Deal Point is a regular briefing on issues relevant to corporate transactions, notably
M & A and reconstructions. Each edition of Deal Point will focus in detail on
one area of law and practice which may be of interest to principals and practitioners
in the corporate transactions area.
In this edition of Dealpoint we look once again at how TUPE is being applied by
the Employment Appeal Tribunal.
TUPE made easier?
The recent case of Oakland -v- Wellswood (Yorkshire) Limited, decided by the Employment
Appeal Tribunal, has caused something of a stir. Some have hailed it as a green
light to purchase businesses from administrators without worrying about the employment
implications at all. But what is the real story?
It is well known that the Transfer of Undertakings (Protection of Employment) Regulations
2006 operate on pretty much any business sale and purchase to transfer employees
to the buyer on their existing terms and conditions (except as to pensions), giving
them special protection from
unfair dismissal, and giving rise to prescribed information and consultation
obligations. The Regulations also transfer to a buyer any employment liabilities
not met by the seller pre-transfer.
In insolvency situations however, the situation is different. Where the insolvency
proceedings have been “instituted with a view to the liquidation of the assets
of the [seller]” the Regulations do not apply at all, and essentially a buyer
is free to pick and choose which employees to take on, and free to change their
terms and conditions if he can. On the other hand, where the insolvency proceedings
are not with a view to the liquidation of the seller’s assets, only a defined
set of employment liabilities remains with the seller, effectively to be picked
up by the State. The balance transfers to the buyer, with some fairly limited flexibility
to change terms and conditions of employees who have transferred.
Unhelpfully the Regulations did not use English Insolvency Law phraseology such
as administrators, liquidators and receivers.
Oakland explored the distinction between the two types of insolvency envisaged by
the Regulations.
On 6 December 2006 OldCo called in administrators, and on the same day NewCo acquired
the lease of the business premises formerly occupied by OldCo, together with other
business assets such as vehicles. It also took on the majority of OldCo’s
employees. The question was which type of insolvency this was under the Regulations,
which in turn would determine the impact of the Regulations on NewCo
It is fair to say that many observers would have assumed that, being a purchase
out of administration, this was a transfer out of insolvency proceedings which had
not been instituted with a view to the liquidation of OldCo’s assets such
that the Regulations should apply as described above. Although the Regulations do
not specify which type of insolvency falls into which category, that is certainly
the view set out in the DBERR Guidance, on the basis that the objective purpose
of administration is to save the business and sell it.
The EAT in Oakland decided otherwise, and focussed on the subjective purpose of
the insolvency proceedings in the minds of the administrators. It appears that the
administrators had decided immediately on appointment that it was not possible to
save OldCo’s business and that therefore they should realise its assets as
best as they could to achieve the best results for its creditors, anticipating that
OldCo would then move into creditors’ voluntary liquidation. Accordingly the
EAT held that the specific intention of the administrators was the liquidation of
OldCo’s assets and therefore the Regulations did not apply at all.
Critics of the decision believe that it sows confusion and doubt for administrators,
employees, and purchasers out of administration and may encourage a somewhat cavalier
attitude towards employee rights, which could come back to haunt a purchaser which
finds itself before a different Tribunal.
On the other hand, the case has been praised by many as endorsing the “rescue
culture” that the insolvency provisions within the Regulations are meant to
encourage, pointing out that it is a particularly helpful decision in the current
economic climate. As is clear on the facts, at least some of the employees were
able to continue in employment, albeit perhaps on less favourable terms, whereas
the full application of the Regulations might have put off a prospective purchaser
altogether.
There is no doubt that guidance is needed from the Court of Appeal though it appears
Oakland is not itself on appeal. What is absolutely clear however, even if (as we
believe) the decision is correct, is that it was key to the EAT’s decision
that the administrators came to an immediate conclusion that it was not possible
to continue to trade OldCo’s business and sell it as a going concern, and
immediately embarked on a sale of assets. Equally important seems to have been the
fact that this was recorded in the administrators’ insolvency report. Had
there been any trading following their appointment, even if a sale had not been
achieved in the end, the Regulations may well have applied, albeit in the more limited
form described above.
In summary, this case is helpful to purchasers out of pre-pack administration in
certain circumstances, but it is important to carry out as much investigation as
possible (in the often limited time available) to assess whether there has been
an immediate decision to sell assets, rather than trade, as in Oakland. It should
also be noted that the employee in Oakland did not argue that his continuity of
employment was maintained under the Employment Rights Act even though there was
no relevant transfer. Even where the Regulations do not apply buyers should be aware
that continuity of employment may still be preserved, giving rise to the possibility
of unfair dismissal claims where former employees of the company in administration
are taken on and later dismissed in the belief that they do not have a year’s
qualifying service to bring a claim.
This change in law clearly requires some detailed thought. For further advice please
contact David Faulkner on T: 0870
763 1385 E:
david.faulkner@sghmartineau.com or Richard Wrigley on
T: 0870 763 1586 E:
richard.wrigley@sghmartineau.com
