Last week the Employment Appeal Tribunal ruled in five conjoined appeals that TUPE applies in all administrations, since they constitute "relevant insolvency proceedings" and not "liquidation proceedings". This will be the case even in “pre-pack” administrations, where a business is placed into administration but immediately sold to a purchaser who has been lined up to buy the business beforehand.
The way TUPE usually operates is varied when a business subject to insolvency proceedings is sold. Different rules apply depending on whether a business is subject to "liquidation proceedings" at the date of the sale (such as compulsory liquidation or creditors’ voluntary liquidation) or "relevant insolvency proceedings" - ie insolvency proceedings which have not been opened with a view to the liquidation of the assets of the company under the supervision of an insolvency practitioner.
In liquidation proceedings, the employees assigned to the business will not automatically transfer to a purchaser nor will the employees be entitled to enhanced protection from being unfairly dismissed. That means a purchaser will not inherit any pre-existing liabilities relating to the employees employed in the business it is acquiring and it would be free to decide whether it wishes to employ any of its employees and, if so, the terms and conditions of the employees' employment. That said, any employees who are re-engaged would carry forward their period of continuous service.
In the case of relevant insolvency proceedings TUPE will apply as normal and the employees will automatically transfer to the purchaser under their existing terms and conditions and are protected from being unfairly dismissed for a reason relating to the transfer. However, purchasers are granted limited scope to agree variations to the terms and conditions of transferring employees (provided these are necessary to safeguard the future of the business) and certain pre-existing debts owed to the employees up to set (and arguably low) limits will not transfer to it.
Although this decision has the benefit of clearing up the uncertainty left in the wake of a previous EAT decision on this issue (Oakland v Wellwood), it is unwelcome news to the purchasers of businesses in administration. They will now need to investigate the pre-existing employment liabilities before purchasing any business and seek advice on how and for what reasons the transferred staff can be re-organised post transfer. The value of a business - and indeed any purchase price - should now take into account the costs of employing transferring staff under their existing terms and conditions as well as post transfer redundancy costs. This will be of greater importance as insolvency practitioners will seldom give any indemnification protection against these liabilities and costs in any business sale agreement.