Insolvent companies remain responsible for social dialogue with employees

The European Court of Justice has issued a decision on the Luxembourg Landsbanki redundancy case, after being addressed in May 2010 by the Luxembourg Supreme Court. Indirectly, the European judges were asked to rule on the role of social dialogue once a company liquidation has been ordered by a court. This preliminary ruling will probably require the revision of provisions on the immediate termination of employment contracts in cases of company bankruptcy.

Fate of employment contracts in cases of court-ordered liquidation

In December 2008, the irremediable insolvency of Landsbanki Luxembourg SA led the District Court of Luxembourg to announce the dissolution of the bank and its winding up under the bankruptcy laws.

Some Landsbanki employees, including staff delegates, were told that, in accordance with article L. 125-1 of the Labour Code, their employment contracts had automatically come to an end. In fact, according to this article, the closure of the bank resulting from the bankruptcy order terminated their employment contracts with immediate effect.

Three staff delegates argued before the Labour Court, and later before the Court of Appeal, that the dissolution, liquidation and bankruptcy were strictly independent and distinct legal notions. Therefore, since article L. 125-1 of the Labour Code only provides for the immediate termination of employment contracts when the employer issues an order of bankruptcy, its provisions do not apply to the dissolution and winding-up ordered by a court.

The claimants therefore argued that the terminations should have been regarded as dismissals grounded on non-personal reasons within the framework of collective redundancy.

Initially, the Labour Court and the Court of Appeal both rejected this argument, saying that the dissolution and liquidation associated with a bankruptcy were comparable to the bankruptcy from a legal point of view.

The courts also stated that the termination of an employment contract under article L.125-1 LC corresponds to an automatic termination and cannot be regarded as a dismissal.

This is the crucial point, since it keeps the termination of an employment contract based on article L.125-1 LC away from the regime of collective redundancy. This means that when the termination of an employment contract coincides with the termination of activities ordered by a court, then there is no requirement for the information and consultation process and negotiation of a social plan that takes place in the case of collective redundancies.

Legal analysis of the termination of employment contracts

The judges of the Supreme Court (Cour de Cassation) began by confirming the link between the court-ordered dissolution and liquidation and the bankruptcy in order to justify the application of article L.125-1 LC. As for the second part of the claimants’ argument, the judges chose to suspend the proceedings to lodge a preliminary issue with the European Court of Justice (ECJ).

Article L.125-1 of the Labour Code does provide for the termination of employment contracts with immediate effect without further formalities when the business cessation results from the employer’s order of bankruptcy. On the other hand, the Labour Code (article L.166-1 and others following it) also requires the employer to engage in a prior information and consultation process and to start negotiations on a social plan with staff representatives whenever collective redundancy is contemplated. The code explicitly mentions that those provisions apply even though the contemplated collective redundancy results from a closing down ordered by a court.

Hence, the European judges were asked to determine whether the rules related to collective redundancies provided by legislation (Directive 98/59/EC) were applicable in case of a judicial decision ordering the dissolution and winding up of a company and therefore, indirectly, to clarify whether such termination was deemed to be a dismissal.

A second step was to rule on the place left, in that specific context, for the information and consultation process and collective bargaining.

Social dialogue survives with the employer’s legal personality

To both questions, the ECJ answered in the affirmative and even ruled in its decision that, until the legal personality of an establishment whose dissolution and winding up have been ordered has ceased to exist, the obligations related to any information and consultation process and social plan negotiation must be fulfilled.

As long as the management of the establishment remains in place, even with limited powers of management, it must fulfil the obligations of the employer in relation to the information and consultation process and social plan negotiation.

Moreover, if the management of the establishment is entirely taken over by a liquidator, the latter will have to fulfil those obligations.

In practice, this ruling sends a strong message to the social partners that, despite the powers possessed by the courts to interfere in such decisive issues, they still have an undisputed role to play in respect of the mission they have been entrusted with by law.

Therefore, the provisions of national legislation cannot provide a way out of a fundamental principle such as the entitlement to information, consultation and social bargaining.

Guy Castegnaro and Ariane Claverie, Castegnaro Cabinet d'avocats

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