The “rescue culture” and employment law

The statutory protection afforded employees by the Transfer of Undertaking (Protection of Employment) Regulations 2006 (TUPE) is the most recent enactment of successive EU Acquired Rights Directives. Under these Regulations, in circumstances where a business or undertaking is transferred to a new owner, an employee’s employment is protected and is not automatically terminated.

Regulation 4 provides that the employment contracts of the transferor company’s employees will not be terminated upon a transfer. Those contracts will still have effect after the transfer to the transferee undertaking “as if originally made between the person so employed and the transferee”. Accordingly any employee moving to a new company will be transferred under his existing terms and conditions.

TUPE and insolvency situations
Nonetheless, where the transferor company has become insolvent, the position is somewhat different. Regulation 8(7) of TUPE provides that Regulation 4 does;

“not apply to any relevant transfer 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 and are under the supervision of an insolvency practitioner”

As such, employees (and their contingent liabilities) will not pass to the transferee company and any dismissal will not be automatically unfair. The reasoning behind this provision is to facilitate and promote a “rescue culture” for failing businesses. Evidently, this will be of assistance to businesses facing financial difficulties. Prospective purchasers will be less likely put off by the protection of TUPE which would be otherwise triggered.

The application of Regulation 8(7) was recently examined by the Employment Appeal Tribunal in Oakland v Wellswood (Yorkshire) Limited [2009], a case which involved a pre-pack administration.

Facts of the case
Mr Oakland, the claimant, had been a co-director and 50% shareholder of Wellswood, a firm supplying produce to the catering industry. The company fell into difficulties in 2006 and appointed administrators. The administrators transferred the assets of Wellswood Ltd (OldCo) to Wellswood (Yorkshire) Ltd (NewCo) which had been set up by one of OldCo’s creditors for that purpose. The book debts of the OldCo remained. Some five of the seven employees of OldCo were transferred to the new undertaking, Mr Oakland being one of them.

Upon the claimant’s subsequent termination of employment he brought a claim for unfair dismissal. However, the respondent NewCo argued that Mr Oakland did not have the requisite one year’s continuous service to be able to substantiate such a claim. They argued that Regulation 4 was not applicable in this case as by Regulation 8(7) a relevant transfer had not taken place. The tribunal agreed.

Administration or liquidation? That is the question…
Mr Oakland appealed to the Employment Appeal Tribunal, arguing that the appointment of joint administrators did not constitute the institution of insolvency proceedings nor liquidation. This would only arise where there was a creditor’s voluntary liquidation (or a compulsory winding-up by the court). It was further argued by the claimant that the business continued to trade as before under the guise of NewCo.

The EAT considered the administrators’ Statement of Proposals in depth. It indicated that the administrators had concluded that it was impossible to rescue the company as a going concern. They had therefore applied themselves to the secondary purpose at para 3(1)(b) of Schedule B1 Insolvency Act 1986, namely:

“achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first being in administration)”

Further consideration by the administrators indicated that ongoing trading of OldCo in its insolvent position would have led to increased losses further prejudicing the creditors’ position and causing a loss of customers. Accordingly the administrators decided that a pre-pack sale to NewCo was in the best interests of the creditors and a transfer of the assets was concluded on the same day as the appointment of the administrators.

The administrators had also concluded in their Proposals that OldCo would imminently proceed from administration into a creditor’s voluntary liquidation. Due to this finding, the EAT decided that Regulation 8(7) did indeed apply. Mr Oakland did not therefore have the requisite continuity of employment necessary to substantiate his unfair dismissal claim, his employment not having been transferred to NewCo.

Judge Peter Clark in the EAT stated that difficulties had arisen in the instant case as TUPE did not specify which insolvency proceedings are those instituted “with a view to the liquidation of the assets of the transferor”. However, it was his view that this was a question of fact for a tribunal to decide. Whilst an administration would normally fall within the remit of Regulation 4, in this particular case the facts indicated otherwise. OldCo’s precarious financial position had been promptly ascertained by the administrators upon their appointment. The assets were quickly transferred to NewCo in the best interests of the creditors and the appointment of the administrators had been with a view to a CVL following thereafter.

How should administrators view this decision?
The EAT has clearly indicated that every case will be fact dependent and the exception provided by Regulation 8(7) may or may not be applicable to a transfer.

In Oakland, Regulation 8(7) applied as it was evident during the administration that the company could not be sold as a going concern and there would be an eventual liquidation. Clearly such a situation is an advantageous one for a transferee as obligations under TUPE restricting post-transfer changes to employees’ terms and conditions will be avoided. Furthermore such a transferee will be able to choose those employees whom he wishes to retain in the new undertaking.

Nonetheless, administrators should not seize this as an authority to use to their advantage. Indeed, the timely “pre-pack” execution of the transfer in Oakland which took place immediately after appointment of the administrators indicated that OldCo was not traded as a going concern. The sale which took place was accordingly “with a view to the liquidation of the assets”.

It should be noted however that this decision also conversely suggests that the longer a company is traded under any administration then it is much less likely that a Tribunal would make a finding that Regulation 8(7) applies. Therefore, any purchase of a business as an ongoing concern where previously it has been traded by the administrators for any length of time is more likely to afford employees the protection of TUPE.

To obtain the best outcome for a company’s creditors, it still remains the objective of many administrations to wind up a company. However, whilst Regulation 8(7) is intended to promote a rescue culture, Employment Tribunals remain ever vigilant to TUPE avoidance. Tribunals will have to have regard to what the relevant parties intended with regards to the insolvent undertaking. In light of this, administrators and prospective purchasers of businesses must negotiate carefully and consider their relative positions with care and due diligence.