Where a company goes into administration and the administrators sell on part or all of the business the question arises whether accrued employee liabilities will pass over to the buyer, who may inherit an unexpected list of old debts.
Regulation 8(7) of TUPE 2006 attempted to mitigate the effect of TUPE in the case of certain insolvencies. Mirroring the wording in the Acquired Rights Directive, it provides that contracts of assigned employees (with their accrued liabilities) will not pass to the buyer where the transferor
‘is the subject of bankruptcy proceedings or any analogous insolvency proceedings which have been instituted with a view to the liquidation of the assets of the transferor and are under the supervision of an insolvency practitioner’.
In Oakland v Wellswood, the EAT held that administrations could fall within the Regulation 8(7) exception, depending on the facts. This decision caused a lot of controversy and has now been addressed again by the EAT in OTG Ltd v Burke and others (5 combined cases).
The EAT in OTG disagreed with the approach taken by the EAT in Oakland, which had followed what it called a fact based approach. Instead, it preferred the absolute approach, in other words, that administrations can never fall within the Regulation 8(7) exception. This is the case even in the case of a pre-pack procedure (where the insolvency practitioner plans in advance an arrangement under which the business is sold immediately after his appointment).
The EAT stated that the focus should be on the object of the procedure rather than the object of the individuals operating it, and the object of administration is to rescue the company. It is the obligation of every administrator on appointment to consider first whether the primary objective of rescuing the company as a going concern is overridden by other obligations. Formally, therefore, at that point the object is not to liquidate the company. Further, following a fact based approach would mean there was no authoritative way of establishing whether Regulation 8(7) applies, leading to increased cost, delay and uncertainty.
Given that the purpose of the Acquired Rights Directive is to protect employees and safeguard their rights in the event of a transfer, this must be the preferred decision but it does cut against the spirit of the Enterprise Act 2002 and the ‘rescue culture’. Technically there are now two conflicting EAT decisions on these issues, but it is expected that the decision in Oakland will no longer be followed.