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TUPE transfers and insolvency: Employment Appeal Tribunal rejects Government's guidance on status of administrations

17 December 2008

A recent case before the Employment Appeal Tribunal (EAT) has left things 'unhelpfully unclear' for buyers from administrators.

Under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE), where there is a "relevant transfer", employees' contracts of employment, and any rights and liabilities in connection with their employment, transfer automatically to the transferee.

However, in certain insolvency situations the automatic transfer principle will not apply.

Where the transferor is subject to ‘bankruptcy proceedings or any analogous insolvency proceedings which have been instituted with a view to the liquidation' of its assets, employees will not automatically transfer to the transferee, and any transfer-related dismissals are not automatically unfair (regulation 8(7)).

Where the transferor is subject to proceedings which have not been opened with a view to the liquidation of the assets of the transferor the employees will transfer automatically to the transferee in the normal way (regulation 8(6)). However, in these circumstances there is greater scope to vary terms and conditions and certain pre-transfer debts (although not all of them) are taken over by the Secretary of State.

The purpose of these relaxations of the normal TUPE principles is to promote the "rescue culture".

In its official guidance, the Department for Business, Enterprise and Regulatory Reform (BERR) states that administrations do not fall within regulation 8(7) because they are not opened with a view to liquidating assets and are not analogous to bankruptcy proceedings.

However, in the recent case of Oakland v Wellswood (Yorkshire) Limited, the EAT decided that, on the facts of the particular case, rescue of the business had never been considered a realistic outcome, with the administrators' efforts always focused on the secondary aim of achieving a better result for creditors. Therefore, regulation 8(7) applied, and the claimant's employment did not transfer to the buyer of the assets.

The EAT held that because Parliament had declined to spell out in TUPE which particular insolvency proceedings should be considered as being ‘with a view to liquidation', this was a question for employment tribunals to decide.

In the current climate, it is vitally important for advisers and their clients to have certainty about the meaning of the law.

However, this case suggests that the question of how TUPE will operate - or not operate - in an insolvency situation will be one of fact for a tribunal to decide in each case, having regard to the position envisaged by the parties at the time the insolvency proceedings were instituted.

This means it will be very difficult to appeal such decisions, and leaves the position for insolvency practitioners, potential buyers and employees unhelpfully unclear.

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