10.5 Restart

Outside bankruptcy, employee protection in the Netherlands is above average in relation to our neighbouring countries, while that protection is relatively low in case of a bankrupt employer. There is a large discrepancy here. The gap between both situations (protection from dismissal inside and outside of bankruptcy) inevitably leads entrepreneurs to – consciously or unconsciously – test the limits of the law, as shown by case law. That doesn’t necessarily have to happen malevolently. It seems more like a natural development stimulated by article 7:666 of the Civil Code (exceptional cases of misuse aside). This search for finding the limits, clearly expressed in the call for a pre-pack by the insolvency law practice, eventually leading to the cooperative attitude of the Dutch legislator with a legislative proposal on the Business Continuity Act I (in Dutch: ‘wetsvoorstel Wet Continuïteit Ondernemingen I’), left the practice empty-handed in the Smallsteps-judgment from the Court of Justice of the European Union. Not only the pre-pack, but also the more traditional forms of restart are now attacked, with legal uncertainty as a result.

The views on a solution to this problem are divided. I am proposing to repeal article 7:666 paragraph 1 under a of the Civil Code, with a simultaneous introduction of a new article in the Bankruptcy Act, which provides for a smoother regime for the restarter. By declaring articles 7:662 et seq. of the Civil Code also applicable on transfer of undertaking in the event of bankruptcy, first and foremost the gap between protection from dismissal inside and outside bankruptcy, respectively, will be reduced (for example, by introducing selection criteria for dismissal upon bankruptcy, as a result of this). Meanwhile the restart will, as a result of the mitigating measures in favour of the restarter, remain relatively attractive for a restarter, which also maintains the level of the proceeds from the sale of the company by the trustee in bankruptcy, which in turn is in favour of the joint creditors.

It is conceivable that, besides the repeal of article 7:666 paragraph 1 under a of the Civil Code, a new article is added to the Bankruptcy Act that specifically deals with the consequences of this. The following components can be part of it:

In this way, on the one hand restarters are prevented from so-called “cherry picking” while ignoring the regular selection criteria, but on the other hand a hand is extended to potential restarters.

An essential side effect of these new regulations furthermore is that the pre-pack, while distinguishing itself from the ‘regular’ restart after bankruptcy, remains attractive, which ensures the pre-pack benefits are retained. Conversely, in the absence of such an intervention, the pre-pack becomes an unusable phenomenon. This proposal brings the pre-pack back to life and the envisaged law can still be adopted by the Senate to make an actual serious contribution to practice.

Another solution that is worth exploring, is to make a distinction between a (pre-packed or not pre-packed) restart where the restarter is linked to the original entrepreneur (similar to the concept of a “connected party” as used in the United Kingdom) and a restart where another market participant opts for taking over (part of) a bankrupt competitor and its staff. This will lead to some definition and enforcement problems and also to cases of misuse, however the distinction does touch the sore spot: when an entrepreneur is intent on a cheap and fast reorganisation, without taking into account the applicable dismissal laws, he will come away empty-handed. In that case the general rules apply, including the transfer of undertaking (as well as the regular selection criteria for dismissal, the grave unilateral change-test when adjusting employment conditions, etc.). This is different when another market participant is taking over the company, which should then be arranged in such a way that the latter restart takes place within the framework of the liquidation objective of the bankruptcy.

The research in this chapter also reveals another essential (painful) point: shouldn’t the guideline be changed? Given the broad (because: European) recognized development in the field of insolvency law going from traditional law directed towards liquidation, to law increasingly aiming at preservation of the company, it is conceivable that not the distinction between liquidation/continuation, but the distinction between affiliated versus unaffiliated restart will be considered decisive for the question whether the applicability of the guideline can be dispensed with. Obviously, this can only happen on the condition that it, by definition and exclusively, involves a case of insolvency of the employer which will take place in a procedure that is supervised by a government agency.

Such a distinction (affiliated versus unaffiliated restart) can also be made in assessing successive terms of employment: only in case of an affiliated restart do the years of service from the period before a bankruptcy count. Now that it is purely a national matter, it seems obvious to connect to a criterion developed in case law: the “zodanige-banden"-criterion (which can be roughly translated/described as that to some extent ties have to exist between the former and the current employer). To me, such a change in legislation seems to be a benefit for the restart practice: for unaffiliated restarters, this would mean the end of the obligation as introduced in the Work and Security Act (article 7:673 paragraph 4 of the Civil Code), to also involve years of service from the period before the restart in calculating the transition payment. This article should, in my opinion, have immediate effect and thus also extend to so-called old restarts (from before July 1^st, 2015), which is in line with the Constar-judgment from the Supreme Court. As a result, this would end the widely shared undesirability of taking into account old years of service from before the restart (by another market participant) at a later dismissal.

This leads to the recommendation to include the following provision in the Bankruptcy Act:

In summary, it is important to strike a good balance between reorganisation outside bankruptcy and the restart, in which the benefits of the last phenomenon are secured as much as possible – not least in favour of (the best possible proceeds for) the joint creditors, without compromising the legitimate interests of a specific group of creditors, namely the employees. This is possible with an amendment of the Bankruptcy Act and – in conjunction with this – also of Book 7 of the Civil Code.