Cautionary note about new TUPE decision on sales by administrators

A recent ruling by the Employment Appeal Tribunal appears to open the way for buyers of insolvent businesses to escape having to take on the former owner’s obligations to the employees of the business.

Broadly, when a business is transferred the Transfer of Undertakings Protection of Employment Regulations 2006 (TUPE) operate to transfer the employment contracts to the new owner. The ruling in Oakland v. Wellswood (Yorkshire) Ltd (UKEAT/0395/08), however, means that a transfer by an administrator of an insolvent business will not necessarily bring TUPE to bear. According to the EAT, if the administrator’s subjective analysis is that the purpose of the administration is the liquidation of the insolvent business’s assets, it follows that a transfer of the undertaking is exempted from TUPE by virtue of TUPE Regulation 8(7).

The result therefore was that the buyer of the assets of the insolvent business in question did not have to take over the employees or honour their old contracts or the liabilities connected with them. The decision is at odds with the established understanding of the position and – we think – is not safe to rely on.

Facts

The administrators were appointed out of court on 6 December 2006, having initially been consulted about 10 days before. On the same day as the administrators were appointed, certain assets were purchased by a third party, which also acquired the lease of the business premises occupied by the company in administration and five out of seven employees. The Employment Tribunal (ET) accepted the administrators’ report, prepared nearly two months later, to the effect that, due to the scale of the company’s insolvency, rescuing the company as a going concern was not achievable. Rather, the administrators said that they concentrated their efforts on achieving the secondary purpose of administration, namely a better result for creditors than if the company were wound up.

Decision

The ET found therefore that the purpose of this insolvency administration was the liquidation of the assets of the insolvent company, and that therefore Regulation 8(7) applied, taking the resulting sale out of TUPE’s scope.

The unsuccessful claimant appealed to the Employment Appeal Tribunal. The EAT agreed with the original ET decision. The EAT judge noted that, when making TUPE, Parliament had not specified what sort of insolvency procedure would fall into Regulation 8(7). The EAT also found no assistance in the official guidance published by the Department of Business, Enterprise and Regulatory Reform (BERR).

The EAT decided that the question under Regulation 8(7) was one of fact, not a matter of law, and that the ET had been entitled on the facts to conclude that the administration was with a view to the eventual liquidation of the assets of the insolvent company by way of a creditors’ voluntary liquidation. Accordingly, this was a case where Regulation 8(7) applied, so TUPE did not apply at all.

Comment

We doubt that this decision is correct. It contains inconsistencies and is in direct conflict with BERR’s guidance on the subject [click here to access]. BERR’s guidance focuses on the objective purpose of administration rather than the specific purpose the administrators decide is achievable on the facts of the case.

We think the correct approach under the underlying European Directive and under TUPE is the objective one – what is the legal purpose of the process itself? - and not the subjective one of what is the insolvency practitioner’s purpose in any particular insolvency.

As this area is of great practical importance and financial significance, we doubt that the decision will long go unchallenged. Those concerned with relevant matters – insolvency practitioners and buyers from insolvent companies - should therefore proceed with caution, rather than assume the Oakland decision will necessarily provide an escape route from TUPE even in the administration of a hopelessly insolvent company.