The EAT's judgment

Article 5 of the Acquired Rights Directive (ARD) provides that employment is not transferred and there is no corresponding protection from a transfer-related dismissal where the transferor is the subject of "bankruptcy proceedings or any analogous insolvency proceeding which have been instituted with a view to the liquidation of the assets of the transferor". This is replicated in Regulation 8(7) of the Transfer of Undertakings (Protection of Employment) Regulations (TUPE). The Employment Appeal Tribunal (EAT) has held that this exemption does not include administration proceedings which are instigated with a view to saving the business, as opposed to winding up or liquidating the assets of the business for the benefit of its creditors.

The ARD provides for a distinction between insolvency proceedings which are 'terminal' - that is, aimed at liquidating the assets of a business, and those which are 'non-terminal' - that is, those intended to 'rescue' the business or a part of the business as a going concern. Where the transferor is the subject of 'terminal' insolvency proceedings, the ARD will not apply so as to transfer employment; nor will it provide protection against dismissal. However, this exemption is clearly limited to those proceedings which are 'terminal'. It is only the relaxation of the restrictions on changing terms and conditions post-transfer and the non-transfer of certain employment debts which apply to non-terminal insolvency proceedings.

The question in this case was whether administration proceedings could fall in the 'terminal' category. In Oakland, the EAT adopted a flexible approach, and held that this could be the case depending upon the administrator's intention.

In Olds the EAT held that the Oakland approach is wrong. The primary aim of administration proceedings in the UK is to seek to preserve the business as a going concern, even if this rapidly becomes no more than a pipe dream. However, it is this initial objective which is the determining factor. As a result, administration proceedings in the UK are non-terminal and therefore not exempt from TUPE. In reaching this decision, Underhill P upheld the 'absolute approach' to the nature of the proceedings. In support of his decision, he put forward the following reasoning:

  • The fact-based approach advocated by the Oakland case depended upon the intention of the administrator during the proceedings, and led to confusion and uncertainty. It is important for the players (the potential buyer, the administrator and the employees) in the drama of insolvency to know where they stand.
  • The key is the statutory objective of the administration proceedings at the outset. The primary objective of administration proceedings is to rescue the business as a going concern, even if this subsequently changes in the particular circumstances. This means that the administration proceedings are not 'terminal' proceedings.
  • The 'fact-based' approach inevitably increases the likelihood of disputes. As the intention of the administrator is not stated at the outset of the proceedings, the fact-based approach leaves the parties unclear as to whether TUPE applies or not. Evidence of the administrator's intention may therefore be hotly disputed. A 'bright-line' rule has clear advantages in this respect.
  • The purpose of the ARD is to protect employees on a business transfer and ensure that their terms and conditions of employment are safeguarded. An 'absolute' approach to the definition of insolvency proceedings in the Directive, and TUPE, is preferable to achieve that purpose. The exception for 'terminal' proceedings from the application of TUPE is a derogation from that primary purpose of the ARD, and where there is room for ambiguity, the primary purpose of the ARD must apply.

What about the Rescue Culture?

Whilst acknowledging the inherent tension between the promotion of the 'rescue culture' and the rights of employees under the ARD and TUPE, the EAT came down in favour of TUPE over the 'rescue culture'. Despite the current recession, the EAT declined to interpret the legislation in a way which might be considered more favourable to the survival of a business as a going concern. The message is loud and clear: TUPE trumps Rescue Culture in administration proceedings.

The EAT held that promoting a rescue culture "may favour the interests of the workers generally... but the Directive plainly proceeds on the basis that a balance requires to be struck between those interests and the rights of individuals prejudiced by a transfer by an insolvent transferor". Although perhaps 'blunt', the EAT held that it had to respect the distinction adopted by the Directive.

Where now for pre packs?

A pre pack is the pre-planning of the sale of the business assets. It is therefore a quick and relatively convenient way to liquidate the assets of an insolvent company in the interests of the creditors. The administration procedure was not designed to be used for pre packs, as its primary objective is the rescue of the business as a going concern. The decision in the Olds set of cases thus limits the viability of pre packs going forward, as it is clear now that administration proceedings are, for the purposes of TUPE, 'non-terminal' proceedings. This means they are not exempt from the application of TUPE other than in the two more minor respects (changing terms and conditions following the transfer, and the non-transfer of certain limited debts).

Action Points

All transfers of a business in administration (and pre packs) will now be subject to the main requirements of the Transfer of Undertakings (Protection of Employment) Regulations (TUPE). This means that employees, and the associated liabilities of these employees (other than certain limited debts), will transfer to the buyer of the business. The transferring employees will have the usual TUPE protection from dismissal, although the buyer may make changes to terms and conditions (an exception to the 'Daddy's Dance Hall' principle set out in Regulation 9).

Clearly, this will have not only cost ramifications for the buyer but also potential knock-on employee relations issues. The application of TUPE may even hinder the sale of the insolvent business as a going concern, given the liabilities that are now clearly attached to it. Gone are the days when it may have been possible to argue that TUPE did not apply to the transfer of a business in administration because the administrator intended to liquidate the assets.

Buyers therefore need to be aware of the impact of TUPE in these situations. Of particular note:

  • Buyers will need to assess employment liabilities insofar as is possible prior to acquiring a business.
  • Due diligence will assume a more important role going forward. The administrator has obligations under TUPE to provide the Employee Liability Information, but this obligation is both limited in content and in terms of sanction for failure to comply. (Indeed, it is not uncommon for the administrator to expect the buyer to provide an indemnity in the event that such a claim is made against the administrator).
  • Although certain employment liabilities are excluded and covered by the National Insurance Fund, these are limited in scope, and any excess is recoverable from the buyer, as the liability passes under TUPE. The Secretary of State may also take forward the employees' claims against the insolvent business, and a buyer may be expected to give an indemnity in this respect.

The buyer should consider what protections are available for it, including:

  • Price adjustment, retention sum or escrow arrangements.
  • What indemnities it is prepared to give; possibly agreeing a claims resolution procedure.
  • Compromise agreements (tri-partite).
  • Unlisting other insolvency procedures which do fall within the 'terminal category'.

In practical terms there is often little room for negotiation in an administration situation, and buyers may find that their hands are effectively tied by the requirements of the administrator. The absolute rule that TUPE will apply on transfers of businesses in administration does have some significant consequences for buyers and it is perhaps preferable to know these up-front. This will make buyers better able to negotiate and make appropriate decisions, rather than face subsequent claims for unexpected transferring employees, as a result of the unanticipated application of TUPE.