Bill on transfer of undertaking in bankruptcy

Bill on transfer of undertaking in bankruptcy

On May 27, the Bill on transfer of undertaking in bankruptcy (in Dutch abbreviated as:  WOVOF) was submitted for consultation. The purpose of this bill is to improve the protection of employees in a transfer of undertaking in bankruptcy. The premise of the bill is that in a relaunch, all employees must be taken over. Read in our blog for more information on what else this proposal entails.

Current legislation; distinction between transfer of undertaking outside or within bankruptcy

In a transfer of undertaking, employees are protected. When a company is acquired by another company, the employees of the acquired company (the transferor) are automatically transferred to the acquiring company (the transferee). These employees retain the same employment conditions as with their previous employer, and termination of employment due to the transfer is not allowed.

These protective rules do not apply to a business transfer following bankruptcy (the relaunch). This means that the acquirer of a company from a bankruptcy estate is not obligated to keep the employees. The acquirer has the discretion to decide whether, and if so, which, employees will be retained. In addition, the acquirer may offer these employees different terms and conditions of employment, such as a fixed-term contract, even if the employee had an open-ended contract with the former employer.

The current difference in employee protection between transfers of undertakings outside and inside bankruptcy is considered undesirable by the legislator for the following reasons:

1. Abuse of the bankruptcy procedure: It may be perceived that the bankruptcy process is being used to easily eliminate employees, particularly in cases where the restart is planned prior to bankruptcy (also known as a pre-pack).
2. Lack of transparency: It is unclear how decisions are made about which employees will be employed during the relaunch. CBS research shows that young people (15-25 years old), older people (55 and over), pregnant women and low-skilled workers are less likely to be employed in a restart.
3. Competitive advantage: The acquirer in a bankruptcy reorganization enjoys a competitive advantage by continuing with a streamlined business and selected employees after bankruptcy. In contrast, competitors who restructure for economic reasons must adhere to the reflection principle and cannot choose which employees to keep.

The proposal

General principle: all employees transferred in case of restart

It has been proposed that in the event of a restart, the acquirer is obliged to offer employment contracts to the employees who were employed by the bankrupt employer at the time of the bankruptcy, with the same terms and conditions of employment as those applied by the bankrupt employer.

If the relaunched company does not offer an employment contract to the employees of the bankrupt company, although it should do so under this law, the employee can apply to the subdistrict court for an offer or for fair compensation.

Exception in case of job loss due to economic necessity

If there are economic circumstances leading to job losses, the acquirer if not obligated to offer employment contracts to all employees. In such cases, the acquirer cannot freely select employees but must, in principle, utilize the mirror reflection method. This method entails offering employment contracts first to employees with the longest employment with the transferor.

Deviation from the mirror reflection method is possible with the permission of the supervisory judge for an alternative method. The supervisory judge will grant this permission if the following conditions are met:

1. It has been made sufficiently plausible that the alternative selection method is necessary for efficient business operations after the transfer.
2. The proposed selection criteria are transparent, proportionate, objective and non-discriminatory.

If, within 26 weeks of the restart, it becomes apparent that there is work for more employees and a vacancy arises for the same functions performed by employees who were not offered an employment contract because of job losses, the acquirer must offer an employment contract to one of those former employees of the transferor. To determine to whom the acquirer should offer an employment contract in this case, the same selection method should be used as in the original selection process.

Smaller enterprises

An exception applies to small businesses with up to 20 employees: They are not required to retain all employees in the event of a restart, as is the case for larger companies. However, before the restart takes place, the acquirer must explain how it will select the employees, what employment conditions it will apply and how it will inform the employees. Only if these conditions are met will the bankruptcy judge approve the restart.

Please note: If it concerns a pre-pack (a restart prepared before the bankruptcy and aimed at continuing activities), the exemption for smaller enterprises does not apply. In that scenario, the principle that the employees must go along with the transfer also applies to the smaller enterprise.

Employee participation

Furthermore, according to the proposed legislation, employee participation during bankruptcy is regulated. The insolvency practitioner will be obligated to request advice from the works council under the following circumstances:

• If the insolvency practitioner intends to temporarily continue the business in bankruptcy.
• If the insolvency practitioner plans to restart the business and there is a prospect of retaining jobs.

The timeframe for these specific advisory processes must be at least three days.

Noncompetition clause

Finally, the proposed legislation stipulates that the non-competition clause automatically expires for employees who do not receive an offer during a restart after bankruptcy.

Status of the proposal

Transitional law is included in the proposal. The new legislation will only apply to bankruptcies declared after the enactment of the law takes effect. Currently, the proposal is open for online consultation until July 22, 2024. The formal legislative process, including approval by the House of Representatives and Senate, has yet to commence. It will take some time before the law comes into effect, either in its current or amended form. We will keep you informed of any developments.