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Insolvency and TUPE – EAT Provides Clarification

08 July 2011

Whilst the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) operate to protect the employment law rights of employees when there is a relevant transfer of a business or part of a business, Regulation 8(7) provides that where insolvency proceedings are analogous to bankruptcy proceedings and have been instituted with a view to liquidation of the assets, the transfer provisions of TUPE do not apply. In such circumstances, employees do not automatically transfer to the new owner and any dismissals are not automatically unfair.

In an important case (OTG Ltd. v Barke and Others), the Employment Appeal Tribunal (EAT) has provided clarification on the application of Regulation 8(7) with regard to administration proceedings under Schedule B1 of the Insolvency Act 1986. The EAT heard five appeals, four of which arose from ‘pre-pack’ sales by administrators, which raised the same primary issue, which was whether or not administration proceedings are capable of constituting bankruptcy proceedings instituted with a view to the liquidation of the assets of the transferor.

In reaching its decision, the EAT gave full consideration to the EC Acquired Rights Directive, which TUPE gives effect to, and relevant case law of the European Court of Justice (ECJ). From this it was clear that the ECJ made a deliberate distinction between proceedings aimed at the disposal of the undertaking and/or its assets and proceedings aimed at its continuation in the same hands.

The EAT declined to follow the decision in Oakland v Wellswood (Yorkshire) Ltd., in which a different EAT had taken a fact-based approach to the issue and held that the transfer provisions of TUPE did not apply in a case where the administration had clearly been instituted with a view to the eventual liquidation of the old company’s assets. The EAT ruled that this approach was incorrect. In such cases, an absolute approach is required. It is clear from the provisions of the Insolvency Act that the primary purpose of an administration under schedule B1 is to give the administrator the opportunity of rescuing the company as a going concern. This is his first duty, even though that is not the only use that can be made of the administration proceedings – as evidenced by its use for pre-pack sales. It cannot formally be said, therefore, that at the moment of the institution of any proceedings, the administrator’s object is to liquidate the assets. Furthermore, the primary purpose of the Directive is to protect employees in the event of a transfer and, in particular, to ensure their rights are safeguarded. On a fact-based approach, it would often be difficult for those affected to know where they stand. Such an approach also increases the likelihood of disputes arising over who is liable for the transferor’s obligations and such disputes generate cost, delay and uncertainty.

In the EAT’s view, therefore, TUPE will always apply to the sale of a business by an administrator and the rights of transferring employees are thereby protected under the Regulations.

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