Introduction to the pre-pack

The pre-pack procedure, in short, entails that an entity that faces financial difficulties prepares a sale of its business, without its financial difficulties becoming public or known to its stakeholders, with the purpose to increase the value of the business. In such pre-pack the relevant entity requests the court to appoint an ‘envisaged bankruptcy trustee’ (beoogd curator) and an ‘envisaged supervisory judge’ (beoogd rechter-commissaris) who will monitor the relevant pre-pack sale in the interest of the joint creditors of the relevant entity. After the sale is agreed, the relevant entity files for its bankruptcy, after which the business will be restarted immediately out of bankruptcy.

This pre-pack procedure does not (yet) have a formal basis in Dutch law, but is derived from case law. The legislator has tried to give the pre-pack a legal basis through the WCO I (in Dutch: Wet Continuïteit Ondernemingen I) in 2013, but the pre-pack practice has come to a standstill due to a ruling of the ECJ in the Smallsteps case. The question in the Smallsteps case was whether a restart by means of a pre-pack constitutes a bankruptcy proceeding within the meaning of Article 5 (1) of Directive 2001/23: the exception on the basis of which employment contracts do not have to transfer with the entity in the event of a transfer of the business. According to the ECJ, the pre-pack procedure at stake was not ultimately aimed at liquidating the business of the relevant entity and could therefore not satisfy the condition for supervision by an authority as required under Article 5 (1) of Directive 2001/23. As a consequence, the relevant employees of the entity were automatically transferred to the purchaser after the restart.

Heiploeg judgment

The Heiploeg group suffered from significant financial losses during the years of 2011 and 2012. Due to the impending insolvency, the board of Heiploeg investigated a potential sale of its business by means of a pre-pack. Two days after Heiploeg filed for its bankruptcy, the (envisaged) bankruptcy trustee agreed on the pre-pack sale and Heiploeg’s business was restarted.

According to the Dutch Trade Union Confederation (FNV), the pre-pack does not constitute a bankruptcy procedure within the meaning of Article 5 (1) Directive 2001/23 and hence the relevant employees of Heiploeg are automatically transferred to the purchaser after the restart. The Dutch Supreme Court requested a preliminary ruling from the ECJ on this point. The Dutch Supreme Court introduced those questions with a detailed explanation of the pre-pack in the Netherlands. According to the Dutch Supreme Court, it should also be taken in consideration in this respect that the intention in this pre-pack was to satisfy to the greatest extent possible the claims of all the creditors and to preserve the employment as far as possible.

In his conclusion in relation to the Heiploeg judgment, A-G Pitruzella effectively confirmed the line of thinking in the Smallsteps judgment of the ECJ. According to A-G Pitruzella, a pre-pack does not meet the second condition (intention of liquidation) of Article 5 (1) of Directive 2011/23.

Against all odds, the ECJ ruled that a takeover prepared within the framework of a pre-pack procedure, such as the Heiploeg takeover, under circumstances can fall within the exception as mentioned in Article 5 (1) Directive 2001/23, provided that such pre-pack (i) aims at a satisfaction of the claims of all creditors to the greatest extent possible, (ii) aims at preserving employment as far as possible and (iii) is regulated by statutory or administrative provisions.

Practical relevance

As a result of the Heiploeg judgment, there seems to be a new lease of life for pre-pack sales in the Netherlands. More importantly, this judgment also has a similar effect for equivalent proceedings in other EU member states.