In the recent case of Pressure Coolers Ltd v (1) Mr J Molloy; (2) Maestro International Limited; and (3) Secretary of State for Trade and Industry, the Employment Appeal Tribunal had to decide who should pay an employee’s basic award and notice pay following his unfair and wrongful dismissal after a “pre pack” TUPE transfer from his insolvent employer.

Mr Molloy was employed by Maestro as a bench fitter.  When Maestro got in to financial difficulties, Pressure Coolers Limited (“PCL”) agreed to acquire the business as a going concern by way of an administration “pre-pack”, meaning the company was put into administration and its business and assets were immediately sold before the administrator was appointed. A “pre-pack” is different to the more usual process whereby the administrators commence the marketing of the business after they have been appointed.

Maestro went into administration at 11am on 13 January 2009 and PCL acquired Maestro's business simultaneously. At 3pm on the same day, PCL informed Mr Molloy that he was redundant.  Mr Molloy was dismissed with immediate effect and without pay in lieu of notice.

Mr Molloy brought claims for age discrimination, unfair dismissal, wrongful dismissal, failure to inform or consult under TUPE 2006, unpaid holiday pay and unlawful deductions from wages.

The Tribunal found that there had been a TUPE transfer and that Mr Molloy’s employment transferred to PCL, following which he had been unfairly and wrongfully dismissed by them.  The Tribunal found that, pursuant to the provisions of TUPE that govern insolvency situations, PCL was liable to pay compensation in respect of Mr Molloy’s basic award and notice pay.

PCL appealed contending that the National Insurance Fund (“NIF”) provided for at Part XII Employment Rights Act 1996 (“ERA”) should meet those liabilities, and not PCL, irrespective of the fact that Mr Molloy was not dismissed until after the transfer.

Law

Part XII ERA contains the statutory scheme by which the Secretary of State assumes responsibility for certain unpaid employment “debts”, including capped arrears of pay, basic award, holiday pay and notice on the part of insolvent employers. These debts are paid out of the National Insurance Fund.

TUPE 2006 introduced new measures to encourage a "rescue culture" by making failing businesses more attractive to prospective purchasers. There are two alternative regimes depending on whether the seller is subject to what can broadly be described as either "terminal" or "non-terminal" insolvency proceedings. “Terminal” insolvency proceedings are defined as where the seller 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 [i.e. seller]".  The buyer is permitted to acquire the insolvent business without the seller’s employees in this situation.

"Non-terminal" insolvency proceedings are where the transferor is the subject of "relevant insolvency proceedings" such as administration.  In this situation, employees transfer with the business and are afforded the usual TUPE protection from dismissal for reasons connected to the transfer.  Furthermore the liabilities covered by the National Insurance Fund (“NIF”) (as provided for at Part XII ERA) will be met by the Secretary of State and paid out of NIF rather than by the buyer (regulation 8(1)-(6) TUPE).

Judgment

The EAT held that:

  • Regulation 8(1)-(6) TUPE implements Article 5.2 of the Acquired Rights Directive, which allows EU member states to provide that debts of an insolvent company arising from the employment relationship and arising before the transfer shall be paid by the State rather than the buying company.  Any debts or liabilities arising after the transfer are beyond the scope of this guarantee.
  • It is a requirement of Part XII ERA that the employee’s employment be terminated for the debts to be met by the Secretary of State.  However, Regulation 8(3) TUPE relaxes this requirement, and specifies that the date of the TUPE transfer shall be treated as the date of termination (so that an actual termination is not required).
  • However, to be payable by the Secretary of State, any debts must have crystallised before the transfer.
  • As Mr Molloy was unfairly and wrongfully dismissed by PCL after the transfer took place, his basic award and notice pay could not be said to constitute a debt in respect of a transferring employee under the above legislation.
  • PCL and not the Secretary of State were therefore liable for these payments.