Getting to grips with TUPE and acquisitions out of administration

A recent Employment Appeal Tribunal (EAT) ruling regarding the notoriously ambiguous Transfer of Undertakings Protection of Employment (TUPE) Regulations means that employers will now have to take responsibility for staff and any potential or outstanding claims when purchasing an insolvent business.

The EAT found that TUPE Regulations apply in full to purchasers of insolvent businesses out of administration and that organisations need to factor the transfer of staff into their commercial considerations, negotiations and strategy. The case of Ms AE Olds v Late Editions Ltd – concluded on 16 February 2011 – ruled that TUPE must now operate in the usual way to acquisitions of business out of administration.

It was previously held that the TUPE Regulations did not apply to administrations as the intention would usually be to continue to trade the business, unlike in cases of bankruptcy and liquidation. There would therefore be no automatic transfer of contracts of employment.

Charles Wynn-Evans, partner at law firm Dechert LLP, explains: “Previously the position had been uncertain and it had been possible to argue that staff would not transfer to an acquirer of a business or part of a business in administration if the intention of the administration was the liquidation of the assets of the insolvent company.”

However, employees will now be fully protected under TUPE when their company is purchased from a business in administration. Any company taking over an insolvent business will need to take responsibility for potential claims, such as unfair dismissal and redundancy, from existing pre-transfer staff.

Wynn-Evans says that timing could also become an issue under the revised ruling. “The due diligence that employers will need to do is no different than in relation to a business acquisition in any other circumstances, although the speed of the transaction may not allow as much investigation as might otherwise be ideal.”

HR practitioners will now have to bridge the gap between the expectations of the business on the one hand, and the hard legal reality of TUPE, says Lee Jefcott, head of employment at Blue Sky Law.
“In my experience, clients often pretend that TUPE does not apply or shy away from dealing with it. However, while most practitioners are comfortable with the idea that terms and conditions of employment will transfer, many are in the dark in deciding which staff are ‘in scope’ for a transfer, ie which staff are covered by TUPE. Employment lawyers like putting things into neat boxes. Life is not as simple as that.” 

Organisational structures, especially in cases where staff do not work exclusively for the business or are seconded elsewhere, can be particularly problematic when it comes to working out which staff are “in scope” and protected by TUPE.

The issue of pre-packs is also significant. Pre-packs are a specific form of administration where an acquisition of all or, more often, specific parts of an insolvent business is arranged in principle before the business in question actually enters administration. Pre-packs have traditionally been used to speed up the acquisition process without the delay and complication of a detailed administration. If AE Olds holds and there are no conflicting cases, TUPE will apply as normal in relation to transactions out of administration including pre-packs.

Interestingly, the AE Olds judgment actually conflicts with another EAT ruling in 2009. The case of Oakland v Wellswood concluded that a company in administration could fall outside the protective scope of TUPE, but only if the objective of the administration was the liquidation of the insolvent company’s assets.

“The Oakland case contradicted government guidance on TUPE and suggested that in each case the actual intention of the insolvency practitioner had to be ascertained as a question of fact,” Jefcott notes.

The new ruling will, however, bring some advantages to employers that are purchasing a business out of administration. It will enable them to calculate the probable costs of financial liabilities and identify the risk of unfair dismissal claims being brought against them in advance.

But Jefcott believes that the muddled maze of TUPE will continue to confuse and bewilder businesses. “TUPE still remains an area that strikes fear into the hearts and minds of clients and there are plenty of other areas that could do with clarification.”

Key points from the ruling

Going forward, HR practitioners will now be better placed:

  • to calculate with certainty the likely financial liabilities of the acquisition from an HR perspective, which will feed into the bigger commercial picture and overall cost of the transaction;
  • to identify with more certainty the post transfer position, ie whether or not redundancies of transferring staff will be required;
  • to enter into early discussions with the administrator about who is responsible for the potential financial liabilities arising under TUPE: the usual position in acquisitions from insolvency is that the acquirer bears the employment liabilities including the costs of inherited claims, payroll costs post transfer, notice payments and redundancy payments;
  • to identify the likelihood of the risk of unfair dismissal claims being brought against the acquirer by employees dismissed in connection with the transaction before the acquisition takes effect;
  • where the timetable does not allow for information provision or consultation with in-scope employees, to calculate the potential liability in the event that claims are brought against the acquirer for failing to inform and consult under TUPE; and
  • where the timetable allows, to plan and deliver the provision of information to, and where relevant, the consultation process with transferring employees: TUPE of course requires the transferor to deliver information to in-scope employees and to consult with them if measures (usually changes to terms and conditions or redundancies) are proposed.

Source: Georgina Rowley, solicitor at Dechert LLP.

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