Employees' rights and position in bankruptcies - latest developments

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The number of bankruptcies declared in the Netherlands reached a record high in 2003, and questions have been raised in parliament over the potential misuse of bankruptcies to the detriment of creditors and employees. This article looks at recent developments in legislation and case law on employees' rights and position in the event of their employer's bankruptcy.

In 1999, EIRO published an article examining the industrial relations aspects of company insolvencies and bankruptcies in the Netherlands (NL9911171F). The current article looks at the most significant developments since then with respect to legislation and case law.

Record number of bankruptcies

The Dutch economy has been going through a difficult time of late, resulting in increased unemployment and rising numbers of bankruptcies. In the course of 2003, a total of 5,235 bankruptcies of companies and institutions (excluding one-person businesses) were declared. This represents a rise of more than 28% in comparison with the average figures for the past 10 years and is an absolute record. During the last economic slump at the start of the 1990s, the number of bankruptcies also rose by percentages of this order. The number of job losses in 2003 arising directly from bankruptcy is estimated at 39,000, almost 40% more than in 2002. Furthermore, the number of bankruptcies recorded during the first quarter of 2004 remained high.

At over 1,600, the number of bankruptcies was highest in 2003 in the rental and commercial services sectors. Relatively sharp increases also occurred in the agricultural and fishing sectors, and in the hotel, restaurant and catering industry. An average of almost 11 out of every 1,000 companies or institutions went bankrupt in 2003. The figures differ vastly for the different sectors: in manufacturing industry, around 17 out of every 1,000 companies went bankrupt, while in education, healthcare, the environment and other services the figure was around three out of every 1,000.

Bankruptcy misuse

Research conducted in 1996 revealed that in one in five cases of bankruptcy where the company continues to operate in a pared-down form after being 'resurrected' following the declaration of bankruptcy, there was reason to believe that the bankruptcy was in some way intended to undermine the protection of employees under labour law. Recent cases also provide evidence of the abuse - or, at the very least, the improper use - of bankruptcies, in order to avoid paying out severance compensation, for example. This is thought to have affected some 14,000 employees in the construction sector alone in 2003. Various members of parliament have since requested an explanation from the ministers involved.

One method of preventing abuse is to have a court overrule the bankruptcy. For some time, such steps were doomed to failure for individual employees because Article 13 of the Bankruptcy Act (Faillissementswet) specified that legal acts performed by the trustee in bankruptcy - including the dismissal of employees - could not be reversed, even in cases where the bankruptcy had been overruled.

This problem was solved in 2002, based mainly on an explicit instruction to prevent the misuse of insolvency proceedings issued by the European Union legislator in 1998 in Directive 98/50/EC amending Directive 77/187/EEC on the transfer of undertakings (now consolidated in Directive 2001/23/EC). To implement this rule, a new article (Article 13a) was inserted in the Bankruptcy Act, specifying that legal acts performed by the trustee in bankruptcy pertaining to the dismissal of employees can be reversed in cases where the bankruptcy is overruled. It is unclear how effective this addition has been in practice.

Court cases on alleged bankruptcy misuse

Case law shows that it is not easy for employees to expose the misuse of bankruptcy law. Although in a number of cases there was clear evidence that the bankruptcy was also intended to circumvent labour law protecting employees, it was often the case that the company was actually in an extremely bad financial position. In some cases, however, employees have succeeded in holding a 'natural person' director or majority shareholder personally liable in an appeal against unlawful action and thus secure some measure of financial compensation for having lost their jobs.

In cases of the bankruptcy of part of a group of companies, attempts have been made to hold the parent company liable for the unpaid financial claims of employees (such as holiday allowances, but especially severance scheme payments). However, case law emphasises that parent companies and subsidiaries are separate legal entities that, barring exceptional circumstances, cannot be identified as being one and the same as other parts of the group.

Influence of trade unions and works councils

In 1999, the Enterprise Section (Ondernemingskamer) of the Amsterdam Court of Appeal (Amsterdamse Gerechtshof) ruled that a works council possesses advisory powers (NL0309102T) with respect to an application for 'suspension of payments' (usually the forerunner to bankruptcy) submitted by the company. The Enterprise Section argued that the appointment of an administrator leads to a significant change in the division of authority and that any applications must therefore be preceded by a request for the works council's recommendation. The company in the case in question appealed to the Supreme Court (Hoge Raad) against this ruling and in 2001 won the case. According to the Supreme Court, legal history shows that the legislator has attempted to keep bankruptcy law and the right to worker co-determination carefully separated. The Supreme Court’s ruling further means that any decision taken by a company to apply for bankruptcy is not accompanied by an obligation to request the works council’s recommendation. However, it is possible that certain decisions taken by the administrator (in cases of a suspension of payment) or the trustee (in bankruptcy) could fall within the scope of the works council’s advisory powers. Examples here include decisions related to the reduction, closure or transfer of the company.

However, the fact that a works council possesses no advisory powers with respect to applications for a suspension of payment or bankruptcy does not imply that it cannot exert influence. As an interested party, the works council (and any of the trade unions involved) can object to an application or decision to grant a suspension of payment or declaration of bankruptcy. This took place at the start of 2004 at RWSW/TAAK, an organisation that promotes labour market participation amongst unemployed people. According to the works council and the trade union involved, ABVAKABO, this organisation was erroneously declared bankrupt, and the bankruptcy was unjustly used to circumvent labour law protecting the employees. The Arnhem Court did not concur with this standpoint and upheld the declaration of bankruptcy.

Changes in bankruptcy law

The Lower Chamber of the parliament is currently assessing a legislative proposal directed in part at upgrading the efficiency of suspension of payments as an instrument. In practice, most cases involving a suspension of payments ultimately lead to bankruptcy. The most important reason is that declaration of bankruptcy also puts an end to protection of employees under labour law, including employee protection arising by virtue of the EU Directive on the transfer of undertakings. While such protection holds in cases of suspension of payment, this is not the case concerning bankruptcy. Potential candidates interested in taking over (part of) the company's activities push for bankruptcy in order to avoid having to take (all of) the employees on under the same terms and conditions of employment.

The legislative proposal will not bring about any change with respect to this distinction between suspension of payments and bankruptcy. It does aim to make suspension of payments more efficient by, for example, strengthening the company’s position vis-à-vis its creditors. One of the parts of the legislative proposal relates to an additional obligation to draft a redundancy plan to accompany an application for suspension of payments.

Commentary

Comparative studies show that employees occupy a relatively weak position in the event of bankruptcy in the Netherlands. It remains to be seen whether the recent and pending changes in insolvency law will bring about much change. It remains a fact that there is a fundamental difference between the level of protection employees can count on under labour law in cases of suspension of payments on one hand, and bankruptcy on the other. If bankruptcy is declared, the advantages will therefore be great for the trustee in bankruptcy and any potential takeover candidates.

The Dutch legislator has not taken advantage of the option of adjusting the terms and conditions of employees when transferring undertakings afforded by virtue of Directive 98/50/EC (now consolidated in Directive 2001/23/EC), providing that this takes place following consultation with the employee representatives. Whether this offers any advantage in practice also remains to be seen. Beyond bankruptcy, it appears more a case of there being a need to be able to dismiss some of the employees when transferring an undertaking than (only) adjusting terms and conditions of employment. In insolvency literature, this is referred to as reorganisational dismissal. It is unclear however whether such a dismissal is consistent with the Directive. (Robbert van het Kaar, HSI)