A BASIC GUIDE TO INSOLVENCY PROCEEDINGS. 1. The Transfer of Undertakings (Protection of Employment) Regulations

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1 A BASIC GUIDE TO INSOLVENCY PROCEEDINGS 1. The Transfer of Undertakings (Protection of Employment) Regulations ( TUPE ) are notoriously difficult to interpret. This is partly because they refer to other complex pieces of legislation. One must have some understanding of these other provisions in order to make sense of TUPE. The principal legislative provisions that govern insolvency proceedings in the UK are contained in the Insolvency Act 1986 ( IA ). 2. Below is a snapshot of the types of insolvency that an employment lawyer needs to understand to advise on TUPE cases in an insolvency context. Depending on the type of insolvency, there will be different TUPE implications. INSOLVENCY IN GENERAL 1

2 3. A company is insolvent when it is unable to meet its financial liabilities as they arise. When this happens, an insolvency practitioner 1 is appointed either by the court, by the company directors or its creditors to oversee the process whereby the maximum repayment of the company s debts is achieved. 4. The repayment of a company s debts is prioritised as follows: (i) The costs of the insolvency procedure are paid first (including the remuneration of the insolvency practitioner, his expenses and all court fees, if any); (ii) Then the debts to the secured creditors; (iii) Finally, the remainder (if any) is shared out between the unsecured creditors. 5. The insolvency practitioner s duty is to the creditors of the company. This is a fundamental rule in all insolvency proceedings. The general view is that the maximum repayment of a company s creditors is achieved by keeping the company afloat i.e. as a going concern. However, when this is not possible, terminal insolvency proceedings are instituted i.e. the company is liquidated. 1 Ss IA (Part XIII). In summary, an individual can act as an insolvency practitioner (i.e. as liquidator, provisional liquidator, administrator etc) if authorised by a recognised professional body or a competent authority (eg. Insolvency Practitioners Association, SRA, Association of Certified Chartered Accountants, the Secretary of State). 2

3 TERMINAL INSOLVENCY: LIQUIDATION 6. Liquidation, or winding-up, is a process whereby a company s assets are realised and the proceeds used to pay the company s creditors and shareholders by a liquidator. In doing so, the liquidator takes over the powers of the company directors and the management of the business. He may continue trading only so far as may be necessary for the company s beneficial winding-up There are three types of liquidation: compulsory liquidation, creditors voluntary liquidation and members voluntary liquidation. COMPULSORY LIQUIDATION 8. This type of liquidation is commenced by a court petition presented by the company itself, its directors or its creditors on the ground that the company cannot pay its debts 3. The Official Receiver will usually be the appointed liquidator if the court makes a winding-up order (unless the 2 Paragraph 5, Schedule 4 of IA 3 Ss IA 3

4 compulsory liquidation has followed a company voluntary arrangement or an administration). 9. The Official Receiver is a civil servant, who will very rarely continue the business. The court s permission would be required before doing so, in any event. As the liquidator is an officer of the court, his appointment will have the effect of terminating any existing employment contracts. 10. Under Part XII of Employment Rights Act 1996 ( ERA ), when their contracts of employment are terminated, the employees become eligible to receive specific protected payments (such as wages of up to eight weeks pay, pay in lieu of untaken holiday entitlement not exceeding six weeks, notice pay under s.86 of ERA) as well as statutory redundancy payments from the National Insurance Fund 4. CREDITORS VOLUNTARY LIQUIDATION 11. This is the most common form of winding up and, similar to compulsory liquidation, its main purpose is the realisation of assets to meet the company s financial liabilities. 4 Ss ERA (note a week s pay is capped at 430 since February 1, 2012 as per SI 2011/3006) 4

5 12. The creditors will convene a meeting and appoint a liquidator. They may also appoint a liquidation committee. The role of the committee is to ensure that the liquidator complies with the duty to act in the interests of the creditors. 13. The liquidator is an agent of the company, as opposed to an officer of the court, so his appointment does not automatically terminate any existing contracts of employment. Dismissed employees will be eligible to statutory payments under Part XII of ERA MEMBERS VOLUNTARY LIQUIDATION 14. Also known as solvent liquidation, this type of winding-up arises for reasons other than insolvency. It is a way of bringing a company to a formal end. It is not a true insolvency proceeding. 15. The procedure is commenced by a special resolution of the members of the company (its shareholders and its contributors ). This type of liquidation is appropriate when the company is genuinely able to meet its liabilities with a prospect of a surplus left over for distribution amongst its members. 5

6 16. The directors must be in a position to make a statutory declaration to the effect that the company is solvent and will be able to pay its debts in full in the next twelve months. An insolvency liquidator will be appointed to realise the company s assets and distribute them among the shareholders. NON-TERMINAL INSOLVENCY 17. Note that the provisions of Part XII of ERA will apply in relation to employees whose employment contracts are terminated whilst the employing company is in administrative receivership, administration or under a voluntary arrangement 5. RECEIVERSHIP AND ADMINSTRATIVE RECEIVERSHIP 18. The purpose of both receivership and administrative receivership is to protect the whole or part of the business and assets of a company from the actions of creditors while seeking to realise those assets for the benefit of secured and other creditors. 19. A receiver can be appointed by the court, by the holder of a fixed charge attaching to specific property under the Law of Property Act 1925 ( LPA ) (also known as a fixed charge receiver or a LPA receiver ) or by the 5 s. 183 of ERA 6

7 holder of a floating charge secured over the whole or the majority of a company s assets under the terms of a debenture or other loan agreement ( administrative receiver ). RECEIVERSHIPS UNDER LPA 20. The holder of the fixed charge (usually a bank) may appoint a receiver to recover its property when a company defaults on the terms of the charge, such as a mortgage over a fixed property. A fixed charge receivership is, technically, a method of enforcing security, not an insolvency proceeding. The receiver has a contractual relationship with the company that is dictated by the terms of the charge. 21. The appointment of an LPA receiver does not automatically terminate existing contracts of employment. If receivers permit contracts of employment to continue for 14 days or more, they will be deemed to have adopted 6 the contracts and thereby assume personal liability for sums incurred (such as wages) in respect of those contracts from thereon. 6 S. 37 IA 7

8 ADMINISTRATIVE RECEIVERSHIPS 22. This type of receivership has largely been replaced by administration following the coming into force of the Enterprise Act The holder of a floating charge over the whole, or substantially the whole, of a company s assets under the terms of a debenture, can no longer appoint a receiver to recover any sums in default. Instead, the holder of the charge has the right to seek the appointment of an administrator. 23. The power to appoint administrative receivers continues to occur in respect of public private partnerships, urban regeneration projects, capital market arrangements, utilities, financial markets, registered social landlords and protected railway companies 7. COMPANY ADMINISTRATION 24. Administration orders are appropriate when a company is insolvent but has a real chance of being rescued. An administrator, when taking over the management of a company s business, must pursue the objectives of administration in a strict priority order dictated by legislation. 7 Ss. 72A-72GA IA 8

9 25. The primary objective is to rescue the company as a going concern if that is in the best interest of the creditors. Failing that, the second objective is to achieve a better return than would be possible if the company was simply wound up, for example, by seeking a purchaser of any viable part of the business or its principal assets. 26. A moratorium applies during the currency of an administration order, which prevents the creditors from taking steps to wind up the company or enforce any security they may hold over it. In addition, legal proceedings cannot be commenced or continued whilst an administration order is in force, without leave of the court or the administrator. 27. Although the formal status of an administrator is that of an officer of the court, regardless of whether it was the court who made the appointment, in exercising his functions, an administrator acts as an agent of the company 8. Therefore, his appointment does not automatically terminate the contracts of employment. 28. An administrator is deemed to adopt the contracts of employment after a 14-day grace period from the date of his appointment. Once the contracts are adopted, liability in respect of wages and salary arising under a contract of employment is chargeable on and payable out of the property 8 Para 69, Schedule B1 of IA 9

10 of which the administrator has custody and control in priority to the administrator s own remuneration and expenses 9. VOLUNTARY ARRANGEMENTS 29. A company in financial difficulties can enter into an arrangement with its creditors, which may allow it to continue as a going concern. The arrangement may involve reduced or delayed repayments and will normally last from two to four years. 30. The directors of the company will usually appoint an insolvency practitioner whose role is to consider any proposals put forward to the creditors, and if these are approved, to oversee the voluntary arrangement. 31. The contracts of employment of the company s employees are not normally affected by the implementation of a voluntary arrangement. The company simply continues to trade subject to the arrangement. 9 Paragraphs 99(4) and (5) of Schedule B1 IA 10

11 PERSONAL BANKRUPTCY 32. This applies only to insolvent individuals including sole traders. A bankruptcy order is made by the court following a petition by a creditor or the individual himself on the grounds that he cannot pay his debts. 33. When an order is made, a trustee in bankruptcy takes control over the bankrupt s assets. The trustee s function is to realise the assets and distribute the proceeds amongst the creditors. 34. The appointment of a trustee in bankruptcy does not automatically terminate the contracts of employment of anyone personally employed by the bankrupt. The provisions of Part XII of ERA also apply in relation to employees of an individual who (inter alia) has been adjudged bankrupt or who has made an arrangement with his creditors 10. INSOLVENCY AND TUPE 35. Not all the above are relevant types of insolvency for the purposes of TUPE. It is generally accepted, for example, that TUPE do not apply to receiverships. The terminal types, with the exception of the members voluntary liquidation, come within the ambit of Regulation 8(7). The non- 10 S.183 of ERA 11

12 terminal types of insolvency are likely to attract the application of Regulation 8(2)-(6) when a transfer occurs from an insolvent transferor to a transferee. NICOLETA ALISTARI 4 th March

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