7. Insolvency

One of the innovations introduced by TUPE 2006 was a new regime for insolvent businesses, aimed at encouraging the rescue of failing businesses and the preservation of employment. The relevant rules can be found in Regulations 8 and 9. Under this regime, special rules limit the protection provided to employees by TUPE where the transferring business is under the supervision of an insolvency practitioner.

The aim is to make it easier for the business to survive, retaining at least some of the jobs. These special rules are looked at below. Basically, these rules differentiate between transfers where an insolvency practitioner’s primary aim is to sell the business as a going concern, and transfers where his primary aim is to liquidate the assets, pay off creditors and wind up the business.

What rules apply when an insolvency practitioner is attempting to sell on a business as a going concern?

Where an insolvency practitioner is attempting to rescue the whole or any part of a business as a going concern, two key features of TUPE are modified:

Debts owed to employees

Some of the debts owed to employees by the old employer will not transfer under TUPE to the new employer. These debts include:

• statutory redundancy pay;

• unpaid wages;

• notice pay;

• holiday pay; and

• basic award of compensation for unfair dismissal.

Instead of becoming debts due from the new employer, these sums are paid by the Secretary of State through the National Insurance Fund. Any remaining debts not met by the fund will transfer to the new owner.

Freedom to change terms and conditions

Where an insolvency practitioner is attempting to engineer a rescue, the Regulations provide greater scope to agree changes to employee terms and conditions. In summary, the restrictions on varying contracts of employment on a transfer discussed in Chapter 5 cease to apply and instead, the parties are allowed to agree to cut pay and to introduce other less favourable terms and conditions, as long as these changes are designed to “safeguard employment opportunities” by ensuring the survival of the business. In practice, the speed of negotiations in these circumstances may be much faster than normal, owing to the pressure of insolvency.

The freedom to agree changes in these circumstances is tightly regulated. The following additional conditions must be met:

• where an independent union is recognised, variations must be agreed with the union rep. Union reps are entitled to paid time off for the purposes of negotiation;

• where there is no recognised union, variations must be agreed with a non-union rep, following the procedural rules already set out in Chapter 4; and

• where there is no recognised union, extra restrictions are in place.

Non-union reps are allowed to agree variations to employment contracts as long as:

• the agreement recording the variation is in writing and signed by each non-union rep; and

• before it is signed, the employer must give all affected employees a copy of the agreement, along with any guidance they would reasonably need in order to be able to understand it.

Any new terms must not breach other statutory rights. For example, any agreed pay rate must not fall below the national minimum wage.

Any variations agreed by the representative become part of employees’ contractual terms and conditions of employment.

What is the relevance of TUPE when an insolvency practitioner is not trying to sell the business as a going concern?

This situation is governed by Regulation 8(7) of TUPE. This regulation says that where a seller is “subject to bankruptcy proceedings or analogous insolvency proceedings”, started in order to liquidate the assets under the supervision of an insolvency practitioner, dismissals because of a transfer will not be automatically unfair, and employees’ terms and conditions will not be protected. In other words, employees caught up in an insolvency situation where the insolvency practitioner does not intend to continue the business as a going concern will not automatically transfer under TUPE to the new owner.

TUPE and “Pre-pack” administrations

In the current recession, Regulation 8(7) has produced some troubling results, where new companies seemingly emerge phoenix-like from the ashes of an insolvent liquidation, but the employees have no claim against them. However, such employees may be in a slightly stronger position as a result of comments by the Court of Appeal in Oakland v Wellswood (Yorkshire) Ltd [2010] IRLR82, discussed below.

The government has published guidance, which can be accessed from the Redundancy Payments Office (www.insolvency.gov.uk) setting out the government’s opinion as to the effect of TUPE on the different categories of insolvency proceeding. The guidance is not legally binding. It looks at the purpose of different types of insolvency proceeding, in particular whether that purpose is to continue the business as a going concern (in which case TUPE should apply to transfer the employment in its modified form) or to liquidate the assets (in which case TUPE should not apply to transfer the employment).

The guidance is clear that in the case of a standard administration, TUPE will apply to transfer the employees of the insolvent company to the new purchaser, subject to the increased ability to agree variations to terms and conditions, set out above. This is because the primary aim of a standard administration is to sell the business as a going concern.

However, the recession has seen a growth in the number of administrations known as “pre-pack” administrations, in part triggered by the lack of cash made available by banks for lending. Indeed, the number of “pre-pack” administrations is reported to have overtaken “standard” administrations.

In a “pre-pack” administration, the sale of the insolvent business is pre-arranged, so that immediately after the appointment of the administrator, the company’s assets are sold, often to managers or former directors of the old company. The theory behind a “pre-pack” administration is that a very fast sale enables the best price to be achieved. By securing a buyer before entering into administration, pre-packs are said to save a troubled business from the burden of continuing to trade in a climate where there is limited access to cash.

However, there has been some doubt as to whether TUPE applies to transfer the employment of staff in this situation. The basis of the argument against is that TUPE does not apply to protect the employees because the insolvency practitioner in a pre-pack administration has not been appointed to sell the business as a going concern. However, recent comments by the Court of Appeal in Oakland v Wellswood (Yorkshire) Ltd [2010] IRLR82, suggest that TUPE may well apply to transfer the employment contracts to the new owners in a “pre-pack” administration, albeit in its more limited form with the modifications explained above. As always, each case depends on its own facts.

In Oakland, the seller, a wholesaler in fruit and vegetables, was in financial difficulties. A buyer of the assets was found, whereupon the seller went into administration. The administrator decided a pre-pack sale of the assets to the buyer was the best option for creditors, rather than simply liquidating the company. The option of selling the company as a going concern was not available, because the company’s financial position was too dire.

Mr Oakland had been employed by the seller, and after the sale of the assets he continued to work for the buyer for 10 months before being dismissed. He claimed unfair dismissal, but the buyer asked for the claim to be struck out on the basis that Mr Oakland did not have a year’s service. The EAT decided that Mr Oakland’s employment did not transfer under TUPE because the administrator had been appointed to sell the assets rather than to continue the business. This meant that there was no transfer.

On appeal to the Court of Appeal, the Court decided that Mr Oakland did have sufficient continuity to bring his claim. They reached their conclusion by relying on section 218 of the Employment Rights Act 1996, which provides that where a trade, business or undertaking is transferred from one person to another, the period before the transfer is counted, and the transfer does not break continuity of employment. This gave him sufficient service to bring his claim.

Although it was not necessary for them to decide the point, the Court of Appeal then went on to state that there were “strong grounds” for thinking that the EAT had made a wrong decision in Mr Oakland’s case, and that TUPE may well apply to “pre-pack” administrations like the one in this case. As a result, most insolvency practitioners will now be reluctant to proceed on the basis that TUPE does not apply (in its modified form) to transfer the employment of employees caught up in a “pre-pack” administration. This slightly improves the position of these employees.

Timing issues

The special exemptions from full TUPE protection described above are only available if insolvency proceedings “have been opened” by the time of the TUPE transfer. Tribunals interpret this restrictively. In Secretary of State for Trade and Industry v Slater (27 June 2007), a business became insolvent, owing back-pay and holiday pay to 20 employees. The business was bought from the liquidator by CFG Nationwide Site Services and the employment transferred under TUPE. The new employer refused to pay the sums owing to the employees, arguing that these debts were due from the Secretary of State. The EAT concluded that the Secretary of State was not obliged to make the payments, because the transfer of the business took place before insolvency proceedings had opened. Instead, the new employer was obliged to make the payments.

Collusion to engineer insolvency

From time to time, employers attempt to manipulate the Regulations to avoid liability under TUPE. In Dynamex Friction v AMICUS ([2008] EWCA Civ 381), the Court of Appeal concluded that the administrator may have been the “unwitting tool” of a director who “stage-managed” the placing of the company into administration, knowing that dismissals were inevitable and that a sale of the business was likely, and hoping (as proved to be the case) that one of his companies would be the purchaser.

The case concerned complex corporate dealings, as well as a tribunal judgment against the company for unfair dismissal of 86 striking employees which, if paid, would have cost the business £3 million. The administrator dismissed all the employees on 7 August 2007, because there was no money to pay them. A week later, the company’s assets were acquired by two companies connected to the previous owner.

The tribunal made a finding of fact that the administrator had not engaged in collusion and had concluded in good faith that he had no choice but to dismiss the employees because there was no money to pay them. What mattered was the administrator’s state of mind as decision-maker, not that of the director, or any other party. The Court of Appeal concluded that the dismissals before the transfer were for an “economic reason”, namely the lack of any funds to pay their wages. The employees’ claim failed.

Can TUPE still be triggered even if there is no transferee in sight at the time of dismissals?

Each case depends on its own facts, but in CAB Automotive Limited v Blake and Others (UKEAT0298/07CEA), a case that arose out of the administration of MG Rover, the EAT confirmed that a transfer can be the reason or principal reason for a dismissal, even where no potential purchaser is on the scene and, for example, an administrator is “slimming down” a business with a view to sale. For example, TUPE can apply where a number of transferees are interested but at the time of the dismissal, matters are at a very early stage and no transferee has been identified.

In CAB Automotive, the administrator instructed managers to select employees for redundancy within an hour and a half and 72 employees were selected. They brought claims alleging unfair dismissal by either the transferor or the transferee.

The EAT concluded that TUPE could apply to transfer the employment even though, at the time of the dismissals, no transferee had been identified. The case was remitted back to the tribunal for a re-hearing.