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Randell York
8 years ago
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1 This publication is written as a general guide only. It is not intended to contain definitive legal

2 The protection of employment rights in scenarios where businesses are being acquired (asset purchases) is governed in the UK by The Transfer of Undertakings (Protection of Employment) Regulations 2006 ( TUPE ). In situations of solvent business sales, the position is clear employees employment rights are protected by TUPE and the acquiring business (the transferee) effectively steps into the shoes of the previous employer and inherits all of the obligations and liabilities of that transferring workforce. If the transferee thereafter dismisses an employee in connection with that transfer then the employee has an automatic claim for unfair dismissal. However, in situations where a company is in financial difficulty, the position may become clouded, as we shall see below. Where a selling business (transferor) is subject to relevant insolvency proceedings at the time of the relevant transfer, TUPE relaxes certain provisions that would usually protect employees. TUPE Regulation 8(6) defines relevant insolvency proceedings as meaning insolvency proceedings that have been opened in relation to the transferor, not with a view to the liquidation of the assets of the transferor and which are under the supervision of an insolvency practitioner. Transferees in this position have less restrictions on changing employees terms of employment. In addition, the transferee does not automatically inherit employee-related debts, listed in Parts XI and XII Employment Rights Act 1996, such as holiday pay, arrears of pay and statutory redundancy payments. These are subject to maximum limits paid out of the National Insurance Fund (NIF) by the Redundancy Payments Office (RPO). Sums in excess of such limits become the liability of the transferee. With regard to varying terms of employment (Permitted Variations) for the purpose of safeguarding employment by saving a business, the transferor, the insolvency practitioner or the transferee may agree certain changes to an employee s terms of employment Herrington & Carmichael Page 2 of 5 Feb2011

In situations of solvent business sales, the position is clear employees employment rights are protected by TUPE and the acquiring business (the transferee) effectively steps into the shoes of the

3 In situations of bankruptcy (for an individual employer) or compulsory liquidation or creditors voluntary liquidation (for corporate employer) TUPE Regulation 8(7) has the effect of disapplying Regulations (4) (re automatic transfer principal) and (7) (re automatic unfair dismissal). Therefore employees may not automatically transfer to the transferee, the employees may become redundant and the RPO will be liable for statutory payments referred to above. TUPE Regulation 9 sets out the position concerning the variation of an employee s employment contract where the transferor is subject to relevant insolvency proceedings. The position in each type of insolvency proceeding/business sale is set out below: Members Voluntary Liquidation (MVL) An MVL is a solvent winding up of a company and such is not deemed to be an insolvency proceeding under TUPE. Therefore TUPE Regulations 4 and 7 continue to apply to protect an employee and TUPE Regulation 8 is not applicable in this instance. Creditors Voluntary Liquidation (CVL) In scenarios where a liquidator sells a business operated by a company in a CVL, TUPE Regulations 4 and 7 will not apply, pursuant to Regulation 8(7), as these are liquidation proceedings under the supervision of an insolvency practitioner. Therefore, a transfer of a business by a liquidator in a CVL may, in the absence of an agreement substituting the transferee as their employer, result in the termination of employees employment contracts. Such employees whose contracts have been terminated will be entitled to NIF payments i.e. arrears of wages and redundancy payments as referred to above Herrington & Carmichael Page 3 of 5 Feb2011

Therefore employees may not automatically transfer to the transferee, the employees may become redundant and the RPO will be liable for statutory payments referred to above.

4 Bankruptcy As with a CVL, this is a clear instance where employees contracts of employment do not pass to the purchaser under TUPE. Regulations 4 and 7 of TUPE will not apply, pursuant to Regulation 8(7) and any sums owed to employees, subject to limits referred to above, will be paid by the Secretary of State. Voluntary Arrangements Voluntary Arrangements are subject to TUPE Regulations 4 and 7 on the grounds that the insolvency practitioner is only supervising the arrangement which the debtor has control over. Administration A business in Administration does not fall within TUPE Regulation 8(7) and thus Regulations 4 and 7 will apply to protect an employee. This is because the main purpose of Administration is to rescue the business as a going concern rather than realising all of the assets and sharing such proceeds amongst the creditors of the debtor business. However, in the event of transferring employees, Regulations 8(2) and 6 will apply to Administration scenarios and liabilities owed to employees will be paid out by the NIF. Compulsory Liquidation In scenarios where an employer company is wound up by the court on the grounds that it is unable to pay its debts, TUPE Regulations 4 and 7 will not apply. On the granting of a winding-up order, an employee s employment contract is deemed to have been terminated and NIF insolvency and redundancy payments shall be due to such employees Herrington & Carmichael Page 4 of 5 Feb2011

Voluntary Arrangements Voluntary Arrangements are subject to TUPE Regulations 4 and 7 on the grounds that the insolvency practitioner is only supervising the arrangement which the debtor has control

5 Administration Receivership TUPE Regulation 8(7) does not apply in this scenario and as such TUPE Regulations 4 and 7 will apply on the grounds that it is not analogous to bankruptcy proceedings. In the event there is a relevant transfer TUPE Regulations 8(2) to (6) will apply so that liabilities due to employees at the date of transfer are not inherited by the transferee and would be paid out of the NIF. Pre-Pack Administrations Following the recent Employment Appeal Decision in OTG Ltd v Barke on 16/02/11 it was viewed that administration proceedings pursuant to Schedule B1 of the Insolvency Act pre-packaged asset sales (or Pre-Packs) - are not capable of constituting bankruptcy or analogous insolvency proceedings which have been instituted with a view to the liquidation of the assets of the transferor, within the meaning of Regulation 8(7) of TUPE and Article. 5.2 of the consolidated Acquired Rights Directive, with the consequence that on a sale by an administrator of the business, Regulations 4 & 7 of TUPE will apply and the previous authority of Oakland v Wellswood (Yorkshire) Ltd (which provided that an employee was not protected under TUPE) was not followed. For further enquiries please contact Jonathan Craig jonathan.craig@herringtoncarmichael.com, who advises on corporate recovery matters at Herrington & Carmichael LLP. Watchmoor Park Camberley Surrey GU15 3YL 27 Broad Street Wokingham Berks RG40 1AL tel: tel: Herrington & Carmichael Page 5 of 5 Feb2011

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

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