TUPE and pre-pack administration

09 Mar 2011

The Employment Appeal Tribunal (“EAT”) has determined that administration will not be sufficient to avoid regulations 4 and 7 of TUPE.

Regulation 4 of TUPE determines that all employees (who are employed at the time of the transfer) shall transfer automatically upon a relevant transfer of a business and any outstanding liabilities under such contract will also transfer. Employees are protected against changes to their terms and conditions as a result of the transfer.

Regulation 7 makes a transfer-related dismissal automatically unfair, except where there is an economical, technical or organisational reason.

Under TUPE, companies in insolvency or analogous insolvency proceedings, which have been instituted with a view to the liquidation of the assets of the transferor (i.e. the original company), are excluded from the application of Regulations 4 and 7.

A great deal of controversy has existed over whether a company, which is in administration, would qualify for the liquidation exemption, with case law giving contrasting decisions. The position has now been clarified by the EAT.

In the case of OTG Ltd v Barke, it was determined that a company in administration would never fall within the exclusion. In these circumstances, any employees who are employed by the transferor immediately before the transfer will have their contracts transferred under TUPE. In coming to this decision, the EAT considered that the main aim of Administrators, as set out in the Insolvency Act 1986, is to rescue the company as a going concern. It considered that this was entirely inconsistent with the liquidation of the assets of a company.

The EAT did distinguish the position of employees who have already been dismissed before the transfer occurred, unless this is done in order to circumvent TUPE. TUPE only applies to employees who are employed at the time of transfer, unless they have been dismissed for a reason related to the transfer. So, provided that any dismissal was both before the transfer and unrelated to the transfer, liability for the dismissal will not pass to the new employer.

This case has clarified the grey area regarding the application of TUPE to administrations. Potential purchasers can therefore be sure that, when dealing with an administration, TUPE will apply and all current employees (and any liabilities) will transfer to the purchaser. Where a business has been failing for a long time, the liability for outstanding wages could be substantial.

As always, when you are considering buying the assets of a company in financial difficulties, make sure you seek professional advice before formalising any agreement to ensure that you fully understand the liabilities to which you may be exposed.