Oakland v Wellswood (Yorkshire) Ltd UKEAT/0395/08 is an important and welcome EAT case. The judge decided that a pre-pack administration business sale did not result in the employees automatically transferring under regulation 4 of TUPE1. Contrary to previous government guidance, the EAT held that the transferor employer, in administration, was in a form of ‘terminal insolvency’ as being subject to ‘bankruptcy proceedings or... analogous insolvency proceedings... instituted with a view to the liquidation of the assets of the transferor’. Therefore regulation 8(7) of TUPE applied and the transferor’s employees did not automatically transfer. This will make certain pre-pack administration business sales much more attractive to buyers. It allows the employee claims to be left behind and new (perhaps reduced) employment contracts agreed in the purchasing company. Given the difficulties in finding buyers in the present economical climate, this is welcome news.
Wellswood Limited (Oldco) traded as a wholesaler in fruit and vegetables. The claimant was an employee and co-director of Oldco. By mid-2006 Oldco was in financial difficulties, which culminated in an ‘out of court’ appointment of administrators over Oldco. Before that appointment, one of Oldco’s major suppliers had effectively agreed to buy Oldco’s assets out of the administration as a pre-pack sale. To do so, the supplier set up a wholly owned subsidiary, Wellswood (Yorkshire) Limited (Newco). As well as the assets, Newco took on some (but not all) of Oldco’s employees. These included the claimant, but with a much reduced annual salary, down from £39,000 to £20,000 (later rising to £24,000).
In a report dated January 2007 the joint administrators set out the three statutory objectives of administration: (a) rescuing the company as a going concern; (b) achieving a better result for the creditors as a whole than would be likely on a winding up of the company; or (c) realising any property in order to make a distribution to one or more secured or preferential creditors. They concluded that the first objective was not achievable for Oldco. In considering the second, they observed that any further period of trading to allow the marketing of the business and assets for sale would be likely to result in further losses and so reduce the funds available to creditors. They therefore anticipated that the company would move from administration to a creditors’ voluntary liquidation.
The claimant brought a claim for unfair dismissal against Newco. The claim was dismissed at first instance by the employment tribunal on the ground that the claimant had less than one year’s service with Newco and he was precluded from relying on the transfer provision of TUPE because Oldco was ‘the subject of bankruptcy proceedings or any analogous insolvency proceedings… instituted with a view to the liquidation of the assets of [Oldco]’. The claimant appealed.
The relevant provisions of TUPE
TUPE applies to transfers of the whole or part of a business or undertaking or a change of service provider (a relevant transfer) subject to certain exceptions. Regulation 4 of TUPE provides that a relevant transfer does not operate to terminate the contract of employment of employees who are working in the business at the time of the transfer but transfers their contracts to the transferee. Regulation 7 provides that a dismissal because of a relevant transfer or a reason connected with it that is not an economic, technical or organisational one is automatically an unfair dismissal.
Regulation 8(7), however, disapplies these regulations to any transfer where there is what has been called a ‘terminal insolvency’, ie ‘the transferor is the subject of bankruptcy proceedings or any analogous insolvency proceedings that have been instituted with a view to the liquidation of the assets of the transferor and are under the supervision of an insolvency practitioner’. The wording ‘bankruptcy proceedings or any analogous insolvency proceedings which have been instituted with a view to the liquidation of the assets of the transferor’ was directly copied from article 5(1) of the Acquired Rights Directive 2001, which in turn reflects the ECJ case law on the previous directive.
The position in administrations – uncertainty and argument
The Department for Business, Enterprise and Regulatory Reform guidance on regulation 8(7) states that ‘regulations 4 and 7 will always apply in relation to a relevant transfer that is made in the context of an administration’ as administration is not analogous to bankruptcy. It continues, ‘the correct approach is to look at the main or sole purpose of the procedure rather than its outcome in a particular instance. The main purpose of bankruptcy proceedings is to realise free assets and expenses amongst all the debtor’s creditors. This is not the main purpose of administration.’
This guidance is not binding and has been widely criticised. During the consultation process and following the introduction of TUPE, R3, the Association of Business Recovery Professionals, lobbied for changes to the insolvency provisions. On 3 May 2006 a motion to revoke the regulations was put to the House of Lords and defeated by 79 votes to 77. R3 published its ‘Response to government about TUPE’ following the defeat of this motion, arguing that the use of generic wording resulted in uncertainty about the types of insolvency procedures covered by the regulations and that interpretation of regulation 8(7) to exclude administration was flawed because:
- while the purpose of administration is set out in the form of a hierarchy, with the first objective being rescue of the company, this objective can rarely be achieved. In most cases the purpose of the administration will be achieved through the second objective of achieving a better result for the creditors as a whole than would be likely on a winding up. This will usually be effected through the sale of the whole or part of the business (the business being an asset of the company) or the sale of assets on a piecemeal basis. Such activity should be characterised as a realisation, ie liquidation, of assets; and
- it was wrong to state that administration is not instituted ‘with a view to’ liquidation of the assets on the ground that the first objective is to rescue the company and that the other objectives only come into play once that objective proves impossible. It may be apparent at the very beginning of the process that it will not be possible to save the company.
His honour Judge Peter Clark upheld the employment tribunal and dismissed the appeal.
He accepted that ‘where administrators continue to trade the business with a view to its sale as a going concern any relevant transfer will attract TUPE protection for those employees under regulation 4’. He distinguished that situation, though, from the facts of this case where it soon became apparent to the joint administrators that it was not possible for them to continue to trade the business. Instead, immediately on appointment they took steps to sell the assets to Newco. Judge Clark held that the employment judge at first instance was entitled to conclude that the appointment of the joint administrators was with a view to the eventual liquidation of the assets of Oldco by way of a creditors’ voluntary liquidation.
He concluded, ‘it seems to me that this construction accords with the policy behind Article 5(1) and in turn regulation 8(7); namely the ‘‘rescue culture’’, whereby a purchaser, here Newco, is not put off by the effects of TUPE protection. The outcome, as demonstrated by this case, was that some jobs were preserved and the creditors benefited from the best available option’.
Good news for pre-pack administration
Some clarity at last on TUPE
This is a sensible and much needed decision by the EAT, particularly welcome in these turbulent days. It cuts through the confused reasoning and uncertainty of earlier government guidance over what constitutes ‘bankruptcy proceedings or any analogous insolvency proceedings’.
Administrators should however be cautious in relying on this case: the judge appeared to be heavily influenced by the fact that the joint administrators did not trade at all. Naturally each case will turn on its own facts in determining whether the administration was ‘instituted with a view to the liquidation of the assets of the transferor’. The administrator report or other evidence of intention may well prove important in this respect. Nonetheless this case establishes that immediate pre-packs can leave behind the employment claims, a significant step forward for the rescue culture.
Care also needs to be taken in that it does not seem to have been argued that the claimant could look to his previous service with Oldco to establish the necessary period of continuous service even though there was not a TUPE transfer by reason of regulation 8(7). Section 218(2) of the Employment Rights Act 1996 provides for there to be continuity of employment where there is a transfer of a business. This section does not refer to TUPE and arguably means that continuity is preserved even if TUPE does not apply.
Further recognition of pre-pack administration
Again a court has tacitly approved pre-pack administration. With Statement of Insolvency Practice 16 on pre-packs coming into force on 1 January 2009, this seems to put the legality of a pre-pack administration beyond serious argument.