Administrations and TUPE – EAT Gives Guidance

Posted: 11th March 2011

In an important case (OTG Ltd. v Barke and Others), the LorryEmployment Appeal Tribunal (EAT) has provided clarification on the application of Regulation 8(7) of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) with regard to administration proceedings under Schedule B1 of the Insolvency Act 1986. Regulation 8(7) provides that where insolvency proceedings are analogous to bankruptcy proceedings and have been instituted with a view to liquidation of the company’s assets, the transfer provisions of TUPE do not apply. In such circumstances, employees do not automatically transfer to the new owner and any dismissals are not automatically unfair.
The EAT heard five appeals, four of which arose from ‘pre-pack’ sales by administrators, which raised the same primary issue – whether or not administration proceedings can constitute bankruptcy proceedings instituted with a view to the liquidation of the assets of the transferor.
In reaching its decision, the EAT gave full consideration to the EC Acquired Rights Directive, which TUPE implements into UK law, and relevant case law of the European Court of Justice (ECJ). From this it was clear that the ECJ made a deliberate distinction between proceedings aimed at the disposal of the undertaking and/or its assets and proceedings aimed at its continuation in the same hands. The primary purpose of the Directive is to protect employees in the event of a transfer and, in particular, to ensure their rights are safeguarded.
The EAT declined to follow the decision in Oakland v Wellswood (Yorkshire) Ltd., in which a different EAT had taken a fact-based approach to the issue and held that the transfer provisions of TUPE did not apply in a case where the facts showed that the administration had clearly been instituted with a view to the eventual liquidation of the old company’s assets. The EAT ruled that this approach was incorrect. In such cases, an absolute approach is required. It is clear from the provisions of the Insolvency Act that the primary purpose of an administration under schedule B1 is to give the administrator the opportunity of rescuing the company as a going concern, even though that is not the only use that can be made of the procedure – for example, for pre-pack administration sales. In the EAT’s view, therefore, at the moment at which any administration proceedings are initiated, it cannot be said that their object is to liquidate the assets of the company.
The EAT held that TUPE will always apply to the sale of a business by an administrator so that the employment contracts of those employed by the transferor immediately before the transfer will pass to the transferee, together with any accrued liabilities to the employees.
Failure to comply with the TUPE provisions can be very expensive for businesses and it is important to take advice at the beginning of the process.
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