TUPE and pre-packs,recent developments

With the economy still in the grip of recession, firms need clarity over TUPE more than ever. Here’s why:

  • Corporate insolvencies are at a 10-year high. Quarter 3 of 2009 has shown a decrease of 7.2% in overall numbers since the previous quarter. However, the numbers are still an 11% increase on the same quarter of 2008.
  • A total of 6,114 businesses across England and Wales entered into insolvency in July, August and September 2009.
  • The first three quarters of 2009 saw insolvencies increase by 32% compared to the first three quarters of 2008.
  • England and Wales saw 4,716 compulsory liquidations and creditors’ voluntary liquidations in Q3 of 2009, an increase of 14.6% on the same period in 2008.
  • In the 12 months ending Q3 2009, about one in 114 active companies went into liquidation, which is up slightly on the figure of one in 120 in the previous quarter.
  • There were 1,578 other corporate insolvencies in Q3 of 2009. These represent an increase of 9.3% on the same period of 2008.

Source: Insolvency Service

Q Has the Court of Appeal decision changed people’s understanding of TUPE?

John Francis, technical director, Association of Business Recovery Professionals

The Employment Tribunal (ET) and the Employment Appeal Tribunal (EAT) reached their decisions on the basis of TUPE. But the Court of Appeal didn’t discuss TUPE because the basis of the claim was changed. Instead, they decided it on the basis of the Employment Rights Act (ERA) section 218. So in a sense, TUPE is still unclear, and this particular case hasn’t helped. At the same time, the ET interpreted the insolvency relief in TUPE in such a way that there was no transfer of employment rights and obligations. The logic they used is that TUPE says there won’t be a transfer in situations where there are proceedings with a view to the liquidation of the assets. But nobody knows what that means.

Alastair Beveridge, partner, Zolfo Cooper (corporate recovery advisers)

Experienced lawyers will say they have a clear view of TUPE despite this ruling. The regulations were designed to keep jobs, have been in place for a long time, and, broadly, people have understood them. They should also operate across Europe so there should be a fairly level playing field. So if we change them for the sake of it, I don’t think it is going to help the UK. I would prefer the Oakland case never existed, and we still had the clarity of the past.

Q Does TUPE need to be clarified?

Francis TUPE is badly drafted. The 2006 regulations were intended to introduce a slight relaxation because people were concerned that the associated risk of taking on massive employment claims was making it more difficult to sell an insolvent company. The problem is the regulations were incredibly badly drafted, so nobody really knows what they mean. It is something we have complained about since they came in – we even arranged for them to be debated in the House of Lords so the government could reintroduce them properly. Nobody knows how this insolvency relief is supposed to work.

Beveridge Oakland v Wellswood has created uncertainty where previously it was reasonably clear. It has diminished the clarity of the TUPE regulations. So people would really like another case that corrects or restates the old position. Then we can go back to where we were before and have the clarity restored. The regulations themselves are not necessarily bad but we need to remove this uncertainty. There are only two ways of doing it: the rules are restated or changed; or there is another case that goes to the Court of Appeal and the judgment clarifies things.

Q How should firms now approach the whole issue of TUPE and pre-packs?

Francis At the moment, people are working in accordance with guidance issued by the Redundancy Payments Office – which has admitted the wording of the regulations isn’t clear. I don’t think even their interpretation is right, yet the only pragmatic thing you can do is work in accordance with what they’ve said.

Beveridge This is an interpretational point. If a company goes into liquidation, employment contracts are terminated, so usually people’s jobs are effectively finished. If the assets of the company are sold at the point of liquidation, normally the employees do not TUPE over to the buyer of the assets. Over the years, we have done many pre-pack deals. In the vast majority of situations, the employees will transfer. They only tend not to transfer where they have been made redundant prior to the company filing. If you are selling the businesses – and most businesses require employees to operate them – then the business should also include the employees.

Q Who are the winners and losers in all of this?

Francis Employees will be the ones who lose rather than gain. That is why there is the provision that the Redundancy Payments Office will step in and pay up to a certain limit out of the redundancy fund. But if the EAT had been right, it could be argued that it would have been beneficial because it would be easier to sell businesses and you could get more money for them. It all depends on how you look at it.

Beveridge The impact is really going to fall on the creditors. From an insolvency practitioner’s perspective, you are trying to sell the business and get the maximum value. If someone takes the view that they are only taking on 100 employees instead of 200, so therefore want to pay more for the company, that’s great from an insolvency practitioner’s perspective. But the risk is mainly for the buyer, and someone will try to exploit the situation and make life difficult.

Q What does the future hold?

Francis TUPE will be clarified eventually, as it desperately needs to be sorted out by the courts. I don’t know if there are any other cases making their way through the system, so it is a big disappointment the Court of Appeal was unable to rule on this and clarify it for everyone – particularly as this is happening more now than it has for years. This is the time people need clarity more than ever.

Beveridge If you hold a view that the most important thing is selling businesses rather than saving jobs, you could amend the rules to say pre-pack rules are outside of the TUPE regulations. That would mean that more businesses are sold, but it would also mean more jobs would be lost. If people are now trying to say that some employees won’t transfer because of this ruling, they are effectively bending the rules and trying to do what the regulations were introduced to prevent them from doing: using the fact that a buying company is insolvent to cut the workforce.

The administration game

  • While pre-packs are causing headaches for TUPE experts across the nation, it is just one strand of a burgeoning growth in administrations:
  • The first nine months of 2009 saw 2,320 companies fall into administration, compared with 2,109 companies in 2008.
  • Quarter 3 of 2009 saw 666 companies go into administration, down 6% compared with Q3 of 2008, which saw 707 companies fall into administration.
  • Comparing the first three quarters of 2009 with 2008, the recruitment and business services sector has seen administrations increase 11% from 339 in the first nine months of 2008 to 375 in 2009.
  • There were 199 retail administrations in the first three quarters of 2008, which rose 8% to 215 in 2009.
  • Administrations in the manufacturing sector have increased by 33% in the first nine months of 2009 compared with the same period last year.
  • The manufacturing sector saw the largest increase in administrations (35%) in Q3 2009 compared with the same quarter last year, followed by the wholesale and distribution and financial services sectors, which increased by 34% and 17% respectively.

Source: Deloitte

Court fails to dispel doubts over TUPE staff transfers and insolvencies

TUPE and insolvency: interpreting the regulations

Caroline Carter, partner and head of employment, Ashurst

If the pre-pack falls within the terminal regime, then buyers can pick and choose which employees to take and on what terms and conditions. One qualification to this is that employees who are taken on will have their continuity of service preserved under section 218 of the Employment Rights Act 1996, as the Court of Appeal found in Oakland. On the other hand, if the pre-pack falls within the non-terminal regime, TUPE will transfer employees to the buyer on their existing terms and conditions. Buyers will, however, have some increased flexibility to change the terms and conditions of employment, subject to negotiations with employee representatives.

Edward Wanambwa, partner, CM Murray

Although the Court of Appeal did not decide whether TUPE applies to pre-pack sales, it indicated that there are strong grounds for arguing that TUPE does apply in a pre-packaged situation. Pending any test case on this specific point, buyers are well advised to adopt a risk-averse approach during pre-pack sales. This should include, assuming TUPE does apply, carrying out thorough due diligence and calculating the financial costs of TUPE applying, including in relation to redundancies. At the same time, many buyers will wish to front load protection by reducing, as appropriate, how much is offered for the target company in the first place.

Rob Washington, associate, Hogan & Hartson

Unfortunately, neither TUPE nor the Insolvency Act 1986 specifically considers the pre-pack phenomenon. So the central issue is whether the insolvency proceedings are ‘with a view to liquidation’ or not. Department of Business guidance from 2007 suggested that administration would always amount to being ‘not with a view to liquidation’. Unfortunately, in the case of Oakland v Wellswood, the EAT went against this guidance. So now the employer and potential buyer must decide whether the company enters administration with a view to liquidation or not. For a pre-pack administration, the key question is now likely to be whether it would be possible to rescue the company as a going concern if the sale of the assets did not take place.

Charles Newman, partner and head of TUPE unit, Beechcroft

A lot of pre-packs will now take the view that TUPE does not apply. This may not necessarily lead to more job losses, but it may lead to more staff retaining their jobs on lower terms. So people will remain in work, despite the fact there is no TUPE transfer. Even in Oakland v Wellswood, a lot of staff kept their jobs – they just kept them on slightly different conditions. At the same time, the Court of Appeal confirmed their continuity of employment would be preserved, so staff can lodge an unfair dismissal claim if they are removed within a year of the insolvency.

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