Reforms

On 6 April 2006, the Transfer of Undertakings (Protection of Employment)(“TUPE”) Regulations 2006 come into force, replacing the TUPE Regulations 1981 wholesale.

For insolvency practitioners (IPs), the main changes in the 2006 Regulations are as follows:

  • Reducing the burden on purchasers of certain insolvent businesses by providing that certain TUPE liabilities shall to be met by the National Insurance Fund

Many insolvent businesses are simply wound up and there is no prospect of saving jobs. The claims of such employees are against the insolvent entity, however, the Government underwrites some of these claims under the Employment Rights Act 1996.

Prior to 6 April 2006, where there was a relevant transfer of an insolvent business, the employment contracts transferred with the business to the transferee and the employees had no preserved claims against the insolvent entity. Similarly, any employees who had been unfairly dismissed before the transfer would look to the transferee to meet their claims. If the level of these TUPE liabilities was substantial, this could be a disincentive to purchase an insolvent business.

The 2006 Regulations provide that any claims which employees would have been able to make against the National Insurance fund under the 1996 Act but for the transfer, can nevertheless be made on that fund, thereby lifting that burden from the transferee. The DTI calculate that additional liabilities will amount to around £6.6million per year. They also calculate that the preservation rate of all insolvencies will increase by 2-3%, affecting around 4,900-7,300 employees, of whom they expect half will retain their jobs with concomitant savings for the taxpayer both in relation to redundancy payments and unemployment.

Previously, it was not possible to re-negotiate employment contracts to any extent in the context of a transfer, even with the employees’ consent. However, this inflexibility has been changed in the 2006 Regulations, which provide that an IP (or the transferor or transferee) may agree certain permitted variations in the employees’ contracts with employee representatives for the purposes of survival of the business.

The regulations set out procedures which must be followed in entering into such negotiations. These changes should operate in practice to give IPs and those advising in restructuring situations greater flexibility to re-negotiate contractual terms where the business is being prepared for a transfer. There will be time and cost involved in seeking to vary contracts and, in some cases that may present difficulties. However, in other cases, these provisions may make the difference between rescue and failure. In such a case, it is important to ensure that the prescribed procedures are followed, for example arranging for the appointment of specially elected employee representatives where the business has no such representatives in place.

The Regulations provide that a transferor must disclose certain information to the transferee, including the name, age and statutory employment terms of the employees being transferred; details of any statutory grievances and disciplinary action taken in the last two years; and details of any future potential employee claims.

There is a financial penalty for failing to meet this requirement. The penalty will be a minimum of £500 per employee affected. In some cases, IPs will have difficulty in complying with this obligation, however, attempts will have to be made to try to keep down the potential penalties to maximise any potential dividend in the insolvency and avoid criticism.

Conclusion

The new Regulations introduce some measures which are designed to promote the Rescue Culture. However, these measures are somewhat offset by the prospect of new liabilities for failure to disclose and failure to inform and consult. IPs should be alive both to the greater flexibility which the new Regulations will provide and the need to take prospective liabilities into account in negotiating any sale agreement.

If you require any further information, please contact Gillian Carty on 0131 473 5138 or Joanna Clark on 0131 473 5242.

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