Insolvency And TUPE – An Update

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. However, Regulation 8(7) provides that the transfer provisions of TUPE do not apply to any relevant transfer where insolvency proceedings are analogous to bankruptcy proceedings and have been instituted with a view to liquidation of the assets of the transferor and are under the supervision of an insolvency practitioner. In such circumstances, employees do not automatically transfer to the new owner and any dismissals are not automatically unfair.

A recent case, Oakland v Wellswood (Yorkshire) Ltd., concerned a ‘pre-pack’ administration. In a pre-pack, the profitable parts of the company are transferred to a new company set up for the purpose of continuing all or part of the trade of the insolvent company. The new, viable company often takes on employees and assets of the old company, which is liquidated after the transfer.

Mr Oakland was a director of Wellswood (Yorkshire) Ltd., 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 appropriate course of action. GTL was not willing to purchase the old company as a going concern but decided to incorporate a new company as a wholly owned subsidiary of GTL. The new company would acquire the assets of the old company and five of its seven employees, including Mr Oakland.

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

The new company subsequently dismissed Mr Oakland, who brought a claim of unfair dismissal. The Employment Appeal Tribunal (EAT) held that the administration had been instituted with a view to the eventual liquidation of the old company’s assets and Regulation 8(7) of TUPE therefore applied. Mr Oakland could not therefore 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.

On appeal, the Court of Appeal focused on Section 218(2) of the Employment Rights Act 1996 (ERA) and held that administration does not terminate a contract of employment. The administrator transferred the business and, under Section 218(2) of the ERA, Mr Oakland’s continuity of service was preserved. He was therefore entitled to bring a claim for unfair dismissal even though there was no finding that he had transferred to the new company under TUPE.

Whilst the Court of Appeal’s decision confirms that continuity of service is preserved when the transferee in a pre-pack sale takes on an employee of the transferor, it was not required to express a definitive view regarding whether or not the insolvency exemption from TUPE applies automatically to a company in administration or to a pre-pack sale. However, the Court expressed the view that a strong argument could be made that it does not.

The material contained in this article is provided for general purposes only and does not constitute legal or other professional advice. Appropriate legal advice should be sought for specific circumstances and before action is taken.

© , October 2009

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