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Controversy in the application of Employment Law in Insolvency Proceedings

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The use of pre-pack administrations in order to transfer a business as a going concern is common place in today's troubled market place. In such circumstances important decisions have to be made in a very restricted time frame however, decisions made in haste and without the appropriate legal advice often fall foul of the complicated interaction between insolvency and employment law. 

The Employment Appeal Tribunal's (EAT) recent decision in the case of Oakland v Wellswood (Yorkshire) Ltd demonstrates the importance of obtaining legal advice when on the cusp of a business transfer by reason of insolvency. The decision dealt with the ambiguity in the definitions contained within Regulation 8 of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). When TUPE applies it automatically transfers the business' employees to the transferee business along with their rights.

The Case

In Oakland v Wellswood (Yorkshire) Ltd the employees of the business were transferred as part of a pre-pack administration shortly after the appointment of administrators. In this particular case an employee had transferred to the purchaser and was subsequently dismissed. In order for the employee to bring a claim for unfair dismissal his employment would have to be considered to have been continuous for at least one year.

Although the employee had more than a year's continuous service with the insolvent transferor business, as a result of the business transfer, the employee did not have the requisite year's continuous employment with the transferee business. The issue which the EAT considered was whether the business was transferred as a going concern and therefore TUPE applied in the circumstances.

In this case, the EAT found that there was sufficient evidence to suggest that the final outcome of the pre-pack administration would be the liquidation of the assets of the company for the benefit of the creditors. It was consequently held that Regulation 8(7) applied and that the employee did not therefore gain the benefit of the regulations in TUPE relating to transfer and unfair dismissal. 

The Law

The ambiguity arises in the definitions of what constitute ‘terminal' and ‘non-terminal' insolvency proceedings under Regulations 8(7) and 8(6) of TUPE, respectively. Regulation 8(7) of TUPE provides that where insolvency proceedings are ‘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' ("terminal insolvency proceedings") the rights in TUPE relating to the transfer of employees and unfair dismissal are disapplied. The employees will not therefore automatically transfer and their dismissals will not be automatically unfair.

In contrast, Regulation 8(6) of TUPE provides that if insolvency proceedings are ‘relevant insolvency proceedings which 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' ("non-terminal insolvency proceedings"), the employees will automatically transfer under TUPE and some of the debts will become the liability of the transferee business.

The deciding factor is whether the insolvency proceedings can be said to be with a view to liquidating the assets of the transferor business.

Guidance

Given the continuity of business usually associated with a pre-pack administration, it could reasonably be presumed that this type of insolvency proceeding would be considered to fall firmly under the scope of the definition of non-terminal insolvency proceedings. In coming to his decision the Judge in the case considered that it is the purpose behind the reason for insolvency proceedings that should be the determining factor as to whether they are to be considered terminal or non-terminal under Regulation 8 of TUPE.

The Department for Business, Enterprise and Regulatory Reform (BERR) has offered guidance on the matter which suggests a different interpretation. The BERR guidance states that ‘the correct approach is to look at the sole or main purpose of the procedure rather than the outcome in a particular instance.' The BERR guidance suggests that the main purpose of the process of administration is not to liquidate the assets of an insolvent business for the benefit of its creditors, rather the purpose of administration is to rescue the business and continue to trade it as a going concern.

This approach therefore considers the objective purpose of the insolvency proceedings rather than the intended outcome. This interpretation suggests that a pre-pack administration would be a non-terminal insolvency proceeding under Regulation 8(6) of TUPE and that an employee would gain the benefit of the provisions in TUPE relating to transfer and unfair dismissal.  

Conclusion

The interaction between insolvency and employment law is complex and the interpretation of the definitions in Regulations 8(6) and 8(7) of TUPE are likely to remain the subject of discussion until further clarified. However, the consequences of misinterpreting Regulation 8 of TUPE or affecting a transfer prematurely could be a costly mistake for the transferee business. Therefore because of the contradictory guidance, until further litigation has clarified the position as to whether it is the intended purpose of the insolvency proceedings or the objective purpose of the insolvency proceedings which is to be considered the determining factor, employee claims should be factored into the costs of purchasing a business engaged in an insolvency process.

Further issues to consider

It is also important for transferee businesses to note that for either of Regulation 8(6) or 8(7) of TUPE to apply, the transfer must occur after the insolvency practitioner is appointed and after insolvency proceedings are instituted.

If the transfer pre-dates the appointment of the insolvency practitioner, or pre-dates the institution of insolvency proceedings, Regulation 8 does not take effect and therefore TUPE will apply in full. This will leave the transferee business burdened with all the liabilities in respect of the employees post transfer without any assistance from the Secretary of State in respect of any payments which may be due to those employees. 

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