The Court of Appeal has issued further guidance on the thorny issue of the application of the TUPE Regulations to administration proceedings. While many practitioners will feel that the decisions are not helpful in trying to achieve business sales in what is already a challenging market, insolvency practitioners (IPs) nonetheless need to be aware of the clarity that these cases have brought. The key points to note are:

  • A dismissal by an administrator may be because of a transfer, or for a reason connected with a transfer (that is not an economic, technical or organisational (ETO) reason), and therefore automatically unfair, even if no particular transferee has been identified at the point of making the dismissal;
  • The ETO reason defence will not generally be available if the practitioner is looking to slim the workforce down to make it more attractive to sell;
  • Tribunals will take an “absolute approach” to determining whether an insolvency procedure is entered into with a view to the liquidation of the assets, irrespective of the particular circumstances of any individual case. Adopting that approach, all administration appointments are made with a view to achieving the primary statutory objective (rescuing the company) whether or not that transpires to be the objective actually achieved post appointment. Administrations will never, therefore, fall within Regulation 8(7) of TUPE, and instead are governed by Regulation 8(6).

Spaceright Europe Limited v Baillavoine [2011] EWCA Civ 1565

In the case of Spaceright Europe Limited v Baillavoine, Baillavoine (B) was the Chief Executive of Ultralon Holdings Limited (Ultralon). Ultralon was placed into administration, and B was dismissed by the administrators on the same day, before a buyer was identified. About a month later, Ultralon was sold to Spaceright, and the sale was governed by TUPE. B brought a claim for automatic unfair dismissal against Spaceright, on the basis that liability for his dismissal transferred to them under Regulation 4 of TUPE.

Regulation 7(1) of TUPE provides that the dismissal of an employee is automatically unfair when the sole or principal reason for the dismissal is a TUPE transfer, or a reason connected with the transfer that is not an ETO reason. In cases of an insolvent transferor, the question has often arisen whether a dismissal can be “connected with the transfer” when that dismissal takes place before a buyer for the business has even been found, and so the transfer is not yet lined up.

The Court of Appeal allowed B’s claim, confirming that “the natural and ordinary meaning of the language in regulation 7(1) does not require a particular transfer or transferee to be in existence or contemplation at the time of the dismissal”. Further, they held that B’s dismissal was not for an ETO reason, as the business would still need a Chief Executive going forward. The Court of Appeal confirmed that an ETO reason will not generally be available when administrators dismiss employees simply to make the business more attractive to potential buyers, which the Court held to be the reason for the dismissal in this case.

Key2Law (Surrey) LLP v D’Antiquis [2011] EWCA Civ 1567

In the case of Key2Law (Surrey) LLP v D’Antiquis, the Court of Appeal has upheld the decision of the EAT in OTG v Barke, confirming that administrations will never come within the scope of Regulation 8(7) of TUPE.

Regulation 8(7) provides that where terminal insolvency proceedings have been instigated, with a “view to the liquidation of the assets of the transferor”, then employees (together with employee-related liabilities) will not be inherited by the transferee, and any dismissal because of the transfer, or connected to the transfer, will not be automatically unfair. However, where non-terminal insolvency proceedings have been instigated, “not with a view to the liquidation of the assets of the transferor”, Regulation 8(6) operates to provide that employees will transfer, and benefit from protection against dismissal. However, some of the transferor’s employee related debts are picked up by the Secretary of State rather than the transferee buyer.

There have been conflicting decisions at EAT level in recent years as to whether an administration comes within Regulation 8(6) or 8(7). In 2008, in the case of Oakland v Wellswood (Yorkshire) Limited, where a business was transferred as part of a pre-pack administration, the EAT held that, on the facts of this particular case, it came within Regulation 8(7) of TUPE, and so the employees did not transfer to the buyer. A couple of years later, in the case of OTG v Barke, the EAT held that the Oakland decision was wrong, and that administrations can never fall within Regulation 8(7), even in a pre-pack situation. This was an absolute rule, and the fact based approach, as adopted in Oakland, was inappropriate.

We now have clear guidance from the Court of Appeal confirming that the “absolute approach” of OTG v Barke, is the correct one. In coming to this decision, the Court of Appeal considered the function of an administrator, in terms of Schedule B1 to the Insolvency Act 1986. As this function is to rescue the business as a going concern, it was not possible to conclude that an administrator’s appointment was made with a view to liquidation of the assets. This may happen in some cases, but it was not the purpose of the proceedings. Further, a fact based approach, rather than an absolute rule, was not appropriate, as it creates uncertainty as to whether or not Regulation 4 applies in any particular case.

Impact of these decisions

  • The Spaceright case confirms that if administrators dismiss employees of an insolvent business to make that business more attractive to buyers, they could be creating liabilities which will then pass to those buyers under TUPE. This is likely to affect the price most buyers will be willing to pay for the business.
  • Whether or not a dismissal is connected to a transfer is a question of fact; however it is one that Tribunals will be able to determine after the event, whilst administrators may not know, at the point of taking a decision to dismiss, whether or not a transfer will ever be achieved. What was important in this case, however, was the fact that the arrangements in place were geared towards sale, and this was not a situation where achieving a sale was ever really doubted.
  • Whilst an ETO defence could not be established in this case, this was largely influenced by the fact that it was clear the company would need a Chief Executive going forward – it was not, therefore, a genuine redundancy, and the dismissal was viewed by the Court as solely being for the purpose of making the business more attractive for sale. In different circumstances, where there are surplus employees, an IP may be able to show any redundancies are either wholly unconnected to the transfer, or, alternatively, are for an ETO reason.
  • The Spaceright case will also be of interest to potential buyers of insolvent businesses, as a reminder of the importance of undertaking proper due diligence in respect of matters such as former employees, to avoid inheriting unknown and potentially significant liabilities.
  • Whilst clarity on the issue of whether administrations come within Regulation 8(6) or 8(7) is likely to be welcomed, it confirms that purchasers of businesses in administration have to be prepared to take on all of the employees of that business, which may make it more difficult for administrators to achieve a sale. This is generally what has been happening in practice at the moment anyway; however critics will no doubt be of the view that adding employee liabilities to the cost of buying insolvent companies is a significant disincentive to those engaged in rescuing them.
  • Insolvency practitioners/purchasers will still be able to rely upon the Regulation 8(7) exemption in relation to companies in liquidation. Further, in administrations governed by Regulation 8(6), there is still a limited exemption from the normal obligations of TUPE, as transferees do not inherit all the employment liabilities of the transferor, and there is more scope than usual to vary employees’ terms and conditions of employment.

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