This recent case in the Employment Appeal Tribunal (EAT) is one of the first to examine how the insolvency provisions in the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) should apply and, in particular, the circumstances in which employment liabilities passed under TUPE to the buyer of the assets of an insolvent company.
This case involved a "pre-pack" administration.
The company in question (OldCo) was in financial difficulties. With advice from insolvency advisors, the claimant, who was director and 50% shareholder of OldCo, held discussions with a supplier, the outcome of which was an agreement in principle that the supplier would incorporate a new company (Newco) to acquire the assets of OldCo immediately after OldCo had gone into administration. The assets included the lease of its premises, fridges and vehicles. Newco would also employ five of the seven employees of OldCo, including the claimant, on much reduced pay.
The insolvency advisors were appointed as joint administrators on 6 December 2006 and on the same date the assets of Oldco were sold to Newco.
Regulation 8(7) of TUPE applies when at the time of the transfer the transferor is "subject to bankruptcy proceedings or analogous proceedings which have been instituted with a view to liquidation of the assets of the transferor". Under Regulation 8(7), no employees and virtually no employment liabilities transfer to the transferor and dismissals in connection with the transfer are not automatically unfair.
However, under Regulation 8(6) of TUPE, employees and certain employment liabilities do transfer if at the time of the transfer the transferor is subject to "insolvency proceedings which have been opened not with a view to liquidation of the assets of the transferor". Equally, dismissals can be automatically unfair.
The DBERR guidance on the issue states that administration is not analogous to bankruptcy for the purposes of Regulation 8(7).
The EAT's decision
The EAT attached considerable weight to the administrators' statement of proposals (the Proposals), which set out the administrators' view on the scope for compliance with each of the three statutory objectives of administration, being:
- rescuing the company as a going concern;
- achieving a better result for the creditors as a whole than would be likely on a winding up of the company; or
- realising any property in order to make a distribution to one or more secured or preferential creditors.
The administrators considered that the first objective was not achievable as a result of OldCo's financial position. Accordingly, the Proposals noted that efforts were concentrated on achieving the second objective.
In view of the probability of ongoing losses, the Proposals noted that any further period of trading by OldCo (in administration) to try and allow the business and assets to be marketed for sale, would have further reduced funds available for creditors and resulted in the loss of customers. Presumably, this is why the administrators reached the conclusion that conclusion of a pre-pack sale on the date that OldCo entered into administration was in the best interests of the creditors of OldCo as a whole. The administrators also anticipated that in due course OldCo would move from administration into a creditors' voluntary liquidation.
The EAT concluded that on the basis of the Proposals that the administration had been instituted with a view to a liquidation of the assets.
It therefore found that Regulation 8(7) of TUPE applied. Consequently, the claimant's continuity of employment was not preserved under TUPE when he ceased to be employed by OldCo. Instead, the claimant had accepted employment with NewCo following the pre-pack and so he did not have the necessary qualifying service to bring an unfair dismissal claim.
The EAT said that the DBERR guidance on the issue was unhelpful.
The EAT acknowledged that an administration will normally aim to sell a business as a going concern, in whole or in part, but found that intention to be lacking here because of the position of OldCo, the timing of the appointment of the joint administrators and the sale of the assets. In particular, the EAT seemed to have focussed particularly on the fact that the administrators did not trade the business of OldCo at all given that the pre-pack sale was concluded immediately following their appointment.
It made no criticism of the pre-pack form of sale and in fact said that applying Regulation 8(7) to the case contributed to the rescue culture that the insolvency provisions of the TUPE regulations were intended to promote – the purchaser was not put off by TUPE and jobs were preserved.
Each case will be decided on its facts but key points to take from this decision are as follows:
- the question whether a TUPE transfer will take place remains a question of fact - if a sale as a going concern is not feasible, Regulation 8(7) of TUPE would seem to apply, even in an administration. The DBERR guidance on the application of TUPE to the various insolvency procedures must now be questionable;
- it is arguable that a pre-pack sale that completes immediately after the appointment of administrators, with the result that the administrators do not trade the business at all, would seem to fall within the category of insolvency proceedings that are instituted "with a view to liquidation of the assets" of a company;
- the practical consequences of this are that the purchaser in these circumstances can cherry-pick employees, avoid the restrictions on post-transfer changes to terms and conditions and avoid inheriting most of the liabilities, which would otherwise transfer under TUPE;
- however, it seems that a purchase of a business as a going concern (even if the sale takes the form of a pre-pack) and/or where the administrators have traded the business for a period of time will not fall under Regulation 8(7) and the TUPE transfer provisions will therefore apply; and
- the wording of the IP's statement of proposals (which, in the case of pre-packs and sales early on in the administration, will not be prepared or circulated until after the sale has completed) will be important to determine whether the insolvency proceedings were instituted "with a view to the liquidation of the assets" of the company or not.
This case is good news for prospective purchasers of distressed assets and provides some clarity to insolvency practitioners regarding the application of the TUPE insolvency provisions. However, it remains the case that tribunals will be alert to attempts at unlawful TUPE avoidance.