HR professionals managing staff in a business that is heading for insolvency are likely to have been through the mill already. Attempts will probably have been made to steer the organisation on to a firmer financial footing – through redundancies or reorganisation – and staff will be understandably anxious.
Should these earlier efforts fail to provide a solution, leaving only the prospect of insolvency, it pays to know the potential consequences.
It is important to note that, once appointed, control of the situation will rest with the insolvency practitioner (IP) and his or her team. The HR team will be in the same boat as all other staff members, wondering what the future might hold for their own employment.
The 2006 revision of the Transfer of Undertakings (Protection of Employment) Regulations (TUPE) places greater emphasis than the 1981 version on the rescue and sale of businesses as a going concern. Whether employees transfer to a buyer under TUPE will depend on the type of insolvency proceedings the organisation undergoes.
Insolvency proceedings fall broadly into two categories. In the case of companies that have no hope of continuing as a going concern, bankruptcy and any analogous insolvency proceedings set out to liquidate company assets, under the supervision of an IP.
In these circumstances, employees will not automatically transfer to the buyer of the business under TUPE. For example, in a compulsory liquidation the employees are automatically dismissed on the appointment of the liquidator and their only recourse is a claim for wrongful dismissal against the employer now in liquidation.
This claim will be owed as an unsecured debt, not as a preferential debt like unpaid wages. In reality, this means claims go to the back of the queue, with little chance of receiving compensation.
But for businesses on the ‘critical’ list but still breathing, an alternate route exists in what are collectively called ‘relevant’ insolvency proceedings. Again, these take place under the supervision of an IP, but they are initiated with the aim of helping the business emerge as a going concern. In these circumstances, TUPE will apply and employees should transfer to the new owner with their employment rights intact.
Guidance from the Department for Business, Enterprise and Regulatory Reform (DBERR) states that ‘relevant’ insolvency proceedings will include administration, voluntary arrangements and administrative receivership, but not other types of receivership, bankruptcy proceedings, compulsory liquidation, or creditors’ voluntary liquidation.
A recent case, Oakland v Wellswood (Yorkshire) Ltd, underlined the importance of ‘intent’ in determining whether TUPE should apply. This case involved what is commonly referred to as a ‘pre-pack’ administration, where a company is put into administration and then sold under an arrangement set up before the administrator was appointed. In the Oakland case, it was decided that this arrangement had not been used to rescue the business and continue it as a going concern, but was instead intended to realise assets and yield the best return for creditors, so TUPE protection for employees was not triggered.
At the time of a TUPE transfer, the buyer normally assumes responsibility for all matters under or connected with the employees’ contracts. However, under the 2006 regulations, there is a limited exception to this principle in the case of relevant insolvency proceedings, so that certain sums outstanding at the date of a relevant transfer will be met from the National Insurance Fund (NIF), rather than by the buyer. This provision is intended to aid the sale of the insolvent businesses as going concerns.
The Redundancy Payments Office deals with claims related to wages, or pay in lieu of notice and accrued holidays, as well as for those relating to statutory redundancy, the basic award of compensation for unfair dismissal and unpaid pension contributions.
But, as with so many aspects of an insolvency situation, it is not quite as simple as that. Whether liability falls on the NIF will depend on the timing of events. The government will only pick up the tab if insolvency proceedings have been “opened” or “instituted”. If not, then the buyer and not the NIF will be held responsible for debts to employees. The timing of events will be closely analysed.
Once appointed, an IP will consider reducing the business’s liabilities by varying contracts of employment. This is allowed by the 2006 Regulations, if it will help to ensure the survival of the business. These “permitted variations” must be agreed by the IP, transferor or transferee and appropriate employee representatives. Where a trade union is recognised for collective bargaining purposes, those representatives must be used.
In the absence of a recognition agreement, elected employee representatives can agree changes. If this latter route is used, there must be a written agreement, signed by each representative. Before it is signed, all affected employees must have been provided with a copy of the agreement and explanatory guidance as to what it means.
The IP will look to HR for details of representatives already elected – for example, in accordance with the provisions of the Information and Consultation of Employees Regulations 2004 – who it may be possible to use for this purpose.
Dismissals will also be on an IP’s agenda. If the principal reason for a dismissal is a TUPE transfer, or is connected with the transfer but is not of an economic, technical or organisation (ETO) nature which involves changes in the workforce, it will be automatically unfair.
The Employment Appeal Tribunal has recently decided a dismissal can be automatically unfair if there are a number of potential buyers interested, even if negotiations were at an early stage at the time of dismissal.
An employment tribunal will carefully scrutinise the real reasons for an IP’s actions. Is the reduction of staff costs because of problematic cash-flow, or is the intention to slim down the company, making it more attractive to potential purchasers? The former is more likely to point to a genuine redundancy situation and a fair reason for dismissal under the ETO umbrella. If it is the latter, an automatic unfairness argument is more likely to succeed.
Where an IP proposes to dismiss as redundant 20 or more employees at one establishment within a period of 90 days, collective consultation should take place. Where it does not, the insolvent employer could be liable to pay a protective award of up to 90 days’ uncapped pay per affected employee.
The story does not end there. Under the TUPE regulations, an IP will be under an obligation to inform and consult employee representativesor trade union representatives about any redundancies. In both collective redundancy and TUPE consultation scenarios there may be an attempt by the IP to rely on the defence that “special circumstances” made this not reasonably practicable. However, insolvency is not, in itself, automatically deemed a special circumstance.
An awareness of the potential consequences of insolvency will help with planning any restructuring exercise. However, once the perilous waters of insolvency are entered, such choices are taken out of HR hands.
Roger Tynan is a partner at Maclay Murray & Spens
Key case: Oakland v Wellswood
Mr Oakland was a director, shareholder and employee of food wholesale business Oldco, which had run into financial difficulties. An IP was consulted and a potential buyer sought. The size of Oldco’s debts meant the buyer was not willing to purchase Oldco as a going concern. Instead, the parties agreed to put Oldco into administration. The buyer would incorporate a new company, Wellswood, referred to as Newco at the Employment Appeal Tribunal, which would purchase Oldco’s assets but would not be liable for Oldco’s debts. Joint administrators were appointed and the sale of assets took place.
The primary aim of administration should be to rescue the business as a going concern. If this is not possible, the administrators should seek to maximise the return for creditors.
Government guidance states administration will fall within the category of ‘relevant insolvency proceedings’ for the purposes of the TUPE Regulations 2006, by which employment should automatically transfer.
Shortly after the transfer from Oldco to Newco, Mr Oakland was dismissed and brought an unfair dismissal claim against Newco. Newco successfully argued that, though the business had been in administration, it did not fall within the relevant insolvency proceedings bracket. Therefore, Mr Oakland had not transferred under the TUPE Regulations and his continuity of employment was not preserved.
Mr Oakland’s claim fell because he did not have sufficient length of service with Newco.
So why was this administration not considered to be a set of relevant insolvency proceedings, in line with the Government guidance? Because the administrators admitted that selling the business as a going concern was not going to be achievable and their primary concern was to maximise creditor return. The administrators had been appointed with a view to the eventual liquidation of the company’s assets.