Plessers: The ECJ on Employee Protection in the Belgian Insolvency Landscape

On 23 January 2019, Advocate General Szpunar delivered his opinion in Plessers, a case before the European Court of Justice that concerns the protection of employees in a Belgian insolvency proceeding, ie a judicial reorganisation by transfer (referred to as ‘GROG’). If the ECJ follows the interpretation by AG Szpunar of Articles 3-5 of Council Directive 2001/23/EC (the ‘Directive’), the referring court would have almost no other option than to rule that Article 61(3) of the Belgian WCO (now: Article XX.86(3) WER) violates the Directive. This would render the GROG morbid, at a moment when Belgium is still processing its withdrawal of the legislative proposal concerning pre-packs due to the recent ruling of the ECJ in Smallsteps (see here).

On 23 April 2012, NV Echo entered into a judicial reorganisation proceeding. A collective agreement could not be reached and on 19 February 2013, a GROG was initiated. On 22 April 2013, NV Prefaco took over the business of NV Echo together with two-thirds of the total employees of the transferor.

Plessers, who was one of the dismissed employees, argued (among other things) that Article 61(3) WCO violates the Directive. According to Article 61(3) WCO, the transferee can choose which employees it will take over provided that the decision is determined by technical, economic and organisational reasons. This provision indeed deviates from the principle that the transferor's rights and obligations arising from a contract of employment existing on the date of a transfer shall, by reason of such transfer, be transferred to the transferee (Article 3(1) of the Directive). The question that the ECJ and its AG have been called to examine is whether the right of option for the transferee under Article 61(3) WCO, insofar as the GROG is applied with a view to maintain all or part of the transferor or its activities, falls under the derogations in Articles 5(1) or 4(1) of the Directive.

The AG’s Opinion

To fall under Article 5(1) of the Directive, the transferor must be (i) the subject of a bankruptcy proceeding or any analogous insolvency proceeding (ii) which has been instituted with a view to the liquidation of the assets of the transferor and (iii) is under the supervision of a competent public authority. The AG opined that the GROG does not satisfy any of those three prongs. First, the GROG is not a bankruptcy proceeding or any analogues insolvency proceeding. The reasoning is that although a GROG can – and often will – result in a liquidation of the transferor, this is not always the case. Second, the primary objective of the GROG is the continuation of the undertaking, and not its liquidation. In this context, the AG refers to the Smallsteps-case, in which the Court clarified that although there may be some overlap of objectives within the aims of any given procedure, ‘the primary objective of a procedure aimed at ensuring the continuation of the undertaking is, in any event, the safeguarding of the undertaking concerned’. Third, the AG opined that the supervision of a judicial trustee (‘mandataire de justice’) who has to organise a transfer ‘in the name of and on behalf of the debtor’ (Article 60 WCO) is insufficient to satisfy the third prong.

In interpreting the facts-based derogation in Article 4(1), providing the permissible causes for dismissal, the AG argued that the transferee should prove that the dismissal is caused by additional economic, technical or organisational circumstances such as the impossibility of transferring the staff to other stores (Kirtruna en Vigano). The mere desire to reduce the costs of taking over an enterprise or preventing or limiting financial problems cannot be accepted as justification. The national court should be exhaustively informed of the justifications to assess the necessity of redundancies. According to the AG, the safeguards provided in Article 61(3) WCO are inadequate to ensure that dismissals are in conformity with Article 4(1) of the Directive.

Will European Collective Dismissal Law Turn against the Employees?

If the ECJ follows the opinion of its AG, the referring court will almost have no choice than to rule that Article 61(3) WCO violates the Directive. Even if the ECJ deviates from the opinion of the AG, it is highly unlikely that the ECJ would rule that the GROG falls under Article 5(1) of the Directive (since all three prongs would have to be satisfied). Although I already predicted this outcome in the aftermath of Smallsteps, this might come as an unwelcome surprise to the Belgian legal community. In fact, even the Belgian trade unions, whose duty is to protect their members, always considered the GROG to be a liquidation proceeding for the purpose of Article 5 of the Directive, thus falling under the categorical derogation.

However, ‘hope’ can still be found in Article 4(1) of the Directive. Possibly, the ECJ could tolerate that in a GROG part of the workforce can be dismissed when the debtor proves that the only alternative to the GROG was the liquidation of the company. In such a case, the debtor could argue that, absent a transfer of the undertaking, dismissals had to take place – since the liquidation and the associated dismissal of all employees was the only real alternative. Indeed, often the transferee has to close down part of a company because it is not performing, meaning that the business does not need people with a certain specialist skill, and therefore makes those employees redundant. Such dismissals are not caused solely by ‘the transfer’ but by additional economic, technical or organisational circumstances (eg, market changes). Being able to dismiss certain employees to save a large part of them (in the present case, two-thirds) would thus be socially and economically desirable.

Interesting to note is that the insolvency proceedings in the UK and Germany seem to have a better chance in complying with the interpretation of the AG. These legal systems could serve as an example for the Belgian legislator when reformulating Art. XX.86(3) WER. Since the ruling in Key2Law (UK), it has been clear that administration proceedings never fall under the categorical derogation in Regulation 8(7) TUPE (that implements Article 5(1) Directive). Furthermore, Regulation 7 TUPE uses a quasi-identical wording to the one used in Article 4(1) of the Directive, including (in §1) an explicit a priori limitation to the freedom of choice of the transferee – a safeguard the AG seems to find extremely important. In Germany, §613a(4) BGB (implementing Article 4(1) Directive) also applies to all insolvency proceedings. Just as Regulation 7 TUPE, this provision provides an explicit a priori safeguard by specifying that a termination of an employment relationship due to the transfer itself is ineffective (something which is not explicitly done in the Belgian Art. 61(3) WCO or XX.86(3) WER).

It goes without saying that the answer to this preliminary question will have significant implications for the Belgian insolvency landscape. If the ECJ rules that the GROG does not fall under any of the derogations in Articles 4(1) or 5(1) of the Directive, the GROG will be moribund. After the recent withdrawal of the legislative proposal concerning pre-packs in Belgium due to the ECJ’s ruling in Smallsteps, this would be a serious blow for the Belgian legislator. Nonetheless, if the legislator chooses to provide extra safeguards in Article XX.86(3) WER, the GROG could still be revived under Article 4(1) of the Directive. The ECJ’s judgement is expected later this year.

Another version of this blogpost appeared here.

Frederik De Leo is a PhD Candidate at the Institute for Commercial and Insolvency Law at the University of Leuven. He is currently a Junior Academic Visitor at the Commercial Law Centre (Harris Manchester College).