Insolvency and TUPE

Whilst the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) operate to protect the employment law rights of employees when there is a relevant transfer of a business or part of a business, Regulation 8(7) provides that where insolvency proceedings are analogous to bankruptcy proceedings and have been instituted with a view to liquidation of the assets, the transfer provisions of TUPE do not apply. In such circumstances, employees do not automatically transfer to the new owner and any dismissals are not automatically unfair.

In a case concerning a 'pre-pack' administration (Oakland v Wellswood (Yorkshire) Ltd.), whereby a business goes into administration with a prospective purchaser already in place, the Employment Appeal Tribunal (EAT) considered Mr Oakland's appeal against the Employment Tribunal's finding that he could not bring a claim of unfair dismissal because the transfer provisions of TUPE did not apply in his case and he did not have sufficient service with his new employer to bring a claim.

Mr Oakland was a director of Wellswood (Yorkshire) Ltd. (Oldco), which traded as a wholesaler in fruit and vegetables. By mid-2006, the company was in financial difficulties. It approached a major creditor, Gilbert Thompson (Leeds) Ltd. (GTL), as a potential buyer and sought the advice of an insolvency practitioner. It was agreed that administration was the better course of action. GTL was not willing to purchase Oldco as a going concern but decided to incorporate Newco as a wholly owned subsidiary of GTL. Newco would acquire the assets of Oldco and five of its seven employees, including Mr Oakland.

On 6 December 2006, the sale of the assets to Newco was completed and the administrators were appointed.

There are three statutory objectives of administration, contained in the Insolvency Act 1986. These are:

  1. Rescuing the company as a going concern; or
  2. 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); or
  3. Realising any property in order to make a distribution to one or more secured preferential creditors.

In the view of the administrators, the first objective had not been achievable in Oldco's case. Any further period of trading, whilst a buyer was sought, would most likely have resulted in further losses, thereby further reducing the funds available to creditors.

Newco subsequently dismissed Mr Oakland, who brought a claim of unfair dismissal. In considering his appeal, the EAT held that the administration had been instituted with a view to the eventual liquidation of Oldco's assets and Regulation 8(7) of TUPE therefore applied. As a result, Mr Oakland did not automatically transfer to Newco and his continuity of employment was not preserved under TUPE.

Aston Bond says, "In the EAT's view, its decision was in accordance with Regulation 8(7), which seeks to bring about the rescue of a failing business when the alternative would be any prospective purchaser being deterred because of the effects of the protection afforded by TUPE. Each case will be determined on the individual facts and, if the EAT's view is the correct one, will depend on the intention of the administrator regarding the transfer of an insolvent business. However, we would urge caution. This decision conflicts with guidance previously issued by the Department of Business, Enterprise and Regulatory Reform and is likely to be challenged."

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