Court of Justice of the European Union rules on protection of employment contracts in pre-pack insolvency procedures

Spain - 

Spain Restructuring and Insolvency Commentary

The European Court has issued a sentence of special relevance for the operation and effectiveness of the “pre-pack” insolvency procedures. Specifically, it clarifies the requirements that must be met to respect the rights of workers in the event of business transfers.

The CJEU has issued a recent judgment, dated on April 28, 2022 in the Federatie Nederlandse Vakbeweging, case stemmed from two references for preliminary rulings by the Supreme Court of the Netherlands and is particularly relevant to the functioning and effectiveness of prepack insolvency procedures[1]. In this judgment the Luxembourg Court returns to an issue on which it had ruled a few years previously in the Smallsteps case (C-126/16): identifying the conditions that need to be met to apply article 5.1 of Directive 2001/23, on the approximation of the laws of the Member States relating to the safeguarding of employees’ rights in the event of transfers of undertakings. That article 5.1 allows article 3 and article 4 of the same Directive (these articles require the employment contracts to continue and the employee/employer relationship to be transferred to the transferee) not to apply where the transferor is the subject of insolvency proceedings and those proceedings fulfill certain conditions. Namely, they have to be (a)  “bankruptcy proceedings or (…) any analogous insolvency proceedings; (b) instituted with a view to the liquidation of the assets of the transferor and (c), they must be under the supervision of a competent public authority (which may be an insolvency practitioner authorised by a competent public authority)”.

The new CJEU judgment focuses on clarifying these conditions. Firstly, in relation to the phrase “instituted with a view to the liquidation of the assets of the transferor”, the Court reiterated the view it gave in the Smallsteps case mentioned above and recalled that the proceeding in relation to the transferor must have as its aim to enable the liquidation of the undertaking. Having established that, the CJEU rules that this condition would be met “Where the transfer of all or part of an undertaking is prepared, prior to the institution of insolvency proceedings with a view to the liquidation of the assets of the transferor and in the course of which that transfer is carried out, in the context of a pre-pack procedure intended to enable, during the insolvency proceedings, a liquidation of the undertaking as a going concern which satisfies to the greatest extent possible the claims of all the creditors and preserves employment as far as possible”.

Later, to reply to the second question referred for a preliminary ruling, the Luxembourg Court focused on another of the conditions set out in article 5.1: that the proceeding must be “under the supervision of a competent public authority”. According to the Court, for this condition to be fulfilled in a pre-pack procedure, one element is that the transfer of the undertaking is prepared “in the context of a pre-pack procedure prior to the declaration of insolvency by a ‘prospective insolvency administrator’, under the supervision of a ‘prospective supervisory judge’ and the other is the agreement concerning that transfer is concluded and performed “after the declaration of insolvency with a view to the liquidation of the transferor’s assets”.

The new CJEU judgment broadly appears to be fully correct and sensitive to the nature of pre-pack procedures and will, without a doubt, put an end to many of the questions remaining to be asked after the Smallsteps judgment. In spite of this, it is surprising that the CJEU should insist on laying down as a condition for including pre-pack procedures in article 5.1 of Directive 2001/23 that they must be governed by “statutory or regulatory provisions”. In truth, however, this condition, which Advocate General Pitruzzella had already called for in his conclusions, appears to stem from the specific features of Netherlands law and therefore may not be automatically transferable to other national laws. According to the Court, in the Netherlands “the pre-pack procedure (…) is governed solely by rules derived from case-law and (…) its application by different national courts is not uniform, with the result that (...)it is the source of legal uncertainty”. The court notes as a result that “In those circumstances, the pre-pack procedure set out in the case law of the referring court cannot be regarded as providing a framework for the implementation of the exception contained in Article 5(1) of Directive 2001/23 and does not meet the requirement of legal certainty” (we added the underlining).

It may be interpreted, therefore, that for legal systems in which, although the pre-pack procedure is not governed by statutory or regulatory provisions, a high level of legal certainty is guaranteed –because, for example, there is a settled and foreseeable court practice - the exception to articles 3 and 4 of the Directive as set out in article 5.1 could come into play. It does not seem likely that the CJEU chooses to identify “legal certainty” only in terms of the existence of “statutory or regulatory provisions”. In actual fact, the European Court of Human Rights has ruled several times that rights protected under the European Convention of Human Rights may be restricted by a practice in the case law or even in administrative practice, if absolute legal certainty is guaranteed. Furthermore, the Advocate General listed the conditions that in his view a pre-pack procedure ought to fulfill to guarantee an acceptable level of legal certainty and which appear absolutely reasonable: “to provide the operators concerned with legislation that will enable identification in each case, ex ante, on the basis of clear and specific principles, the consequences and the costs involved in the use of a mechanism of this type” (unofficial translation). However, if in any one state a practice in the case law actually exists which guarantees fulfillment of the conditions in the handling of the pre-pack procedure, it does not seem to make sense for it to be excluded from article 5.1 as a result of not being governed by a statutory or regulatory provision.

Lastly, the new CJEU judgment is significant because it no longer starts out (as earlier judgments had done) from the contrasting or conflicting interests of creditors on one side, and workers on the other; instead, to the contrary, it regards as being compatible with the workers’ interests the attempt to preserve and achieve the highest value of the company for creditors (paragraphs 50 through 52). For the Luxembourg Court, the pre-pack procedure is a tool able to reconcile the interests of both. As a result, the judgment determines that the pre-pack procedure is an eligible proceeding for the purposes of article 5.1 of Directive 2001/23.

[1] Unlike the terminology used in Spain (the pre-pack procedure is often used for a petition for an insolvency order with a proposal for the sale of a productive unit although not necessarily accompanied by the prior appointment of a “silent insolvency practitioner”), in the discussed judgment a pre-pack procedure is associated with the appointment of a “silent administrator”.