Yesterday, the Employment Appeal Tribunal issued its Judgment in the case of OTG Ltd v Barke and others, in which the central issue to be determined was whether Regulation 8(7) of TUPE could apply to the purchase of business and assets from a company in administration, including purchases using pre-pack arrangements.
Where Regulation 8(7) of TUPE applies it has the effect of disapplying the provisions of Regulations 4 and 7, which operate to automatically transfer employees from the company in administration to the purchaser. So, where Regulation 8(7) applies, there is no automatic transfer of employees to the purchaser, meaning that the purchaser can acquire the insolvent company's business and assets without also necessarily taking on the company's employee related liabilities.
Previously, in the case of Oakland v Wellswood (Yorkshire) Ltd, the EAT had held that, contrary to the guidance issued by DBERR at that time, Regulation 8(7) could apply to the purchase of companies in administration in certain circumstances, including purchases utilising pre-pack arrangements. In summary, the EAT held that the factor determining the application of Regulation 8(7) was whether or not the administrator, at the time of his appointment, intended to liquidate the assets of the company.
This Judgment was controversial for a number of reasons, not least because it meant that the application of Regulation 8(7) was dependant on the mind-set of the administrator at the moment of his appointment.
In OTG Ltd v Barke and others, the EAT decided that its earlier Judgment in Oakland was wrong. Instead, the EAT held that it is appropriate to adopt an "absolute approach" when considering the application of Regulation 8(7) in administrations.
Under that approach, the EAT decided that Regulation 8(7) of TUPE can never apply to the transfer of employees from a company in administration (including pre-pack administrations) to a purchaser. Consequently, in relation to such transfers, there will always be an automatic transfer of employees under Regulations 4 and 7.
This Judgment is welcome from the perspective that it introduces an element of legal certainty to the application of Regulation 8(7). However, it also means that both administrators and potential purchasers of companies in administration must now proceed on the basis that TUPE will operate to automatically transfer employees from the insolvent company to the purchaser. Purchasers must therefore be prepared to assume all relevant employee related liabilities after the purchase takes place.
It is also important that purchasers remember that, even in the remaining circumstances where Regulation 8(7) can apply (i.e. liquidations), there is still technically a TUPE transfer, even though there is no automatic transfer of employees. As a result, the administrator and purchaser are still obliged to inform and consult with appropriate representatives of the affected employees regarding the "transfer". Failure to do so will expose the purchaser to claims for protective awards, which can be up to 13 weeks' full pay per affected employee.