Pre-2006, it was always clear that TUPE applied to transfer employees working in a business when it was bought out of administration. However, changes in 2006 provided that the automatic transfer principle would not apply to any transfer of a business or undertaking where the transferor was the subject of bankruptcy proceedings, which had been 'instituted with a view to the liquidation of the assets of the transferor'.
'New TUPE', as the 2006 version is known, has the effect of categorising insolvency proceedings into what commentators describe as 'terminal' and 'life-support' proceedings.
Terminal proceedings are insolvency proceedings where the business will be liquidated and there is no hope of saving it: a fire-sale, to use a metaphor frequently adopted by practitioners. These are clearly "proceedings which have been instituted with a view to the liquidation of assets".
In this sort of proceedings, TUPE does not apply to a sale of the assets out of the business, however those assets are configured.
Life-support proceedings are insolvency proceedings which 'have been opened not with a view to the liquidation of the assets of the transferor', so where, for example, the primary aim is to rescue the company or business in administration. It would apply on the theoretical example of a company coming out of administration or, more realistically, where the business can be sold as a going concern.
In life-support, the employees will automatically transfer to the transferee but there is greater scope to vary their terms and conditions of employment, and certain outstanding debts to the employees will be taken over by the State.
But the Government didn't put in the legislation which proceedings fall into which category. This has caused much uncertainty and debate, particularly so for administrations.
The primary purpose of administration as an insolvency procedure is the rescue of the company as a going concern. It is sometimes forgotten that when administration first came in, it was intended to be a British version of the US Chapter 11. It is only when rescue is not possible that the administrator must aim to achieve a better result for the creditors as a whole than would be likely if the company were wound up without first being in administration.
As far as the Government was concerned, this meant that 'administration' would never be classed as 'terminal proceedings' and so would fall outside the exemption under TUPE. The UK Department for Business, Enterprise & Regulatory reform issued guidance to this effect.
But guidance is not the law: it is just the Civil Service's view. Crucially, it is not the view of the court. And that is the law.
Oakland v Wellswood (Yorkshire) Ltd
There was nothing special about the facts of this case: company in difficulty; takes Insolvency Practitioner (IP) advice; IP decides company can't be saved and recommends administration with a pre-pack sale arranged to a potential buyer; company goes into administration and deal is completed the same day with the purchaser hiring five of the company's seven employees, taking a lease of the business premises and buying some of the assets, including fridges and vans.
Mr Oakland was actually one of the five taken on, but he was dismissed shortly afterwards. When he tried to claim unfair dismissal, the purchaser said he didn't have enough service as his time with his old employer didn't count: TUPE had not applied to give him continuity of employment.
Crucially, in his report the Administrator stated that the first statutory objective of administration, rescuing the company as a going concern, was not achievable because of the scale of the company's insolvency. The Employment Tribunal decided that the purpose of the procedure was the liquidation of the assets of Oldco. "The deal gave the administrators the chance of making the most advantageous realisations." Mr Oakland appealed to the Employment Appeal Tribunal (EAT) on the basis that, as a matter of domestic insolvency law the appointment of joint administrators could not constitute the institution of insolvency proceedings 'with a view to liquidation of the assets'.
Unfortunately for him - but perhaps fortunately for IPs and potential buyers of businesses from administration in future - the EAT disagreed. In its view, this was not a question for domestic insolvency law but a question of fact for the Employment Tribunal. To use commentators' terminology, it's not a question of deciding which proceedings are 'terminal' or 'life-support', it's about looking at what's happening in each individual case.
In Oakland, the EAT said that the administrator had realised it would be impossible to continue to trade the business, and that following their appointment the administrator had taken immediate steps to sell the assets of Oldco to Newco. This was seen as the best course for realising the optimum return for creditors in the eventual liquidation of the assets of Oldco. This, the EAT said, was consistent with the policy behind the EU and UK changes to TUPE, namely the facilitation of a "rescue culture". The aim is to prevent purchasers being put off buying companies in financial difficulty by TUPE protection. The outcome here was that some jobs were in fact preserved because a purchase took place, which would not have happened otherwise, and the creditors also benefitted.
What does this mean?
This case is another reason for IPs to consider pre-pack administrations to achieve the best result for creditors. Any administration needs to be carefully positioned to make it clear it falls within the circumstances set out in Oakland, but there is no doubt that it opens up the possibility for IPs to get businesses away without being saddled by the employee liabilities that so often put off purchasers or depress the price.
The disadvantage to this of course is that IPs and potential purchasers will not have certainty as to whether TUPE will or will not apply until determination at a Tribunal hearing. It is a question of fact whether insolvency proceedings are 'terminal'. Therefore, any decision is subject to the vagaries of the tribunal process and the sympathies of the Employment Judge at any particular time.
That said, this is unlikely to be the last word. Surprisingly, this case has not yet attracted attention from Unions and other employee commentators, but expect a backlash sooner or later, which may or may not be reflected in the Courts.