This article was first published in Financiers Worldwide on 1 May 2012.
The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) provide employees with a number of key protections when the organisation in which they work is transferred from one owner (the transferor) to another (the transferee). First, TUPE provides for the automatic transfer to the transferee of the employees’ employment on the same terms and conditions as before (Regulation 4(1) of TUPE) and variations to the employees’ contracts are generally void, even if the employees agree to them (Regulation 4(4) of TUPE). Secondly, the transferee will inherit most employment-related liabilities (Regulation 4(2) of TUPE). Thirdly, any dismissal that is connected with the transfer is automatically unfair, unless it is for an “economic, technical or organisational change entailing changes in the workforce” (Regulation 7 of TUPE). Fourthly, employees have the right to be informed about the transfer and consulted about any changes envisaged by the transferee post-transfer (Regulation 13 of TUPE).
However, to assist the rescue of failing businesses, specific insolvency provisions were introduced into TUPE to ease the burden on prospective purchasers of distressed companies. Regulation 8(6) provides that where the transferor is the subject of “relevant insolvency proceedings”, the effect of Regulations 4 and 7 will be modified: some of the transferor’s debts will become the responsibility of the Secretary of State rather than transferring to the transferee, and the transferee will have more freedom to vary the employees’ terms of employment.
Regulation 8(7) of TUPE goes even further. It provides that 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”, Regulations 4 and 7 of TUPE will be expressly excluded. Therefore, the employees will not automatically transfer to the transferee, and transfer-related dismissals will not be automatically unfair. It follows that, as the employees’ employment will not transfer, there is no need to inform and consult with them in accordance with Regulation 13 of TUPE.
Regulations 8(6) and 8(7) do not expressly refer to one of the most common forms of insolvency – administration – and so questions arose as to which of the two Regulations governed businesses in administration. The BIS guidance indicates that administrations do fall within the “relevant insolvency proceedings” definition and, as such, within the ambit of Regulation 8(6), and practitioners have tended to proceed on this basis. However, a line of argument developed which advocated the view that, in circumstances where it was immediately apparent to an administrator that a rescue was not feasible, or in pre-pack situations where there was no prospect of rescuing the company as a going concern, the exemption in Regulation 8(7) would apply.
Judicial guidance on the issue was, for a time, contradictory. In the 2009 case of Oakland v Wellswood (Yorkshire) Ltd UK, the Employment Appeal Tribunal (EAT) held that a pre-pack administration might fall within the Regulation 8(7) exemption where an analysis of pre-appointment evidence indicated that the administration had been instituted with a view to the liquidation of the transferor’s assets. Although proponents of the “rescue culture” welcomed this decision, since it appeared to bring at least some businesses in administration within the ambit of the TUPE exemption, many legal commentators were concerned by the ease with which the protections in TUPE might be avoided, depending on how an administrator’s appointment was presented. Indeed, in a subsequent 2011 case, OTG Ltd v Barke & Others, a different division of the EAT rejected this facts-based approach in favour of a more absolute approach, holding that administrations can never fall within Regulation 8(7) of TUPE.
In the recent case of Key2Law (Surrey) LLP v De’Antiquis (Key2), the Court of Appeal (CA) has brought welcome certainty to this issue. Ms De’Antiquis was dismissed by her employer, Drummonds Kirkwood LLP (DK), a law firm, four days before it went into administration. A planned pre-pack sale fell through and the administrators subsequently entered into a management contract with Key2Law pursuant to which Key2Law would convert and collect DK’s unbilled work in progress. The Employment Tribunal concluded that Oakland did not apply since the administration had not been instituted with a view to the liquidation of DK’s assets. The EAT disagreed with the ET’s conclusion but in any event went a step further by stating that its previous decision in Oakland had been wrongly decided since, in its view, administration could never fall within the 8(7) exemption.
The CA agreed with the EAT and firmly rejected the idea that Regulation 8(7) could apply to administrations. Its view was that a facts-based analysis of the purpose of an administration was wrong in principle. Examining the wording of paragraphs 3 and 4 of Schedule B1 to the Insolvency Act 1986, the CA’s view was that the primary purpose of an administration is always to rescue the company as a going concern. On this basis, it cannot ever be said that an administrator’s appointment is made “with a view” to the liquidation of the transferor’s assets, even if liquidation is the ultimate result.
It is now clear that purchasers of an undertaking in administration should expect to inherit all employees of the business, although they will do so within the more permissive framework of Regulation 8(6). This will be regarded by many as positive news for employees. However, potential purchasers may conversely be deterred from rescuing distressed businesses by the cost of employing inherited employees, the cost of the employment-related liabilities that will transfer to them, and the potential need to undergo a redundancy process and make redundancy payments once the relevant business has been acquired. The extent to which the CA’s ruling will impact negatively on the rescue culture and, in turn on the preservation of at least some threatened jobs, remains to be seen. Either way, creditors of distressed businesses are unlikely to benefit, since the now unavoidable cost of taking on or dismissing employees in administrations will probably be reflected in a reduced purchase price.