In our 'TUPE – How to Comply, and TUPE – Service Provision Change, has there been any?' articles in June, we explained the circumstances in which TUPE will apply.
Recent press concerning the insolvency of City Link, Austin Reed and BHS has again highlighted the difficult position in which TUPE puts employers and insolvency practitioners when trying to save, or sell the assets of, a business in distress.
If insolvency practitioners are seeking to attract a buyer for the assets of a distressed business, you might expect that to assist them, TUPE protection and obligations would be entirely dis-applied. However, you would be wrong save for a few small exceptions.
TUPE continues to apply to businesses in insolvency. However, in certain insolvency situations, specific provisions are either relaxed or dis-applied.
TUPE makes a distinction between businesses which are subject to:
- insolvency proceedings that are not opened with a view to the liquidation of the assets (e.g. administration or a company voluntary arrangement) (“Non-Terminal”); and
- bankruptcy/insolvency proceedings that are instituted with a view to the liquidation of the assets (e.g. compulsory liquidation or a creditors voluntary liquidation) (“Terminal”).
Terminal insolvency proceedings
If a business is in Terminal insolvency proceedings, specific key provisions of TUPE are dis-applied. Employees (and the associated liabilities) will not automatically transfer to a buyer.
Also, employees lose their special protection against automatic unfair dismissal and changes to their terms of employment. However, employees will still be protected from unfair dismissal and changes to their terms under normal employment law principles.
In addition, the obligation to inform and consult about the proposed TUPE transfer with appropriate representatives of the affected employees still applies.
Non-Terminal insolvency proceedings
If a business is in Non-Terminal insolvency proceedings, the key provisions of TUPE continue to apply. These include the automatic transfer of employees to the buyer and the employees’ special protection against automatic unfair dismissal. The obligation to inform and consult with appropriate representatives of affected employees also applies.
However, others provisions of TUPE are slightly relaxed. The employer or insolvency practitioner may make ‘permitted variations’ to the terms of employment of the affected employees (before or after the transfer). This could allow a reduction of salary of benefits to be agreed.
However, to do so, the employer or insolvency practitioner must agree the change with the appropriate representatives of the affected employees and comply with specific procedural requirements.
In addition, the change must be made because of the TUPE transfer and with the intention of safeguarding employment opportunities by ensuring the survival of the business. The change must not be made for an economic, technical or organisational reason entailing changes in the workforce, which is the customary condition that otherwise applies.
In addition to the opportunity to make ‘permitted variations’, if there is a TUPE transfer from a business which is in Non-Terminal insolvency proceedings, some pre-existing debts owed by the insolvent business to the transferring employees (or those who would have transferred, had they not been automatically unfairly dismissed prior to the transfer) do not transfer to the buyer.
Instead the debts are paid by the Secretary of State out of the National Insurance Fund (“NIF”). Such debts include arrears of wages and holiday pay (for holidays taken by transferring employees) in respect of the period prior to the insolvency.
However, the amount of those debts paid from the NIF is capped at 8 weeks’ pay and 6 weeks holiday pay, with a ‘weeks’ pay also being capped at the statutory rate applicable at the relevant time (which is currently £479). The buyer remains responsible for any residual contract debts.
The relaxation of TUPE aims to make insolvent businesses more attractive to potential buyers, and to promote the operation of the business after a sale has been effected.
However, the continued application of the key provisions of TUPE to businesses in Non-Terminal insolvency proceedings presents a real challenge to businesses in distress and insolvency practitioners.
For insolvency practitioners appointed in such circumstances a key aim is often to effect a sale of the business and assets by finding a buyer. The principal purpose of TUPE is to protect employees. However, these two objectives can be irreconcilable.
The sale of the business in Non-Terminal insolvency proceedings often relies on urgent confidential and commercially sensitive negotiations with potential purchasers, and completing a sale quickly. However, frequently this does not allow employers and insolvency practitioners to inform and consult in good time with the appropriate representatives of affected employees in respect of the TUPE transfer.
Further the application of TUPE itself can discourage potential buyers from purchasing the business. There are often significant debts owed to those employees who would TUPE transfer which would pass to the buyer (subject to the limited amount covered by the NIF).
Also, high employee costs are regularly at least part of the reason why the business has become insolvent. However, if the buyer wishes to make redundancies following the transfer to save cost and support the efficient operation of the new business, it would incur significant further cost due to redundancy and notice payments.
Insolvency practitioners frequently choose to make employees redundant prior to the sale of the business to save cost or make the business more attractive to potential purchasers. However, this can lead to the buyer inheriting the majority of the liabilities relating to those employees under TUPE.
Given the complexities of TUPE in insolvency situations and the potential liabilities for buyers, comprehensive advice should be taken as soon as a business is in distress by insolvency practitioners, sellers and buyers to ensure the risks are limited as far as possible.
Our next article to cover TUPE will look at 'TUPE implications in procurement and when tending' and will be published in July.
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