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Insolvency and TUPE

recent EAT decision regarding insolvency and the application of reg. 8(7) of Transfer of Undertakings
(Protection of Employment) Regulations 2006 (“TUPE”) is worth taking particular note of.

TUPE, “protects employees’ terms and conditions of employment when a business is transferred from one
owner to another” (ACAS). Amongst other things, under reg. 4, “a […] transfer shall not operate so as to
terminate the contract of employment of any person employed by the transferor and assigned to the
organised grouping of resources or employees that is subject to the […] transfer” and “all the transferor’s
rights, powers, duties and liabilities under or in connection with any such contract shall be transferred to the
transferee.” And, under reg. 7, “Where either before or after a relevant transfer, any employee of the
transferor or transferee is dismissed, that employee shall be treated […] as unfairly dismissed if the sole or
principal reason for his dismissal is (a) the transfer itself; or (b) a reason connected with the transfer that is
not an economic, technical or organisational reason entailing changes in the workforce.”

However, reg. 8(7), which deals with ‘insolvency’, provides an exception. It states, amongst other things,
“Regulations 4 and 7 do not apply to any relevant transfer where the transferor is the subject of bankruptcy
proceedings or any analogous insolvency proceedings which have been instituted with a view to the
liquidation of the assets of the transferor and are under the supervision of an insolvency practitioner.” The
question is does reg. 8(7) apply to liquidations, administrations or both? The answer could be the
difference between a transferee (NewCo) being liable for the employees of the transferor (OldCo) or not. It
is not a problem if NewCo intended to and does take on OldCo’s employees. The problem arises when
NewCo did not intend to and does not (in fact) take on the employees. Then we are faced with a potential
unfair dismissal situation and the inevitable costs that flow from any ensuing litigation and potential
compensation..

In order to deal with the questions posed we first need to identify the purpose of a ‘liquidation’ and an
‘administration’. The object of a liquidation is to dispose of all the assets of the undertaking, whereas the
object of an administration is to (a) rescue the company as a going concern, or (b) achieve a better result
for the company's creditors as a whole than would be likely if the company were wound up (without first
being in administration), or (c) realise property in order to make a distribution to one or more secured or
preferential creditors. From this it is clear that administration is not generally, initially, “…instituted with a
view to the liquidation of the assets of the transferor…” But, what happens in the case where administration
is ‘instituted’ for OldCo and, for one reason or another, its assets are liquidated instead? Does the
exception in reg. 8(7) apply or not? In other words, it started as an act of administration but manifested itself
into an act of liquidation. Would NewCo still be liable for OldCo’s employees in such circumstances?

In the case of Oakland v Wellswood (Yorkshire) Ltd. (2009) such a situation arose where, “it soon became
apparent [from the administrators’ report] that due to [OldCo’s] weak financial position it was not possible
for the administrators to continue trading the business. Instead, immediately following their appointment
[…] they took immediate steps to sell the assets to Newco, who took on the lease of Oldco’s premises
whilst retaining the book debts in Oldco.” In this case the learned judge held that the exception applied. This
meant that NewCo was held not to be liable for the liabilities of OldCo. In consequence, a ‘factual approach’
was taken in that the administrator ‘subsequently’ in fact acted as a liquidator. However, this decision sat
uncomfortably with some who argued that on an ‘absolute approach’ the proceedings had not been
‘instituted’ with a view to the liquidation of the assets of OldCo but with a view to, “rescuing the company as
a going concern.” The point was revisited in the recent cases of OTG Ltd v (1) Barke (2) Luke (3) BERR &
Others (2011).

OTG & Others consisted of five appeals that were listed together because they raised the same issue. “The
primary issue in these appeals is whether administration proceedings […] constitute, or may constitute,
“insolvency proceedings … instituted with a view to the liquidation of the assets of the transferor” within the
meaning of reg. 8(7) (for short, “liquidation proceedings”), with the result that reg. 4 is disapplied.” In this
case it was held that, “Formally, […] it cannot be said at the moment of the institution of any administration
proceedings that their object is to liquidate the assets” and, therefore, the decision in Oakland was not be
followed.

The above cases are good examples of one’s having to understand what it is they are inheriting when part
of a buy-out/-in or otherwise of another company (OldCo) where insolvency proceedings have been
instituted. Amongst other things, one of the key questions to ask is whether such were instituted with a view
to the liquidation of the assets of the transferor/OldCo or not? If the former, regs 4 and 7 do not apply. If, on
the other hand, the latter i.e. such were instituted with a view ‘not’ to the liquidation of the assets then
NewCo may not only be liable but may, inadvertently, end up facing claims of unfair dismissal by OldCo’s
employees.

-- Ryan Clement is a practising barrister at Conference Chambers: www.conferencechambers.com. He
specialises primarily in general commercial, construction and employment law. He accepts instructions
from both solicitors and the general public through the Bar Public Access Scheme. He provides training to
companies on all aspects of employment and some commercial law. To instruct Ryan or obtain further
information on his full areas of work please contact Conference Chambers.

Conference Chambers