The Employment Appeals Tribunal (EAT) has decided that the sale of a business by way of a pre-pack administration[1] did not result in a transfer of employees under the Transfer of Undertakings (Protection of Employment) Regulations 2006, (TUPE Regulations or TUPE).

TUPE Regulations

The TUPE Regulations preserve employees' terms and conditions where a business or undertaking (or part of one) is transferred to a new employer. TUPE operates by transferring the employment contracts of employees, working in the business at the time of transfer, to the buyer of the business. TUPE also restricts a buyer or a seller’s ability to dismiss or vary the employment terms in connection with the transfer of a business. Similar regulations have been in force since 1981. As the regulations substantially limit a buyer’s ability to make employment related savings at the time of acquisition, they are often (and quite fairly) criticised for killing deals.

In 2006, the TUPE Regulations were amended in order to promote a “rescue culture” for insolvent businesses. Specifically, Regulation 8(7) of the amended provisions disapplied key parts of TUPE to transfers where the selling company is the subject of bankruptcy or analogous insolvency proceedings instituted with a view to the liquidation of the assets of the seller. Therefore in the case of an insolvent seller seeking to liquidate its assets, the application of Regulation 8(7) means that (i) its employees will not automatically transfer to the purchaser and (ii) any dismissals connected with the transfer will not automatically be unfair.

However, under Regulation 8(6), employees and certain employment liabilities will transfer to a buyer if at the time of the transfer the seller is subject to insolvency proceedings (i.e. insolvency proceedings other then bankruptcy or analogous proceedings) which have been commenced with a view other than the liquidation of the assets of the seller, for example a sale of a business as a going concern. Dismissals in circumstances covered by Regulation 8(6) will automatically be unfair and the buyer will be responsible.

As to whether the administration of a seller was analogous to bankruptcy proceedings for the purposes of Regulation 8(7), government guidance made it clear that it was not analogous and accordingly employees being transferred in connection with an administration would transfer to a purchaser following normal TUPE procedures. This also reflected the general opinion held by practitioners in the area based on the premise that the primary purpose of any administration was to rescue a company as a going concern and the realisation of assets for the benefit of creditors would always be secondary to that objective. However, in the recent case of Oakland v Wellswood (Yorkshire) Limited 2008[2], which involved a ‘pre-pack’ administration business sale, the EAT went against government guidance and practitioner opinion on this point.

Case facts

Wellswood Ltd was in financial difficulties, with a view to being wound up. Prior to an administrator being appointed, a deal had been struck for Wellswood to sell its business and assets to one of Wellswood’s suppliers. The supplier incorporated a wholly owned subsidiary, Wellswood (Yorkshire) Ltd (the Buyer) specifically for the purpose of acquiring the Wellswood assets. On the day the administrator was appointed, the Wellswood assets were sold to the Buyer by way of a pre-pack administration business sale. The Buyer agreed to take on some of the Wellswood employees, including Mr Oakland, on a reduced salary. Oakwood was subsequently dismissed and claimed unfair dismissal against the Buyer. At first instance, Oakland’s claim was dismissed on the grounds that he had had less than one year’s service with the Buyer and was precluded from relying on the automatic transfer provisions under the TUPE Regulations as Regulation 8(7) applied i.e. the Buyer was the subject of bankruptcy proceeding or analogous insolvency proceeding. Oakland appealed the decision.

The EAT dismissed the appeal. In its judgement, the EAT confirmed ‘that where administrators continued to trade the business with a view to a sale as a going concern any relevant transfer will attract TUPE protection…’. The EAT concluded that from the facts of the case it was clear that on appointment of the administrators, the business could not continue to trade as a going concern and a decision was taken to immediately liquidate the assets of the business by way of a creditors voluntary liquidation. On this basis, the EAT concluded that Regulation 8(7) did apply which meant that Oakland’s employment did not automatically transfer to the Buyer thereby precluding him from bringing a claim for unfair dismissal against the Buyer.

Points to note

Following the EAT’s judgement in Wellswood, where administration is used merely as a vehicle to liquidate assets to yield the best return for creditors, rather than to continue the business and sell it as a going concern, employees will not automatically transfer. Administrators should, however, be cautious in relying on the case. In this case, the judge was heavily influenced by the fact that the joint administrators did not trade at all and was clear that the issue would be a question of fact for an employment tribunal to determine in each case. As such, decisions will be hard to challenge at appeal.

The practical consequences of this case are that in such circumstances purchasers appear to be able to cherry pick employees, avoid the restrictions on post-transfer changes in terms and conditions and avoid inheriting most of the liabilities which would otherwise transfer under TUPE. The position appears to be a blow to employees. However it is important to note that, if any period of trading occurs during the administration, the normal TUPE rules under Regulation 8(6) will apply. Moreover, much will turn on the intention of the administrators at the time of their appointment and the risk of a successful challenge by employees will be difficult to rule out. Even unsuccessful challenges by former staff will be costly and time consuming for a purchaser of a business.

Nevertheless, this is good news for prospective purchasers of distressed assets. Ultimately the TUPE changes assisted by this case may facilitate business rescue by making failing businesses more attractive to a prospective buyer. The changes allow the employee claims to be left behind and new employment terms to be agreed by the purchasing company. This is undoubtedly a major boost for rescue culture in the current economic climate.