Insolvency and TUPE

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

In an important decision on this issue, the Court of Appeal has ruled (Key2Law (Surrey) LLP v De’Antiquis) that this exception does not apply to administration proceedings under Schedule B1 of the Insolvency Act 1986.

Ms De’Antiquis was made redundant from her job as a solicitor a few days before the firm she worked for, Drummonds Kirkwood LLP (DK), went into administration. The administrators subsequently entered into a management contract with Key2Law (Surrey) LLP under which the part of the business in which Ms De’Antiquis had worked was transferred to it. Ms De’Antiquis brought a claim for unfair dismissal against Key2Law on the ground that there had been a transfer of liabilities under TUPE. Key2Law argued, however, that the facts of the case meant that the exception should apply. As DK was in administration, it was subject to ‘analogous insolvency proceedings’ instituted with a view to the liquidation of its assets, within the meaning of Regulation 8(7).

The Court of Appeal held that an administration is not outside the TUPE rules because it cannot be said to have been ‘instituted with a view to liquidation’ of the company’s assets. The primary statutory objective of an administrator when appointed is to rescue the company as a going concern, even though this may subsequently prove to be impossible. Accordingly, the Court held that a transfer of liabilities under TUPE will take place where a company is placed into administration and the business is subsequently transferred. The Court agreed with the Employment Appeal Tribunal that a fact-based approach (as was advocated in the 2009 case of Oakland v Wellswood (Yorkshire) Ltd.), whereby the decision as to whether the TUPE provisions apply will depend on the intention of the administrator regarding the transfer of the insolvent business, is inappropriate in such circumstances. What is required is an ‘absolute’ approach to the provisions. Such an approach has the merit of achieving legal certainty, since all those involved will know where they stand.

Says DFA Law’s employment expert Gary Lee, “Subject to any appeal, this decision means that the employment rights of employees will be protected when a company is sold following a ‘pre-pack’ administration. If you are contemplating buying or selling a business, we can advise you to ensure that your decision is made after consideration of all the relevant factors.”