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24 May 2019
The European Court of Justice (ECJ) advocate general recently argued that some aspects of the Belgian legal insolvency framework infringe the EU Transfer of Undertakings Directive (2001/23/EC) (for further details please see "Is ECJ jurisprudence torpedoing Belgian insolvency law?").
In particular, the opinion stated that the option to take over only a portion of a company's staff as part of (court-supervised) reorganisation proceedings was contrary to the directive. In the advocate general's view, Belgian reorganisation proceedings could not be seen as liquidation proceedings and therefore did not fall within the scope of the directive's exceptions.
The ECJ's judgment of 16 May 2019 followed the advocate general's opinion. The court considered that the Belgian insolvency framework, where assets are transferred under court supervision while a company is protected against its creditors, aims in principle to continue (and not liquidate) a distressed company's activities. The transfer of all essential assets (and part of the staff) does not always or automatically result in a company's bankruptcy.
As indicated above, the judgment does not come as a surprise. In a similar Dutch case (Estro/Smallsteps), the ECJ also concluded that the Dutch pre-pack provisions regarding employment law infringed EU law.
However, the ECJ added that any party that has suffered damages because of EU legislation not being correctly incorporated into national law could have a compensation claim against the member state concerned.
This judgment could have a significant impact on future reorganisation proceedings as the parties involved must recognise that this aspect of the Belgian insolvency framework does not pass the ECJ's test. Parties will thus probably be more reluctant to organise a transfer of assets in the framework of such proceedings.
This could lead to more bankruptcies. After the opening of formal bankruptcy proceedings, it is possible to take over a company's assets and only a portion of its staff. However, bankruptcy is almost always accompanied by a discontinuation of activities, which makes a smooth and swift transfer of assets, staff and activities more difficult. As a result, it is likely that in insolvency situations, fewer transactions involving assets and staff will take place, which will lead to increased redundancies.
In that regard, the ECJ's ruling risks having the opposite effect of the directive's goal of protecting staff, as it could lead to fewer employees being kept on in insolvency situations.
Notably, the ECJ's judgment could also affect previous reorganisation proceedings. The insolvency mechanism that the ECJ scrutinised was introduced to Belgian law in 2009. Over the last decade, numerous transfers of assets (and staff) have resulted from these new proceedings.
It is estimated that, in most cases, not all of the employees of distressed companies were taken on by the interested buyer. At first glance, it appears that staff who were not taken on in such reorganisation proceedings could have a claim for damages against the Belgian state. It will be important to assess whether such claims are time-barred.
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