Protection of staff in relaunch from bankruptcy

The employees of the bankrupt company often do not: when a bankrupt company is restarted, employees have no rights, and are often left empty-handed. This is because at present, the employee-protected regulation of the Dutch Law Transfer of undertaking (Section 7:662 of the Civil Code) does not apply in case of a bankruptcy.

In May 2024, the Transfer of Undertaking in Bankruptcy Bill (hereinafter: WOVOF”) was launched for consultation. This aims to get employees more involved in restarts from bankruptcy, and largely to give them that protection of transfer of undertaking. How does the WOVOF affect restarts from bankrupt companies?

The relaunch

It is not hard to imagine the benefits of a restart. A restart aims to continue the well-producing parts of a bankrupt company. By a new owner, but sometimes also by the old one. A restart can grow (economically) with the assets that are important to it. But precisely also with the knowledge and skills of staff who are offered new employment contracts. Therefore, restarts of (parts of) a company have an economic but certainly also a social function.

In recent years, partly due to influence from abroad, various forms of restarts outside bankruptcy have been experimented with. The Homologation of Arrangements in Progress Act (also often referred to as: “WHOA”) and the “pre-pack” are examples.

Case law on pre-pack

Based on case law from recent years, in the case of a restart from a pre-pack bankruptcy, where the sale of the company has already been arranged before the bankruptcy was declared, the employee protection of the Dutch Transfer of Undertaking Act does apply: thus, despite the bankruptcy, the employees do go into service by operation of law in the restart. This is only different if the pre-pack is regulated by law, which is not the case so far.

Restart must take over staff

Besides the legislator’s desire to lay down this case law in legislation, it is also the desire to give employees more rights in a relaunch from bankruptcy. More specifically, the proposed WOVOF regulates that in the case of a relaunch of a bankrupt company, the transferee must make all employees working at the bankrupt company on the day of the declaration of bankruptcy an offer to conclude an employment contract. In principle, this should include the same terms and conditions of employment.

If the transferee cannot employ all the employees of the bankrupt company, for example because the company will be continued in a slimmed-down form, the relauncher will have to make it plausible that it can be foreseen that, within 26 weeks after the transfer/relaunch, jobs will necessarily be lost due to business economic circumstances. The restart/acquirer must then apply what is known as the ‘mirror principle’ to determine which employees will be transferred to the restarter; cherry-picking of employees is therefore not allowed.

Question marks over WOVOF from the perspective of restart practice

Needless to say, this provision is a limiting factor for restart practice. After all, the purpose of a relaunch is precisely to retain the most profitable parts of a company and to give them a new chance with lower (personnel) costs. Forcing an acquirer/contributor to take on all staff precisely makes it obligatory to incur more costs, as it is often a matter of cleaning up costs. After all, the company was declared bankrupt for a reason.

It is also not yet clear how a restart of a group of companies whose assets are taken over by certain operating companies/legal entities but not by other operating companies/legal entities will fare. Should, for instance, administrative staff working in a holding company or staff of other operating companies/legal entities also be offered a new employment contract?

And perhaps more importantly, how do restarters/acquirers but also investors deal with the fact that the position of the employees seems to become more important for the set-up of the acquiring or newly restarted company at a stroke, than the business benefits added by various assets of the bankrupt company? It cannot be ruled out that restarts will become much less attractive now that a large part of ongoing costs (namely staff costs that may have made bankruptcy inevitable), cannot be remediated. We expect that after the introduction of this legislation, liquidators will be less likely to be able to sell business units to a relaunch, with the paradoxical result that more jobs will actually be lost.

Conclusion

All in all, the WOVOF bill gives much food for thought. And especially reason to consider all possibilities for a relaunch at an early stage. In that context, the situation may arise that more use will be made of pre-bankruptcy restarts, such as via a WHOA procedure.

More information

Wondering what to consider in the ever-changing restart practice? Contact us for advice.

This article was written in collaboration with Koen Vermeulen en Christiaan Mensink.