8.6 Insolvency

In Chapter 6 I have addressed the situation in which a entrepreneur is insolvent. Insolvency or a suspension of payment gives rise to a change in control. In the event of insolvency the control over the enterprise is transferred to the trustee; in the event of a suspension of payment the entrepreneur requires the administrator’s permission. Moreover, the decision that the entrepreneur is insolvent is made by a court, not by the entrepreneur himself. The entrepreneur can file an insolvency petition, but that can also be done at the request of creditors. The insolvent entrepreneur comes under insolvency law, the main objective of which is to arrange for the highest possible proceeds of the estate for the creditors of the enterprise. This interest of creditors is at odds with the interest of employee co-determination, which gives rise to delays. Those delays may be caused by the suspension period under Section 25(6) of the Works Councils Act and may give rise to extra costs for the estate.

I have distinguished between the influence prior to the insolvency order or the suspension of payment and the subsequent period, in which the administrator or the trustee has taken over all or part of the control over the enterprise. With regard to the first phase my conclusion is that the works council plays no part during that phase. If creditors file an insolvency petition, the works council plays no part whatsoever. The creditors cannot be regarded as entrepreneurs within the meaning of the Works Councils Act and, unlike in other countries, the employee representatives play no part in the proceedings before the court, except for the possibility to file an objection or appeal against the insolvency order. If the entrepreneur itself files an insolvency petition or a petition for a suspension of payment, the decision or proposal may be subject to a right to be consulted, in any event in the event of insolvency. The insolvency order gives rise to a significant change in the organisation of the enterprise (Section 25(1)(e) of the Works Councils Act), since the enterprise is run by the trustee rather than the entrepreneur after the insolvency order. However, it is apparent from legislative history and case law of the Dutch Supreme Court that a petition in one’s own bankruptcy is not a decision that is subject to the right to be consulted. The reason given by the Minister, as in the case of decision-making under corporate law, is that co-determination rights under the Works Councils Act and under insolvency law are strictly separate. Moreover, in the Minister’s opinion, it is undesirable to make the works council jointly responsible for such a drastic decision. It is remarkable that the Minister does not refer to the objective of insolvency proceedings and the interests of creditors in the fastest possible liquidation of the estate. The Minister opts for a fundamental argument (separate areas of the law) that is out of date in my opinion; see my comments on this point regarding the separation of corporate law and co-determination law. Moreover the Minister is inconsistent in that regard, because he does believe that after the insolvency order the trustee, as a managing director within the meaning of the Works Councils Act, must comply with all the obligations under the Works Councils Act. The argument that a works council should not be made jointly responsible fails to take into account the works council’s position as a consulting party that does not take part in the decision-making, and the double purpose of works councils under Section 2 of the Works Councils Act. That argument is also not in keeping with the adult status that the works council currently has. I then investigated whether there are other formal grounds on which not to involve the works council in the decision-making regarding the insolvency petition, such as setting aside the paritas creditorum (equality of creditors). I concluded that that is not the case, but that it is nevertheless not desirable to fully apply the works council’s right to be consulted, in light of the creditors’ interests. Full application of the right to be consulted, including the right of appeal, would cause too much delay, which is also not in the employees’ interest. I therefore went in search of alternatives, which I again attempted to base on the specific situation that the insolvent company is in and on the interests of other stakeholders in such a case. My conclusion is that it is desirable to link a right to be heard to Sections 2:136/246 of the Civil Code and to involve the works council in the judicial insolvency proceedings, as is also the case in other countries. Another option is a right to be heard without a right of appeal, similar to Section 30 of the Works Councils Act, but having the works council heard in court is more in keeping with the manner of response to the decision-making. An additional advantage is that a right of the works council to be heard during the hearing of its own petition can play a part in the early identification of improper use of insolvency law, to which European legislature has also drawn attention. Finally, a stronger position of the works council in filing an insolvency petition is also in keeping with the notion, arising from case law of the Dutch Supreme Court, that the objective in an insolvency is not only to arrange for the highest possible payment to creditors; social interests such as employment also play a part. Trade unions can also play a role in this regard, since they can fully exercise their power to institute an inquiry after the insolvency order or suspension of payment. The fact that employees have been dismissed by the trustee does not detract from the cause of action.

Once a enterprise has been declared insolvent or has been granted a suspension of payment, the co-determination rights under the Works Councils Act apply in full. In the event of a suspension of payment the managing director is still authorised, albeit together with the administrator, and in the event of insolvency the trustee must be regarded as a managing director within the meaning of the Works Councils Act. The specific situation of insolvency and the creditors’ interests do mean, however, that the works council can be expected, for instance, not to use the suspension period and not to incur too many costs chargeable to the estate.