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Sales by administrators - Recent TUPE decision

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A recent ruling by the Employment Appeal Tribunal ("EAT") in the case of Oakland v Wellswood (Yorkshire) Ltd seems to permit buyers of businesses in administration to avoid having to take on the former owner's obligations to the employees of the business.

When a business is transferred the Transfer of Undertakings Protection of Employment Regulations 2006 (TUPE) operate to transfer the employment contracts to the new owner. However, the ruling in Oakland v Wellswood (Yorkshire) Ltd, means that a transfer by an administrator of an insolvent business will not necessarily mean that the provisions of TUPE apply. According to the EAT, if the "administrator's subjective analysis is that the purpose of the administration is the liquidation of the insolvent business's assets", it follows that a transfer of the undertaking is exempted from TUPE by virtue of TUPE Regulation 8(7).

The result therefore was that the buyer of the assets of the insolvent business did not have to take on the liabilities of the employees nor honour their employment contracts.


Background

On 6 December 2006, the administrators were appointed out of court. On the same day certain assets were purchased by a third party, which also acquired the lease of the business premises together with five out of the seven employees.  The Employment Tribunal ("ET") accepted the administrators' report, to the effect that due to the scale of the company's insolvency, rescuing the company as a going concern was not achievable.  Rather, the administrators said that they concentrated their efforts on achieving the secondary purpose of administration, namely a better result for creditors than if the company were wound up without first being inadministration.

Decision by the Employment Appeal Tribunal

The ET found therefore that the purpose of the administration was the liquidation of the assets of the insolvent company, and that therefore Regulation 8(7) applied.

The unsuccessful claimant appealed to the EAT; however, the EAT agreed with the original decision.  The judge commented that Parliament had not specified what sort of insolvency procedure would fall into TUPE Regulation 8(7).  The EAT also found no assistance in the official guidance published by the Department of Business, Enterprise and Regulatory Reform (BERR).

The EAT decided that the question under Regulation 8(7) was one of fact, not a matter of law, and that the ET had been entitled on the facts to conclude that the administration was with a view to the eventual liquidation of the assets of the company by way of a creditors' voluntary liquidation.  Accordingly, this was a case where Regulation 8(7) applied, so the general provisions of TUPE did not apply at all.

As this area is of great practical importance and financial significance, I doubt that the decision will go unchallenged for long.  Those concerned with relevant matters - insolvency practitioners and buyers from insolvent companies - should therefore proceed with caution, rather than assume the Oakland decision will necessarily provide an escape route from TUPE.

If you have any queries in relation to any insolvency matter please contact a member of the Corporate Recovery Department who will be more than happy to assist.

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