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Tupe and Pre-packs
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Posted in Employers on Jul 13, 2011 by Richard Hayden
Guest Blogger Richard Parr of Blacks Solicitors LLP of Leeds discusses Tupe and Pre-packs in light of recent decisions made by the Employment Appeal Tribunal ("EAT").
Most people have heard of “TUPE”. And many are familiar with “pre-packs” – where a company in financial trouble negotiates a sale of its business, goes into administration, and then completes the deal. Are the days of pre-packs numbered in the light of a recent decision of the Employment Appeal Tribunal (“EAT”)?
An historic criticism of the Transfer of Undertakings (Protection of Employment) Regulations (“TUPE”) was that the Regulations inhibited the rescue of insolvent companies. Purchasers were put off by the financial burden of employees who, under TUPE, transferred along with the business – often bringing with them claims for unpaid wages.
TUPE 2006 purported to address this by disapplying some of the fundamental principles of TUPE (in particular, automatic transfer of employees and automatic unfair dismissal as regards those employees fired because of the transfer) where the business being acquired was the subject of “bankruptcy or any analogous proceedings…instituted with a view to the liquidation of the assets…”. The chosen wording is, to say the least, opaque. The word “bankruptcy” is more commonly associated with individual, as opposed to corporate, insolvency. A company which is “bankrupt” is generally (and more accurately) described as being “in liquidation”.
Ever since the concept was introduced by the Insolvency Act 1986, “administration” has been the insolvency procedure of choice. This is because administration enables a business to be traded whilst a purchaser is sought, or a pre-agreed sale to be concluded at lightning speed (usually labelled as a “pre-pack”). Neither approach is practicable in a liquidation.
It was immediately clear that the new exception in TUPE 2006 for “bankruptcy or any analogous proceedings…” would apply to a company in liquidation. But could it ever apply to a company in administration?
Confusion arose because administration may have three distinct purposes. The two principal purposes are the rescue of a company as a going concern, or achieving a better realisation of assets (when compared with liquidation). But rarely will administration save the company: in most cases it is a company’s business (or part of it) which will be sold as a going concern and therefore rescued.
As most administrations achieve a better realisation of assets (whether through a sale of the business or a sale of assets), there was speculation that administration might legitimately be classified as “bankruptcy or analogous proceedings” and, in consequence, advantage taken of the carve-out in TUPE 2006. That was precisely the conclusion which an Employment Tribunal came to in 2008 in the decision Oakland v Wellswood. Though the matter was appealed to the EAT, the appeal was decided on an entirely separate point. The conclusion on TUPE 2006 reached by the Employment Tribunal was not formally considered.
In the recent decision in OTG v Barke, the EAT has decided that Oakland was wrongly decided. Although, in practice, most successful administrations will involve an asset sale (albeit that this includes the sale of a business as a going concern), this is not to be regarded as “…bankruptcy or any analogous proceedings…instituted with a view to the liquidation of the assets…”.
There are some who advocate an insolvency “rescue culture”, where the employment rights of some individual employees are sacrificed (in order to preserve the employment of others) by limiting employment rights and making insolvent businesses more attractive to purchasers. On this occasion the EAT made a policy decision in favour of the preservation of individual employment rights under TUPE 2006. A victory for employees.
However, this EAT decision does not sound the death knell for the sale of businesses in administration – so-called “pre-pack” transactions. It has always been possible under TUPE fairly to dismiss an employee in the run-up to a TUPE transfer if it could be demonstrated that the reason for the dismissal was an “economic, technical or organisational reason entailing changes in the workforce” – the so-called “ETO” reason.
In the aftermath of the OTG decision, administrators are likely to come under pressure to dismiss prior to sale for ETO reasons those employees who the purchaser considers are surplus to requirements. But any pre-transfer dismissals given the “ETO” label will be the subject of scrutiny by dismissed employees and their advisers, and Employment Tribunals, armed with the benefit of “20/20 hindsight”. So if you are considering acquiring a business that is in financial difficulties, it is essential that you take expert legal advice at an early stage. Otherwise you risk the potentially substantial financial sting of multiple TUPE claims.
Richard Parr
Most people have heard of “TUPE”. And many are familiar with “pre-packs” – where a company in financial trouble negotiates a sale of its business, goes into administration, and then completes the deal. Are the days of pre-packs numbered in the light of a recent decision of the Employment Appeal Tribunal (“EAT”)?
An historic criticism of the Transfer of Undertakings (Protection of Employment) Regulations (“TUPE”) was that the Regulations inhibited the rescue of insolvent companies. Purchasers were put off by the financial burden of employees who, under TUPE, transferred along with the business – often bringing with them claims for unpaid wages.
TUPE 2006 purported to address this by disapplying some of the fundamental principles of TUPE (in particular, automatic transfer of employees and automatic unfair dismissal as regards those employees fired because of the transfer) where the business being acquired was the subject of “bankruptcy or any analogous proceedings…instituted with a view to the liquidation of the assets…”. The chosen wording is, to say the least, opaque. The word “bankruptcy” is more commonly associated with individual, as opposed to corporate, insolvency. A company which is “bankrupt” is generally (and more accurately) described as being “in liquidation”.
Ever since the concept was introduced by the Insolvency Act 1986, “administration” has been the insolvency procedure of choice. This is because administration enables a business to be traded whilst a purchaser is sought, or a pre-agreed sale to be concluded at lightning speed (usually labelled as a “pre-pack”). Neither approach is practicable in a liquidation.
It was immediately clear that the new exception in TUPE 2006 for “bankruptcy or any analogous proceedings…” would apply to a company in liquidation. But could it ever apply to a company in administration?
Confusion arose because administration may have three distinct purposes. The two principal purposes are the rescue of a company as a going concern, or achieving a better realisation of assets (when compared with liquidation). But rarely will administration save the company: in most cases it is a company’s business (or part of it) which will be sold as a going concern and therefore rescued.
As most administrations achieve a better realisation of assets (whether through a sale of the business or a sale of assets), there was speculation that administration might legitimately be classified as “bankruptcy or analogous proceedings” and, in consequence, advantage taken of the carve-out in TUPE 2006. That was precisely the conclusion which an Employment Tribunal came to in 2008 in the decision Oakland v Wellswood. Though the matter was appealed to the EAT, the appeal was decided on an entirely separate point. The conclusion on TUPE 2006 reached by the Employment Tribunal was not formally considered.
In the recent decision in OTG v Barke, the EAT has decided that Oakland was wrongly decided. Although, in practice, most successful administrations will involve an asset sale (albeit that this includes the sale of a business as a going concern), this is not to be regarded as “…bankruptcy or any analogous proceedings…instituted with a view to the liquidation of the assets…”.
There are some who advocate an insolvency “rescue culture”, where the employment rights of some individual employees are sacrificed (in order to preserve the employment of others) by limiting employment rights and making insolvent businesses more attractive to purchasers. On this occasion the EAT made a policy decision in favour of the preservation of individual employment rights under TUPE 2006. A victory for employees.
However, this EAT decision does not sound the death knell for the sale of businesses in administration – so-called “pre-pack” transactions. It has always been possible under TUPE fairly to dismiss an employee in the run-up to a TUPE transfer if it could be demonstrated that the reason for the dismissal was an “economic, technical or organisational reason entailing changes in the workforce” – the so-called “ETO” reason.
In the aftermath of the OTG decision, administrators are likely to come under pressure to dismiss prior to sale for ETO reasons those employees who the purchaser considers are surplus to requirements. But any pre-transfer dismissals given the “ETO” label will be the subject of scrutiny by dismissed employees and their advisers, and Employment Tribunals, armed with the benefit of “20/20 hindsight”. So if you are considering acquiring a business that is in financial difficulties, it is essential that you take expert legal advice at an early stage. Otherwise you risk the potentially substantial financial sting of multiple TUPE claims.
Richard Parr
For further information on Tupe, Pre-packs or related issues please contact Richard Parr of Blacks Solicitors LLP, Leeds.
