Can an employee compete with his former employer following an insolvency? One might wonder how this is possible. In 2001 a legislative proposal was submitted whereby a non-competition clause would cease to have effect if a company was declared insolvent. Although adopted by the Dutch House of Representatives, the proposal was rejected by the Dutch Senate. Despite the fact that there had been some support for such an arrangement, the provisional relief judge of the District Court of Maastricht recently ruled that employees of a company that becomes insolvent must in fact comply with a non-competition clause.
The basic rule
A trustee acts for a company that has become insolvent. He assumes the rights and powers of that company and is able to terminate the employment contracts relatively easily. Under current legislation a non-competition clause is not suspended if a company becomes insolvent.
The trustee’s interest in enforcing a non-competition clause
An insolvent company no longer has as such any interest in enforcing a non-competition clause. The trustee does, however, have a secondary interest in doing so because he will try to sell the company to a third party, who in this regard will often want the trustee to guarantee that the employees comply with their non-competition clause.
If the trustee is unable to effect a turnaround or has great difficulty in doing so without holding the employees to their non-competition clause, he will generally have a sufficient interest in demanding that they comply with it. In such a situation the actual wording of the non-competition clause will be decisive.
The provisional relief proceedings in Limburg (District Court of Maastricht)
The situation described above applied to this case. After the company in question became insolvent, two employees wanted to take up employment with another prospective employer in the same sector. The trustee tried to effect a turnaround with another company in the same sector and he drew the employees’ attention to the non-competition clause in their employment contracts. The contract with this company stated that, where appropriate, the trustee would demand that the employees comply with the non-competition clause. The trustee demanded that both the two employees and the prospective new employer comply with the non-competition clause.
Weighing of interests
In deciding whether a non-competition clause is maintained, the interests of the trustee are weighed against those of the employees. There is therefore no general rule stating that a non-competition clause ceases to have effect if a trustee or a company terminates an employment contract. Under case law however, if a company’s operations are discontinued and it therefore no longer has an interest in the non-competition clause, the employee cannot in principle be held to it.
In the case in question the court ruled that the trustee had a sufficiently compelling interest in enforcing the non-competition clause. A major factor in this decision was that the trustee had effected a quick turnaround and the employees had specific knowledge of the orders in the books and the company’s customers. The employees did not submit any particular or individual compelling interest in opposition to this.
Any party employing a person who is subject to a non-competition clause is only acting unlawfully towards the former employer if additional circumstances apply. The mere fact that such a party knows that by entering its employment an employee would be violating the non-competition clause with the former employer is not sufficient to prohibit that party from taking on the employee. In the case in question the new employer made no secret of the fact that it wanted to use the experience of both employees to boost its own competitive position. According to the court the new employer was thus acting unlawfully in respect of the insolvent estate.
The court awarded the trustee’s claim for enforcement of the non-competition clause pertaining to the two employees. In addition, the prospective new employer was not permitted to enter into an employment contract with either employee until the period stipulated in their non-competition clause had expired.
This decision shows that, in principle, a non-competition clause must be complied with even after a company becomes insolvent unless the trustee is unable to assert a compelling interest. In the case in question the non-competition clause was maintained because the trustee did have a compelling interest, which was to maintain the competitive position of the company effecting the rapid turnaround.