the following terms are used: ‘liquidatie van het vermogen van de vervreemder’ , which translates as ‘liquidation of the patrimony of the transferor’ and, three times, ‘liquidatie van de onderneming’, which translates as ‘liquidation of the enterprise’.[26]
There remains room for debate as to what exactly needs to be liquidated. It is evident that a pre-pack procedure results in the liquidation of the company as a legal entity owning the business. It is also clear that the assets are transferred to a new owner, the acquirer. It must equally be clear that something identifiable as an ‘undertaking’ or a ‘business’ must remain. If everything is sold off in fragments (as bits and pieces), there is no undertaking or business for the employees to accompany. So the liquidation must involve something more. We believe that the best formulation is found in the Dutch version of the judgement, which states that the enterprise should be liquidated.
An enterprise is to be understood as a union of capital and labour. This is a common way of conceptualising what an enterprise is and is also reflected in Dutch Tax law.[27] Applied to pre-packs, this would mean that if the enterprise is genuinely broken up, so that the former shareholder as capital provider is no longer in place, employees as the element labour also does not need to remain in place. A consistent application of this principle would imply that when, after a prepack, the original capital provider remains in place, then so should the employees. Conversely, if the original capital provider does not remain in place, there are no compelling reasons to protect the employees, taking into account the background and rationale of protecting workers’ positions under the Transfer of Undertakings and Businesses Directive. This approach also aligns well with the reasoning of the CJEU in the Abels judgement.[28] In the case of pre-packs involving external (non-related) parties, it may be possible to preserve more jobs by allowing some employees to be dismissed. In the case of pre-packs involving related parties (the former shareholders), however, employees are left defenceless and thereby reduced to sitting ducks, and all labour law protections can easily be circumvented by orchestrating a pre-pack.
5.
The European proposal in stealth mode
The Proposal for a European pre-pack seeks to completely eliminate any protection granted to employees under the Transfer of Undertakings and Businesses Directive in the case of a pre-pack, including one involving a related party. This is rather remarkable, given the reassuring language in the Preamble’s opening statement regarding the effects on employees.
The proposal provides the following in recital 22a of the Preamble:
“The pre-pack mechanism should be without prejudice to employees’ rights under Union and national law, including the involvement of employees’ representatives. Specifically, it should be governed by statutory or regulatory provisions and should be construed in a way where the transfer of all or part of an undertaking is prepared with the assistance of a monitor under the supervision of the court or competent authority, prior to the institution of formal insolvency proceedings that are instituted with a view to the liquidation of the assets of the debtor. While the primary aim of the pre-pack mechanism is to enable, in the interests of creditors, in the insolvency proceedings, a liquidation of the debtor’s assets by the transfer of all or part of the undertaking as a going concern which satisfies to the greatest extent possible the claims of all the creditors, it can also serve employment preservation.
Consequently, when it takes place in proceedings which could end in the liquidation of the debtor, the liquidation phase of the pre-pack mechanism in this Directive is an eligible procedure for the purposes of article 5(1) of Council Directive 2001/23/EC.”
The actual abolishment of employees’ protection is set out in Article 20(2) of the draft Directive, which provides as follows:
For the purposes of Article 5(1) of Council Directive 2001/23/EC16, when it takes place in proceedings which can end in the liquidation of the debtor, the liquidation phase shall be considered to be bankruptcy proceedings or any analogous insolvency proceedings instituted with a view to the liquidation of the assets of the transferor under the supervision of a competent public authority.
It is rather surprising that the preamble asserts that the pre-pack should be without prejudice to creditors’ rights and may also serve to preserve employment, and that, therefore, all pre-packs should qualify as being aimed at liquidation. In this way, the pre-pack mechanism does in fact remove labour protection in cases of transfers of undertakings involving a pre-pack, protection which has been recognised and affirmed by the CJEU.
Elsewhere, in recital 28e of the preamble of the Proposal for a European pre-pack – apparently a new clause compared to an earlier draft – Member States are given the option to introduce requirements obliging related-party acquirers to maintain existing employment contracts.
“Where the offer made by a party closely related to the debtor is considered as the best offer, Member States should be able to introduce additional safeguards for the authorisation and execution of the sale of the debtor’s business or part thereof. Such safeguards can include, for example, the obligation for the acquirer to ensure business continuity for a minimum period of time, or the maintenance of pending employment contracts.”
This may appear to be a minor shift, delegating legislative discretion from the EU level to the level of Member States. In reality, the shift is highly significant. Under current EU law, pre-packs involving the former shareholder do not permit the dismissal of employees. Under the envisaged EU law, such dismissals would be allowed, unless Member States decide to provide protection themselves. The European pre-pack would therefore dismantle long-established protection at the European level.
One might be sympathetic to this approach of leaving difficult issues to Members States in areas where harmonisation proves unfeasible. In this field, however, a harmonised rule already exists and is now at risk of being abolished. Moreover, employees are the weaker party, while the position of capital providers is being strengthened.
6.
Conclusion
The European Commission is seeking to harmonise the pre-pack at the European level. Although it begins by stating that the European pre-pack should not prejudice employees’ rights, in practice it does harm employees.
At present, employees are protected by the Transfers of Undertakings and Business Directive. While it is possible to exclude the operation of these provisions in case of insolvency proceedings, this is only permitted if certain conditions are satisfied. The most important condition is that the insolvency proceedings must be aimed at liquidation. In cases brought before the CJEU, it has become clear that employees derive important protection from these rules in the context of pre-packs. Under existing European insolvency law, employees transfer along with the business in a pre-pack if the pre-pack is not aimed at liquidation. Although one might argue that the precise scope of the rules is not entirely clear, it is beyond doubt that employees currently enjoy very significant protection. The Commission’s assertion that the European pre-pack should not prejudice employees’ rights is therefore difficult to accept as genuine, and appears little more than a dubious attempt to divert attention from what the Commission is actually doing.
In addition, we do not share the view held by some scholars that the basic rules are unclear. If one looks at the cases decided by the CJEU, the following principles regarding pre-packs can be derived:
- Where there is an external acquirer (i.e. not a related party), the insolvency exception applies and employees do not transfer automatically.
- Where there is a related acquirer (a direct or indirect shareholder), the insolvency exception does not apply and all employees will, by reason of this transfer, automatically transfer to the acquirer with the preservation of all their terms and conditions of employment.
The central notion here is that it should be assessed whether the enterprise is actually being liquidated. An enterprise is to be understood as a union of capital and labour. If the capital provider remains in place, the enterprise has not truly been liquidated and the employees should also remain in place. Only in case of a pre-pack involving an external acquirer, it can be held that the union between capital and labour has been broken up and can it be justified that the insolvency exception applies.
Rolef de Weijs and Johan Zwemmer
Prof. dr. R.J. de Weijs is professor of Insolvency Law at the University of Amsterdam and an attorney at a law firm in Amsterdam. Dr. J.P.H. Zwemmer is researcher at the University of Amsterdam and an attorney at a law firm In Amsterdam.
[1] See Proposal for a Directive of the European Parliament and of the Council harmonising certain aspects of insolvency law, 23 May 2025, 2022/0408 (COD), (https://data.consilium.europa.eu/doc/document/ST-9257-2025-INIT/en/pdf) (hereafter ‘The Proposal’). The Proposal for a European pre-pack is part of a broader initiative to harmonise European insolvency law, which also includes proposed harmonisation of rules on directors’ liability and the duty to file, rules on avoidance of transactions, and rules on creditor committees.
[2] See https://transactions.freshfields.com/post/102kswv/eu-insolvency-law-momentum-builds-as-european-parliament-comments-on-the-draft-d “Final adoption could occur by early 2026, depending on the pace of compromise.” See also https://bobwessels.nl/blog/2025-04-doc1-the-european-pre-pack-is-slowly-being-unpacked/.
[3] Proposal, preamble, nr. 22a.
[4] Council Directive 2001/23/EC of 12 March 2001 on the Approximation of the Laws of the Member States Relating to the Safeguarding of Employees’ Rights in the Event of Transfers of Undertakings, Businesses or parts of Undertakings or Businesses.
[5] The English version refers to ‘instituted with a view to the liquidation of the assets of the transferor’. The Dutch version refers to ‘procedure met het oog op de liquidatie van het vermogen van de vervreemder’, the French version to ‘d’une procédure d’insolvabilité analogue ouverte en vue de la liquidation des biens du cédant’, the Spanish version to ‘procedimiento de insolvencia análogo abierto con vistas a la liquidación de los bienes del cedente’ and the German version refers to ‘mit dem Ziel der Auflösung des Vermögens des Veräußerer’.
[6] See for a different perspective, Bob Wessels (https://bobwessels.nl/blog/2025-04-doc1-the-european-pre-pack-is-slowly-being-unpacked/), who writes the following: “In doing so, the proposed directive codifies case law of the Court of Justice of the EU, so that there should be no doubt that the ‘bankruptcy exception’ of Directive 2001/23 applies to this procedure.” We believe that a more accurate description is that the Proposal renders all existing case law and the protection offered thereby to employees obsolete.
[7] See article 20-2 Proposal: “For the purposes of Article 5(1) of Council Directive 2001/23/EC16, when it takes place in proceedings which can end in the liquidation of the debtor, the liquidation phase shall be considered to be bankruptcy proceedings or any analogous insolvency proceedings instituted with a view to the liquidation of the assets of the transferor under the supervision of a competent public authority.”
[8] T. Graham, Graham Review into Pre-pack Administration, June 2014, page 37.
[9] See J.R. Hurenkamp, ‘Failliet of fast forward? Een analyse van de pre-pack in de praktijk’, TvI 2015/20. In the Nederlands in the period 2012-2014 in 15 out of 39 pre-packs, the sale was to a related party.
[10] In the bankruptcy of Mexx (clothing company) it emerged that the shareholder held a right of pledge over the IP rights (See first Public Report Mexx Europe BV, 22 February 2015, no. 5.4). See also the dispute between the trustees in the bankrupty of D-reizen (travel agency) and the founder, who was also a former director of D-reizen, where the IP-rights were placed in a bankruptcy-remote entity and, in addition, pledged to the shareholder (See Court of Noord-Holland, 28 May 2021, ECLI:NL:RBNHO:2021:4344(Tekstra q.q. en Willemse q.q./Selten). Also see the second bankruptcy of Scotch & Soda, where the trustees did not have control over the brand Scotch & Soda (https://www.bnr.nl/nieuws/economie/10550458/koopjesjagers-hoeven-niet-te-rekenen-op-goedkope-deals-na-faillissement-scotch-soda).
[11] The Belgian legislator has recognised this risk. Belgian law provides that a shareholder may only make a bid if it also makes available for sale any assets it controls, so that an outsider can acquire the entire business. See J. Vananroye, A. Van Hoe and G. Lindeman, Curb Your Opportunism: Limits to Group Structures and Asset Partitioning in Insolvency in Belgium, NACIIL Annual Report 2018, available at https://nvrii.nl/wp-content/uploads/2021/07/preadviezen-2018.pdf. In order to counterbalance strategic advantage of insiders, Article XX.87, § 2 (translation taken from J. Vananroye, A. Van Hoe and G. Lindeman) contains the following rule: In case a bid is made by persons who control the undertaking (or controlled it during six months prior to the initiation of the judicial reorganization) and who either directly or indirectly control any rights which are necessary to continue the activities, the offer can only be taken into account if such rights are made accessible to other bidders under the same terms and conditions. (Original Dutch version): Ingeval een offerte uitgaat van personen die controle op de onderneming uitoefenen of hebben uitgeoefend gedurende zes maanden voorafgaand aan de opening van de procedure, en die rechtstreeks of onrechtstreeks de controle hebben over rechten die noodzakelijk zijn voor de voortzetting van haar activiteiten, kan die offerte slechts in aanmerking worden genomen op voorwaarde dat die rechten onder dezelfde voorwaarden toegankelijk zijn voor de andere bieders.”
[12] At the same time, one can and should question the basic model of creditor wealth maximisation as the sole purpose of insolvency law, just as one can and should question the model of corporate law that treats shareholder value maximisation as its only objective.
[13] T. Graham, Graham Review into Pre-pack Administration June 2014, page 37.
[14] See Article 32: Parties closely related to the debtor in the sale process:
1. Member States shall ensure that parties closely related to the debtor are eligible to acquire the debtor’s business or part thereof, provided that all of the following conditions are met: (a) the parties closely related to the debtor they disclose in the bid in a timely manner to the monitor and to the court their relation to the debtor; (b) other parties other than those referred in point (a) to the sale process receive adequate information on the existence of parties closely related to the debtor and their relation to the latter;. (ba) in the case under article 26(1), point (a), a valuation of the business as a going concern is carried out for the purposes of the statement of the monitor referred to in Article 22a(2), point (c). (d) parties not closely related to the debtor are granted sufficient time to make an offer. Member States may provide that, where it is proven that a party closely related to the debtor failed to comply with the conditions the disclosure duty referred to under the first subparagraph, point (a), was breached, the court or competent authority revokes the benefits referred to in Article 28(1). 2. Where the offer made by a party closely related to the debtor is the only considered as the best existing offer, Member States may introduce additional safeguards for the authorisation and execution of the sale of the debtor’s business or part thereof.”
[15] See Preamble, nr. 27: If a Member State opts to require that a public auction is run prior to or after the opening of the liquidation phase, the offer selected by the monitor during the preparation phase should be used as an initial bid (‘stalking horse bid’) for the purposes of the auction (…).
[16] Here we focus on employee rights and how employee protection is abolished at a European level. There are many more concerns which should be addressed adequately if the European Union wants to introduce at a European level pre-packs with related parties.
[17] See David A. Skeel, ‘Bankruptcy Lawyers and the Shape of American Bankruptcy Law’, https://ir.lawnet.fordham.edu/cgi/viewcontent.cgi?article=3511&context=flr, 1998, page 521 and 522: “bankruptcy lawyers exert significant influence over the shape of the bankruptcy process, and they have a strong incentive to maximize the use of bankruptcy. (…) Bankruptcy lawyers are only one of many groups that have a large stake in the contours of bankruptcy law. But no other group has had nearly so far-reaching an influence as bankruptcy lawyers (…).” And Adler, Polak & Schwartz, ‘Regulating Consumer Bankruptcy: A Theoretical Inquiry’, https://depot.som.yale.edu/icf/papers/fileuploads/2425/original/99-99.pdf%5D October 1999: “The current business and consumer bankruptcy systems thus substantially benefit: the bankruptcy bar, the bankruptcy judges, and the academics whose consulting income increases with the cost, complexity, and court centeredness of the system. These groups have dominated the current reform debate and past debates as well. Informal speculation plausibly suggests that we have the consumer bankruptcy system that the lawyers want. ”
[18] See W.J. van Andel, ‘Stop de pre-pack’, TvI 2014/37. In the original Dutch language: “Een faillissement is niet iets wat een partij alleen maar overkomt. Vaak is het ook een bewuste keuze: gaan we nog betalen voor een sanering van het werknemers- en crediteurenbestand of kunnen we de vennootschap beter laten failleren en dan doorstarten met een nieuw opgerichte vennootschap?” and in English, this comes down to: ‘Bankruptcy is not merely something that happens to a party. Often, it is also a conscious choice: do we continue to pay for a restructuring of the workforce and creditors, or is it better to let the company go bankrupt and then make a fresh start with a newly established entity?’
[19] CJEU, 22 June 2017, Case C-126/16 (Smallsteps).
[20] CJEU, 22 June 2017, Case C-126/16 (Smallsteps), nr, 20.
[21] CJEU, 28 April 2022, Case C-237/20 (Heiploeg), nr. 26.
[22] See F.M.J. Verstijlen in his case note to CJEU 28 April 2022, NJ 2022/272 (Heiploeg).
[23] For Smallsteps see CJEU, 22 June 2017, Case C-126/16 (Smallsteps), nr, 20, where the CJEU describes the underlying facts as follows: “During the implementation of Project Butterfly, Estro Groep contacted only H. I. G. Capital — a sister company of its principal shareholder, Bayside Capital — as a potential buyer. No other potential option was explored.” And for Heiploeg see CJEU, 28 April 2022, Case C-237/20 (Heiploeg), nr. 26 where the CJEU describes the underlying facts as follows: ‘In view of the serious financial difficulties faced by Heiploeg-former, 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 in relation to the Heiploeg group were invited to submit an offer for the assets of Heiploeg-former.’
[24] Judgment of the Court (Third Chamber) of 22 June 2017, Case C-126/16 (Federatie Nederlandse Vakvereniging and Others v Smallsteps BV).
[25] See CJEU Heiploeg, nr. 53, where the courts reasons: “It is necessary in that respect to verify, in each situation, whether the pre-pack procedure and the insolvency proceedings at issue were carried out with a view to the liquidation of the undertaking as a result of the established insolvency of the transferor and not with a view to the mere reorganisation of that undertaking.” And again in a similar way in nr. 53 and 67.
[26] See CJEU Heiploeg, nr. 53, where the courts reasons in full: “In dit verband dient in elke afzonderlijke situatie te worden nagegaan of de betrokken pre-packprocedure en faillissementsprocedure gericht zijn op de liquidatie van de onderneming nadat is vast komen te staan dat de vervreemder insolvent is, en niet enkel op een reorganisatie van die onderneming.” And again in a similar way in nr 53 and 67.
[27] More specifically, for Dutch Corporate Income Tax purposes, it is required that there is an enterprise, which entails a lasting organisational union of capital and labour. In full (translation by authors): “An enterprise is deemed to exist if 1) through a durable organisation of capital and labour 2) participation occurs in economic transactions 3) with the intention of generating a profit, which profit may also be reasonably expected.” See Amendment of the Dutch Corporate Income Tax Act 1969 and certain other laws in connection with the modernisation of the corporate income tax obligation for public enterprises (Wet modernisering Vpb-plicht overheidsondernemingen). See https://zoek.officielebekendmakingen.nl/kst-34003-3.pdf.
[28] This approach also aligns well with the Directive itself and with the CJEU judgement of 25 July 1991, d’Urso and Others, C‑362/89. The Transfer of Undertakings Directive protects employees when the ‘entrepreneurial head’ is replaced. It is quite clear that, in the case of a pre-pack involving the former shareholder, this entrepreneurial head does not even change.
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