Start of consultation
On 27 May 2024, the Transfer of Undertaking in Bankruptcy Act (Wovof) was submitted for consultation. All stakeholders will have the opportunity to respond to the bill until 22 July 2024. Thisis a follow-up to the earlier consultation in 2019. What is the purpose of this new legal regulation?
Current law; distinction business transition outside or inside bankruptcy
Business transition outside bankruptcy
Employees are protected during a business transfer. Pursuant to Art 7:663 of the Civil Code, the employees of the transferred company enter the employment of the acquiring party by operation of law. The employees do not have to do anything for this; they keep the same terms of employment and the date of commencement of employment is the date of commencement of employment with the original employer.
Transfer of business within bankruptcy
The aforementioned statutory regulation does not apply during bankruptcy. The legislator chose to make an exception to the above rules because otherwise a successful relaunch would be less likely to take place and thus more jobs would ultimately be lost. If a receiver sells the company after bankruptcy (also known as a restart), the acquirer of the company may choose whether to employ employees of the bankrupt, which employees to employ and under what conditions to employ the employees. This difference in treatment leads to the fact that a takeover from bankruptcy can easily give the impression that bankruptcy is mainly used to easily and cheaply part with unwanted staff.
Selection of employees
If not all employees are taken over in a relaunch, the criteria for selecting which employees will be taken over by the acquirer in a relaunch and which employees will not be taken over are not transparent. Administrators often try to steer this process but are not always in a position to impose sufficient requirements and safeguards on the transferee so as not to jeopardise the restart itself. Because the relaunching company in bankruptcy is reorganised without the cost of redundant employees, this leads to a competitive advantage over companies that have to apply the rules and related costs of regular labour law (demarcation principle, transition compensation) when restructuring. Research shows that young people (up to 25 years old), older people (over 55 years old), pregnant women and low-skilled people in particular are less likely to be hired by the restarted company.
New law: WOVOF
Purpose
The difference in protection of employees in a transfer of a company outside bankruptcy and a transfer of a company within bankruptcy is deemed undesirable by the minister, and the minister has prepared the preliminary draft ‘WOVOF’ (‘Wet Overgang Van Onderneming in Faillissement’). By amending the law, this preliminary draft aims to strike a better balance between, on the one hand, the interest in an easy restart and, on the other hand, the interest of employees in protecting their legal position.
Proposal
The bill regulates that the exception that currently applies to all bankrupt companies will be limited to an exception for those companies where the bankruptcy is aimed at liquidation (and therefore not a relaunch) and for small companies (less than 20 employees). In other cases, the party buying a business from the bankruptcy administrator will be obliged to take over all employees with it, unless this is not possible on the grounds of business economics. For that case, the law requires an objective selection method to be used to determine which employees receive an offer of employment. Also, if a vacancy arises within six months of the relaunch, a former employee would first have to be offered an employment contract.
Approval and participation
The liquidator will need approval from the supervisory judge before selling the company as part of a relaunch. Under the bill, the supervisory judge must hear the receiver, the acquirer and the works council before granting approval. The position of the works council is strengthened here. The supervisory judge assesses whether there are business economic reasons not to transfer all employees to the transferee and what selection criteria will be used.
Sanction
If the relaunching company wrongfully fails to offer employees of the bankrupt company an employment contract, the employee can claim from the subdistrict court that he still receives an offer or that he is awarded fair compensation.
Consequences of introduction
If the law is introduced in this form, it will have an impact on the restart practice of bankruptcy trustees. More investigation around a relaunch will be required to assess whether there are business circumstances that force the relauncher to make a choice in employees for economic, technical or organisational reasons. There will often be a combination of circumstances. The transferee will have to demonstrate to the supervisory judge that measures have to be taken and why not all employees can be taken over. If the acquirer fails to do so, it will have to take over all employees. The works council is also given more say. The works council must be given the opportunity to give its advice.
Procedure
The receiver, as liquidator of the assets of the bankrupt, enters into negotiations with the prospective restarters. Consequently, the liquidator must first assess whether there is a transfer of undertaking in bankruptcy. If that is the case, the liquidator must allow the works council to advise. Next, the liquidator must request the supervisory judge’s approval. If, according to the proposal, not all employees transfer to the re-starter, the supervisory judge must examine whether it has been made sufficiently plausible that there are business economic circumstances to take measures resulting in job losses. If this has been made sufficiently plausible, the supervisory judge must assess whether the method of selecting the employees is in line with the indenture principle to be applied or according to a plan approved by the supervisory judge.
Will it work?
Compliance with the new rules will lead to more transparency and supervision of the selection of employees involved in a relaunch. In itself, there is no objection to this except that more time will be involved in investigating and preparing a proposal to the trustee. The trustee will have to provide more information so that the candidate can assess whether there are economic circumstances that make it impossible to take over all employees. This will be the case in almost all bankruptcies. Next, the consultation process with the works council and the approval process by the supervisory judge require more time. Compliance with these new rules therefore costs time and money. These are precisely the two things that are lacking in a bankruptcy situation. There is no money and there is no time. The longer a relaunch takes, the less likely it is to be successful.
An earlier consultation (2019) on the Wovof raised particular concerns about the impact of the scheme on restart practice. The scheme is considered too complex and time-consuming to apply under high time pressure. There are too many uncertainties for the acquirer. In response to these expressed concerns, the proposal has been amended. Although it is undeniable that the procedure has been improved, the scheme remains complex, time-consuming and represents an obstacle for the relaunch candidate. The risk that the new regulation will hamper the restart practice and thus reduce the number of restarts remains.
Competition clause
Somewhat related is the problemative of the employee with a non-compete clause. If an employee transfers by operation of law to a new employer on the transfer of a company outside bankruptcy, a stipulated non-competition clause simply remains in place. If the employee is offered an employment contract with the new employer in a relaunch in bankruptcy, employee and (new) employer can make their own arrangements. But what happens to the non-competition clause with the employee dismissed by the liquidator but not offered an employment contract with the restarting company? This has been the subject of many proceedings. Although the provision is rarely enforced in full, in principle, the non-competition clause simply remains valid and the liquidator (provided it has a sufficient interest) can claim compliance. The Wovof provides for the inclusion of a new legal provision stating that a non-competition clause ends when the employment contract is terminated by the liquidator and the relevant employee is not offered an employment contract by the re-starter. This improves the employee’s position and creates clarity for all parties.
Entry into force
Following a previous round of consultation in 2019, this is a new consultation. The formal legislative process including approval in the Lower and Upper Houses of Parliament has yet to be initiated. Entry into force of the bill in its current or amended form will be some time away. That does not alter the fact that, in anticipation of and taking into account this new regulation, receivers can ask for more transparency from the candidates for a relaunch so that it can be explained to interested parties why there is no room for all employees in a relaunch. According to the Insolad practice rules, even now a trustee must be guided by interests of the estate the trustee takes into account interests of a social nature. Transparency in the selection of employees can be part of this.
Looking for an insolvency law lawyer?
Would you like to know more about filing for bankruptcy or making an offer on a company in bankruptcy? Feel free to contact Rob Steenhoek of LVH Advocaten. He specialises in insolvency law and will be happy to help you.
