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@martineau-uk.com or Richard Wrigley on
T: 0870 763 1586 E: richard.wrigley@martineau-uk.com
