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The Pre-pack and the Dutch Transfer of Business Act

Updated: Aug 9, 2023

As early as 2015 ( as a result of a European Claim), the Netherlands has been working on amending the Dutch Bankruptcy Act by introducing the so-called Pre-pack (officially: the Dutch Continuity of Enterprises Act). In short, the Pre-pack concerns the preparation of a restart before bankruptcy, which the trustee executes immediately after the bankruptcy is declared with the authorization of the bankruptcy judge. The Pre-pack has two goals. The first goal is a structured and efficient settlement of bankruptcies. The second goal is good preparation before bankruptcy for an intended relaunch of (part of) a company after bankruptcy.

The Pre-pack does not (yet) have a legal basis, but in practice the courts already regularly appoint so-called intended curators (and intended supervisory judges) who advise the company before bankruptcy in order to steer a restructuring or relaunch in the right direction. Not all courts in the Netherlands participate in the Pre-pack: Limburg District Court does not participate as long as there is no legal basis for the Pre-pack.

The original bill to introduce the Pre-pack was already passed by the Dutch Second Chamber in mid-2016. Treatment in the First Chamber, however, is significantly delayed. Partly as a result of a ruling by the European Court of Justice, a new round of consultation is taking place and, for example, trade unions and experienced bankruptcy curators are being asked to advise.

Said ruling of the European Court (of June 22, 2017 in the so-called Estro case) seems to be putting a stop to the Pre-pack. In the ruling in question, the European Court ruled, in short, that a Pre-pack bankruptcy is a form of transfer of undertaking within the meaning of the Dutch Transfer of Business Act. As a result, after the bankruptcy of the company, the employees can claim that they automatically entered the service of the re-starter, retaining all their rights. This ruling is notable because under Dutch law and case law until that time, bankruptcy meant the very end of employment contracts with employees. It was precisely in those cases that employers could not invoke the Dutch Transfer of Business Act. The basis for the decision of the European Court was that the Pre-pack is a bankruptcy procedure, which is not aimed at liquidating the assets of the company, but at continuing the company after bankruptcy.

On July 10, 2018 and July 17, 2018, respectively, the Amsterdam Court of Appeal and the Arnhem-Leeuwarden Court of Appeal nuanced the ruling of the European Court. In both cases, in the context of the Pre-pack, an intended curator had been appointed who, prior to bankruptcy, had considered both the possibilities of a restart after bankruptcy and also the possibility of liquidation, and where the decision for a restart was actually taken after bankruptcy. In both cases, the court ruled that there was no transfer of business (and thus the restarting company did not "automatically" take over the employees of the bankrupt company). The difference is in the degree of preparedness for a restart. If the restart was in fact completed before the bankruptcy and made final the day after the bankruptcy, there is a good chance that a situation as referred to in the Dutch Transfer of Business Act will be deemed to exist. If, prior to bankruptcy, only the possibilities of a relaunch, in addition to the possibility of liquidation, are examined and negotiations about a relaunch are only completed after bankruptcy, there is a real chance that it will not be judged that there is a transfer of business.

This issue was also raised in a recent ruling of the Limburg District Court. That case involved a pre-pack. The subdistrict court ruled that the bankruptcy proceedings had been initiated with a view to restarting the bankrupt company and were not (purely) aimed at liquidating the assets of the bankrupt company. In such a situation, the protective rules of the Transfer of Business Act retain their effect, the subdistrict court ruled. The subdistrict court then ruled that there was a transfer of business.

Therefore, as long as no legal regulation on the Pre-pack has been introduced, it remains uncertain whether or not there is a transfer of business in the case of a restart of a bankrupt company. Thus putting a considerable brake on the practice of the Pre-pack.

Separate from the discussion about the Pre-pack is an initiative of the EU Ministers of Justice who met in Luxembourg at the beginning of October and agreed on the preparation of a European directive that will allow timely restructuring of a company in trouble, in order to prevent the company in question from failing. A final European directive will still be some years away, but the upside is that consideration is being given to creating, as in the U.S., a type of bankruptcy procedure that does not aim to liquidate the entrepreneur, but rather to continue it. Time will tell.

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