Insolvency law and the interests of employees

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Dutch insolvency law places emphasis on the interests of creditors. Employee interests are subordinate, but are not completely ignored. This is clear from a recent judicial decision and from a new bill that was presented to the cabinet in October 1999.

Dutch insolvency law was created to protect creditors. Although employees can be deemed creditors, they do not hold a special position. A recent judicial decision makes it clear that both trade unions and works councils can make use of legal options if companies are using the insolvency legislation on inappropriate grounds, while a new bill now seeks to approach the various interests present in companies experiencing difficulties in a more balanced manner.

The IJsselwerf case

In mid-1999, IJsselwerf, a company based in Schiedam, petitioned for a "moratorium" (surseance van betaling) (ie a suspension of payments - see below). For many, this step came as a surprise. Both the trade unions and the works council objected, because they feared that the company would be closed down, without any economic or financial grounds to justify closure.

The trade unions filed a "petition for inquiry" (enquêteprocedure) with the Enterprise Section of the Amsterdam Court of Appeal. The Dutch right of inquiry dates from 1971 and awards shareholders and trade unions the right to ask the court to investigate mismanagement. Trade unions have had success in the past with inquiry petitions regarding intended company closures, such as that of Batco in 1979. On various occasions, courts have prohibited companies from closing down, because they had not held any consultations with the trade unions or the works council.

The Enterprise Section granted the petition to conduct an inquiry at IJsselwerf on 21 October 1999 (ruling not yet published). As is the custom, the company must itself bear the costs of the inquiry.

According to the Enterprise Section, there are clear indications that the petition for moratorium was filed on inappropriate grounds. The Enterprise Section believes that the company has shown little or no activity in relation to acquiring new orders. Furthermore, it was noted that the company itself indicated that a moratorium could be a cheap way to dispose of employees. The latter fact must be viewed against the background of a two-year job guarantee that was given for all employees in January 1999 after insistence on the part of the unions.

The IJsselwerf works council commenced proceedings simultaneously with the unions. The works council argued that the company should have asked the advice of the works council with regard to the moratorium petition, as the appointment of an administrator with far-reaching powers can be deemed a significant change in the powers and authority of the company. Pursuant to Section 25 of the Works Council Act (Wet op de ondernemingsraden), it is compulsory to obtain the advice of the works council with regard to such changes. The Enterprise Section agreed with this standpoint and, on these grounds, came to the opinion on 21 October that the company could not have reached its decision to petition for a moratorium on reasonable grounds (ruling not yet published). The petition of the works council for measures to be taken was not granted, as the court wishes to await the results of the inquiry.

Dutch insolvency legislation

Dutch insolvency law consists of two chapters: one on moratoriums (suspension of payments) and one on bankruptcy. Originally the moratorium was intended to give companies some breathing space, so that temporary financial problems could be resolved, while bankruptcy is geared towards liquidation. In practice, in more than 95% of cases a moratorium is the forerunner of bankruptcy, even if the intention is to continue a company in a pared-down form after the declaration of bankruptcy. An important reason is that the EU Directive on the transfer of undertakings (77/187/EEC, amended by 98/59/EC) does not apply to bankruptcy proceedings (it does apply to moratoriums), and that in the event of bankruptcy employees can be dismissed fairly easily.

The latter point could be a reason to use bankruptcy for inappropriate purposes. A few years ago, a case occurred in which bankruptcy legislation was abused to dismiss employees. The underlying intention was not to have to pay the redundancy compensation that had been set by the court. After a number of court cases, the employees succeeded in obtaining compensation, but their demand to be reinstated was dismissed, because measures which are taken by the trustee in bankruptcy cases need not be reversed, even if it turns out that the petition for bankruptcy was based on wrongful grounds.

These and other matters gave rise to questions in parliament's Lower House and further investigation, which showed that one in five companies is "resurrected" after a bankruptcy - in other words, continues in a pared-down version by the same parties who played an important role, directly or indirectly, prior to the bankruptcy. A second result of the study was that in one in five "resurrection" situations, dismissing staff or conflicts with staff are an important motive.

Proposals for change

For some time now, discussion has been underway in the Netherlands over amending the Bankruptcy Act (Faillissementwet), which dates from the 19th century. A more balanced approach is desired, whereby continuation of the company is to be given greater emphasis. Reference is often made to the insolvency legislation of the USA. At the beginning of the 1990s, a few minor changes were implemented, but up to now more far-reaching changes have met with substantial opposition from those creditors who have a priority position, specifically the larger banks.

On 22 October 1999, the Minister of Justice presented a new proposal to the cabinet. The gist of this proposal is that during the moratorium, the creditors who now have a priority position - banks, but also the tax authorities and the institutions that collect social security premia - have to wait until the moratorium has been wound up before they can collect their claims. Furthermore, the court is to be given greater powers to reach an agreement between the company and the creditors, even if not all creditors agree.

Spokespersons for large credit providers have in the meantime strongly criticised the proposal. They suggest that the proposed measures will reduce the willingness to provide credit.

Commentary

In the current legal system of moratorium and bankruptcy, the focus is on the interests of creditors. Proposals for change - both now and in the past - share the common aim that account must be taken of the wide range of interests which can play a role in companies in difficulty, including the interests of continuity and job security. This wider approach is called the "forum" approach. Employee interests are not completely neglected in the current situation - certainly in the case of the bankruptcy in recent years of big companies like Fokker and DAF- but these interests are nevertheless subordinate to the interests of the creditors.

That another approach is not impossible is evidenced by the fairly drastic changes in the insolvency legislation relating to natural persons that have recently been implemented. However, to date the changes for legal persons have been relatively marginal. The new proposals go somewhat further because they attempt to alter the priority position of the most important credit providers. The real question is, however, how many more companies than has been the case hitherto will be saved as a result of the new rules. As soon as the bankruptcy has been pronounced, the priority position is re-established. (Robbert van het Kaar, HSI)

Reference: "Bankruptcy and selective dismissal", Robert Knegt, HSI notice 11, Amsterdam, 1996.

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