The much awaited EAT decision in OTG Ltd v Barke and others (formerly Olds v Late Editions Ltd) was delivered on 16 February. As expected, the EAT has taken the view that an administration cannot amount to “bankruptcy” or “analogous insolvency proceedings” for the purposes of Regulation 8(7) of TUPE. So, on a sale by an administrator (even in a pre-pack administration) TUPE will apply.
In more detail
The full force of TUPE is relaxed in relation to insolvent transfers as follows:
- Liquidation (regulation 8(7) TUPE). Where the transferor is subject to “bankruptcy proceedings or any analogous insolvency proceedings… instituted with a view to the liquidation of the assets of the transferor” employees will not transfer under regulation 4 and they will not have the automatic unfair dismissal protection of regulation 7. We’ll call these “liquidations”
- Non-Liquidation (regulations 8(6) and (9) TUPE). Where there are “relevant insolvency proceedings” which are not covered by regulation 8(7) employees will still transfer but the restrictions on changing terms and conditions are relaxed and the Secretary of State will pick up certain employment liabilities. We’ll call these “non-liquidations”
TUPE does not define which insolvency proceedings are liquidations and which are non-liquidations. In particular, it is not immediately apparent where administrations will fall.
The 2007 DTI (now BIS) guidance suggested that administrations would always be non-liquidations. After all, the aim of an administration is to rescue the company as a going concern.
In contrast, and to the surprise of many commentators, in 2008 the EAT decided that an administration could in certain circumstances be a liquidation so that TUPE is diluted (Oakland v Wellswood (Yorkshire) Ltd). The case concerned a pre-pack administration (where the sale of the assets is pre-arranged before the administrator is appointed). On the facts of the case, it was held that the administrators had been appointed with a view to the eventual liquidation of the transferor’s assets. This placed the process squarely within regulation 8(7).
Two years later, in the OTG case, the EAT was asked to reconsider this issue. It looked at whether an administration can never amount to a liquidation (“the absolute approach”) or whether it may do so if, as a matter of fact, the administration was instituted with a view to liquidation of the assets (“the fact-based approach”). In contrast to its earlier decision in Oakland, the EAT favoured the absolute approach. Part of its reasoning was that (formally at least) at the moment when proceedings are instituted the immediate intention of the administrator is not to liquidate assets. The EAT also felt that the fact-based approach would create practical difficulties and lead to disputes between parties looking to ascertain whether or not there was a liquidation. In its view a “bright-line rule has clear advantages”. Further, the EAT took the view that applying TUPE (albeit in the relaxed form under regulations 8(6) and 8(9)) in these situations better reflects the intention of the Acquired Rights Directive to safeguard employees’ rights in the event of a transfer.
On the sale of an insolvent business it is crucial for all parties to know which liabilities will sit where. In practical terms, this is a sensible judgment which provides some useful certainty around the position in an administration scenario. It is also logical given that the statutory purpose of administration is to save the company’s business, not to end it. It remains to be seen whether (particularly where a pre-pack is being considered) that certainty will discourage the use of administration in favour of outright liquidation and the resulting reduction in continuing employment liabilities. Such a result might not best safeguard the immediate rights of the employees who would otherwise transfer to the buyer. But, if it encourages the purchase of the assets, in the long term it may preserve more jobs and thereby better safeguard the position of the staff. This loss of flexibility may be inconvenient to insolvency practitioners and potential purchasers of insolvent businesses who, in practice, will be forced to use price or a retention to allocate liabilities.