So-called “pre-pack” (or back to back) administrations are controversial because they often leave behind them a trail of destruction as far as creditors, and particularly unsecured creditors, are concerned.
They typically arise in situations where a company is in serious financial (generally cash flow) difficulties and provide a way for the business to survive, albeit (or at least it should be the case) in the hands of different owners. they are often used for management buy-outs.
Although such arrangements tend to favour secured lenders such as banks, the same cannot be said for unsecured (e.g. trade) creditors, who can often be left with a measly dividend of as little as 2 or 3p in the £. They are therefore often seen as unfair but, in fact and as long as the procedure is not grossly exploited, they are consistent with the Cork Report of 1982 which did much to shape modern insolvency law and practice and which has at its heart the promotion of a “rescue culture”.
But what about the employees? Does TUPE come to the rescue? For years, there was uncertainty, as the result of a number of conflicting judgments. In 2012 the Court of Appeal, in Key2Law (Surrey) LLP v De’Antiquis (Key2) held that the exemption from TUPE that can arise in other insolvencies (such as liquidations) does not apply to administrations because their objective (even if it is in the short term) is to secure the survival of the business as a going concern. Consequently, all employees will transfer to the buyer in the usual manner (although there is some relaxation of the rules taking into account the insolvency, such as limited contract variations).
The Court of Justice of the European Union has now weighed in on the matter in its decision (on a referral from the Netherlands) in the case of Federatie Nederlandse Vakvereniging and others v Smallsteps BV. Estro Groep BV was the largest childcare company in the Netherlands, with some 380 childcare centres and about 3600 staff. In late 2013 the business was insolvent and facing liquidation. A “pre-pack” was structured, based on relaunching 243 of the 380 centres and retaining nearly 2500 employees. A new entity was created, Smallsteps, and on 5 July 2014 a declaration of insolvency was made in the Amsterdam rechtbank (district court). On the same day a “pre-pack” was signed by the insolvency administrator and Smallsteps,which purchased some 250 centres and undertook to offer employment to nearly 2600 employees.
On 7 July the administrator dismissed all Estro Groep employees. Smallsteps duly offered employment to nearly 2600 former Estro Groep employees but over a thousand for Estro employees remained dismissed.
They brought an action, maintaining that their employment should have been protected under TUPE. the CJEU agreed with them:
…subject to determination by the referring court, it must be held that since such a procedure is not ultimately aimed at liquidating the undertaking, the economic and social objectives it pursues are no explanation of, or justification for, the employees of the undertaking concerned losing the rights conferred on them by Directive 2001/23 when all or part of that undertaking is transferred…
Accordingly, the dismissed employees should have been automatically transferred under TUPE. The case is a useful reminder that the best starting point is to assume that TUPE does apply and then work back from there. A different conclusion should be reached only if there is a compelling reason for departing from what can now be regarded as the norm.