TUPE: fair or unfair for staff?
The Court of Appeal has clarified the impact of the TUPE Regulations on sales out of administration
In insolvencies, personnel issues are key for a variety of reasons, not least of which are the implications for all concerned of a proposal to sell all or part of the business. The TUPE Regulations have a huge impact, and the amendments made when the regulations were revised in 2006 attempted to address some of the difficulties encountered with the previous regulations of 1981.
The key principle is in reg 4, which provides that a dismissal because of a transfer is automatically unfair, and that unless an economic, technical or organisational (“ETO”) reason exists, a dismissal connected to a transfer will also be automatically unfair. The 2006 Regulations attempted to balance the promotion of “the rescue culture” with rights of employees under the TUPE principles by removing the principle of automatic unfairness (and therefore the protections against transfer related dismissals) where bankruptcy proceedings have been instituted with a view to the liquidation of the transferors’ assets (reg 8).
The intention was good and highly laudable; the result was profound uncertainty in almost every case by the straightforward transfer into domestic regulations of the wording of the EU Acquired Rights Directive, and there has followed a series of conflicting cases under which hopefully a line has now been drawn by the Court of Appeal in the case of Key2Law (Surrey) LLP v De’Antiquis  ECWA Civ 1567.
The regulations provide that an acquisition from a company subject to relevant insolvency proceedings, if it meets the ordinary test for a TUPE transfer, would be subject to the TUPE Regulations. “Relevant insolvency proceedings” (sometimes referred to as “non-terminal” proceedings) are proceedings which are not opened with a view to liquidation of the transferor’s assets. In contrast, proceedings instituted with a view to liquidation of the transferor’s assets (“terminal” proceedings) are not subject to the principle of automatic transfer of employment and there is no protection from transfer-related dismissal.
The issues which arose related to administrations. Paragraph 3 of sched B1 to the Insolvency Act 1986 sets out a hierarchical structure of purposes by reference to which an administration is opened, the first of which is “to rescue the company as a going concern”, failing which the administrators may seek to achieve a better result for creditors as a whole than would be achieved by liquidation, or alternatively to realise property to make a distribution to secured or preferential creditors. The question for the Court of Appeal was whether reg 8 of the TUPE Regulations required an “absolute” approach which, because of the provisions of para 3 and the requirement that the administrators consider these and make proposals to creditors following their appointment, excluded the possibility of administration falling within reg 8(7) being “analogous insolvency proceedings which have been instituted with a view to the liquidation of the assets of the transferor”; or whether the regulations require a “fact-based” approach which recognises that in some (but not all) cases administration may be instituted with a view to liquidating assets for a better result for creditors.
In Oakland v Wellswood (Yorkshire) Ltd  IRLR 250 the employment tribunal and the employment appeal tribunal took the view that reg 8(7) applied where the purpose of the administration was directed at liquidation of assets. The Court of Appeal in that case ( ICR 902) decided the case on another point altogether, although it did indicate that it thought the tribunals might have taken the wrong approach.
In Key2Law (Surrey) LLP v De’Antiquis the Court of Appeal has resolved this uncertainty. The court held that administration will always be “relevant insolvency proceedings” and therefore TUPE will apply to the transfer when the business is sold by the administrator. The focus, it said, should be on the purpose of the procedure irrespective of any preconceived ideas the administrator may have as to how he is going to perform his functions. As the primary objective of administration is rescue, it could not logically be opened with a view to liquidation of assets.
Alistair Burrow, Partner, Tods Murray LLP
Alistair Burrow retired from Tods Murray at the end of March and this is his final column. The Journal is very grateful for his commitment to the magazine over many years. – Editor