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What's New? > Employees have rights even when company is insolvent

Employees have rights even when company is insolvent

Published: 3rd March 2011

Companies entering so-called pre-pack administration arrangements will have to deal with TUPE rights for employees.

That's the outcome of a recent Employment Appeals Tribunal (EAT), which has reversed an earlier ruling to confirm that employee rights should be protected in the sale of an insolvent business in administration, including any businesses sold in a so-called 'pre-pack'.

This reverses an earlier EAT decision which had held that a pre-pack administration - where the sale of the insolvent business is planned before entering administration - could be similar to a liquidation and therefore employee protection provisions of TUPE did not apply.

TUPE - which stands for Transfer of Undertakings (Protection of Employment) Regulations - was introduced in 1981 and updated in 2006.   It is designed to protect employees where business changes hands, by moving the employees and any liabilities associated with them from the old employer to the new employer, to create a situation where their continuity of service and any other rights are all preserved.

Over the years, the regulations have proved complex to interpret and many companies underestimate the employment liabilities that can arise under TUPE.  Some of the most common circumstances being when they buy or sell part of a business as a going concern, or if they outsource or otherwise change the supply route; or where they grant or take over the lease of a premises and operate the same business. 

The changes in 2006 were intended to make it easier to rescue insolvent businesses, including a distinction between two types of insolvency situation, "terminal" proceedings and "non-terminal" proceedings.

Terminal proceedings are when a business cannot be rescued and has to be liquidated. In those circumstances, the key principles of TUPE do not apply;  such as employees being automatically transferred to the buyer and the buyer taking on all employee-related liabilities.

In non-terminal proceedings the administrator is looking to sell the insolvent business as a going concern and the key principles of TUPE apply with minor relaxations, for example there is greater scope for the buyer to alter the employees' terms of employment.

Initially, it was taken for granted that pre-pack administrations would be classed as non-terminal proceedings and so TUPE would apply, because their intention is to rescue the business rather than to sell off the assets piecemeal.   This assumption was challenged in the 2008 case of Oakland v Wellswood, where the tribunal ruled that in certain circumstances  pre-packs could be classed 'terminal', depending on the administrator's intentions.   

But now, the latest EAT decision of Olds v Late Editions reverses that decision, as the Tribunal decided that the Insolvency Act requires the administrator to consider whether a business can be sold as a going concern and so it cannot be said that, at the time the administration commences, the intention was to liquidate the assets.

Said Chris Dewey, a senior partner with  Ward Gethin solicitors: "The earlier Oakland decision caused practical difficulties, because whether or not TUPE applied depended on what was in the mind of the administrator at the time of his appointment.  The Olds decision means that any sale of a business by way of administration will be subject to TUPE, which will not make it easier for administrators to find buyers, but at least we have certainty. 

"One of the most important things to remember is that even when a business is liquidated, the provisions of TUPE requiring consultation with employees will apply, even though there is no automatic transfer of employees to the buyer."

For further information on the above or any other related matter, please contact a member of the Company Commercial team on 01553 660033.

This article aims to supply general information, but it is not intended to constitute advice. Every effort is made to ensure that the law referred to is correct at the date of publication and to avoid any statement which may mislead. However, no duty of care is assumed to any person and no liability is accepted for any omission or inaccuracy. Always seek our specific advice.