TUPE and pre-pack administration sales: legal opinion

As more companies fall into insolvency we are seeing the rise of the pre-pack administration sale.

Pre-pack arrangements involve agreeing the sale of a business before entering it into administration. This allows the insolvency practitioner to effect a quick sale and give the best deal to creditors, and enables the buyer to wipe off certain debts and ditch unprofitable parts while the rest of the business continues to trade.

But where does this leave TUPE? The Transfer of Undertakings (Protection of Employment) Regulations 2006 protect employees when a business changes hands by automatically transferring their contracts, and any associated liabilities, to the new company.

However, where insolvency proceedings are ‘non-terminable’ – the business continues as a going concern – employees’ contracts do transfer, but there is greater scope for the employer to vary contracts than in a non-insolvency transfer.

Where the insolvency proceedings are ‘terminable’, and the business effectively ceases trading, the employees’ contracts are automatically terminated. The employer can then set up new contracts with those it wants to keep. This means buyers of failing businesses can dictate the terms of the new contracts without risking automatic unfair dismissals.

Until recently guidance from the Department for Business, Enterprise and Regulatory Reform (DBERR) suggested that administration proceedings were non-terminable, because they are usually started to rescue a business as a going concern, rather than liquidate it.

However, the recent EAT decision in Oakland v Wellswood (Yorkshire) Ltd offers more scope for buyers to cut wage bills and avoid unfair dismissal claims.

Intention matters

The Tribunal held that a former director of an insolvent company had not transferred to a new business as part of a pre-pack arrangement because the administration of the original company was instituted ‘with a view to liquidation’. This meant that under TUPE, his contract did not automatically transfer.

The Tribunal relied heavily on the insolvency practitioner’s report, which said that in its opinion the company could not be rescued and the deal that had been arranged offered the best result for creditors. It did not matter that the company had not, in the end, been liquidated. What mattered was that the insolvency practitioner instituted the administration with the intention of entering the company into liquidation.

Pre-pack administrations of the Oakland type are now likely to be even more attractive to buyers, who could insist on such arrangements to force a deal through even where previously it may have been done without instigating liquidation proceedings.

Buyers would then have the flexibility to dictate their own terms to employees and the insolvency practitioners could argue that, because the buyer would not have bought the company without the pre-pack arrangement, and no other buyer could be found, the insolvency proceedings were ‘instituted with a view to liquidation’.

But rmemebr, whether the insolvency proceedings are terminable or not, employers still have a duty to consult and inform employee representatives.

Failure to do so can result in an award to each affected employee of up to 13 weeks uncapped pay, which as a joint and several liability to the buyer and the seller, can mean large payouts.

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