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TUPE or not TUPE.......that is the question being asked by those dealing with Administrations of insolvent companies
With the country's economic worries continuing, company insolvencies are on the increase with "Pre-pack" Administrations still considered an attractive solution. However, where there is a transfer of a business or part of a business the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) should not be ignored and must be carefully considered.
In 2006 the Government modified the principles of TUPE where insolvent companies were concerned with the aim of promoting a rescue culture. But one of the objectives of the modifications was to protect employees when an insolvent business changed hands so that their contracts and any associated liabilities transferred automatically to the buyer, however distinctions were made as to the nature of the insolvent situation that existed.
Therefore the question as to what extent TUPE applies depends on the type of insolvency proceedings being entered into. TUPE creates a distinction between "relevant insolvency proceedings" and "bankruptcy proceedings or any analogous insolvency proceedings".
Although TUPE does not specifically define the types of insolvency proceedings intended to fall within "relevant insolvency proceedings" it does state that these are "proceedings which have been opened in relation to the transfer not with a view to the liquidation of the assets of the transferor and which are under the supervision of an insolvency practitioner". The Department of Business, Innovation and Skills (BIS) sought to clarify this and stated that Administrations, Administrative Receiverships and Voluntary Arrangements fell within this definition. Where the proceedings are "relevant insolvency proceedings" the employees' contracts will automatically transfer under TUPE to the buyer resulting in the buyer inheriting the insolvent company's employees including many of the associated liabilities. On the plus side, there is scope to vary the terms of employment of the transferring employees as long as the intention is to safeguard employment by ensuring the survival of the business. The above will obviously impact on any consideration paid for a business and Administrators should seek indemnities from the buyer to protect themselves and the interests of the insolvent company should a challenge arise and it be found that the employees did not transfer. In addition, the National Insurance Fund (NIF) will cover certain arrears of wages and outstanding holiday pay owed by the insolvent company and the buyer can ask the employees to claim those sums from the NIF subject to a cap. The buyer will still, however remain liable for any sums owed to the employees above that cap.
Alternatively, where the proceedings are "bankruptcy proceedings or any analogous insolvency proceedings" the principle is that the employees and their associated liabilities do not automatically transfer to the buyer and any dismissal will not be automatically unfair. TUPE states that these are proceedings "instituted with a view to the liquidation of the assets of the transferor". BIS is of the view that this would cover Bankruptcies, Compulsory Liquidations and Creditor Voluntary Liquidations. In the above circumstances, any employee liability remains with the insolvent company and the buyer can "cherry pick" key employees and offer any terms of employment it desires. The buyer will not be liable for any payments owed to the employees, who will have to claim from NIF and/or as creditors of the insolvent company.
The above would appear to be a straight forward distinction, unfortunately the case of Oakland v Wellswood (Yorkshire) Ltd (Oakland) has muddied the waters especially in relation to "Pre-pack" Administrations.
The Employment Appeal Tribunal (EAT) found that TUPE did not apply in Oakland as the only realistic outcome for the insolvent company was to wind it up. Therefore the administration amounted to "bankruptcy proceedings or an analogous insolvency proceeding". The EAT was influenced by the fact that the Administrators did not trade the business before the sale and that the Administrators' report confirmed that the primary objective of administration could not be achieved. The EAT stated that it was a question of fact for an Employment Tribunal in each case having regard to the purpose of the administration. On appeal to the Court of Appeal Mr Oakland's case succeeded however only under the Employment Rights Act 1996. Justice Moses indicated "that there are strong grounds for thinking that the ET and the EAT took the wrong approach [with regards to the application of TUPE]", however the comment was not binding. Therefore, buyers can still rely on Oakland to try and avoid liability for the insolvent company's employees under TUPE.
We are therefore in a position where the decision in Oakland on TUPE remains good law and binding on Employment Tribunals. This can be used by Administrators to make a sale to a buyer more attractive or by buyers to buy what they really want.
There are four cases currently being heard together in the EAT (the lead case being Olds v Late Editions Ltd) on the matter of whether employees transfer on a pre-pack sale of a business by a company in administration. Even if these cases disapprove the decision in Oakland, Employment Tribunals will have a choice on whether to follow the Oakland decision or the potential new position in Olds v Late Editions. We will need a decision at Court of Appeal or higher level to change the law and confirm whether or not a buyer will inherit the employees on a "Pre-pack" sale. We are therefore some way off from receiving clarity on this point and specific legal advice should be sought on a case by case basis.
Whether or not TUPE applies Administrators and buyers must also remember the obligation to inform and consult Failure to do so can lead to an award of up to 13 weeks' uncapped pay per employee. This liability is a joint and several liability of the insolvent company and the buyer. Obviously the employees will claim from whomever has the funds to pay the award.
We will report on the EAT's decision in Olds v Late Editions Ltd once it is published. Watch this space......
In the meantime,if you would like any advice on how TUPE applies to a particular insolvent company, how TUPE can be used to your advantage and advice to ensure that you are adequately protected then please email Georgina Kyriacou or Lydia Scally or contact us on 020 7354 3000
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Authors: Lydia Scally and Sandra Martins
Date: October 2010