TUPE passes the buck

Far from providing clarity, the new regulations will need litigation to decide the effect of the insolvency provisions (longer version of October 2006 briefing article)

Submission, 13 October 2006

The Transfer of Undertakings (Protection of Employment) Regulations 1981 caused considerable litigation and debate over what constituted an “undertaking” and a “transfer”. On 6 April 2006 the 1981 Regulations were replaced by the Transfer of Undertakings (Protection of Employment) Regulations 2006. One purpose of the new regulations is to provide some relief from the transfer of liabilities where a transfer takes place from an insolvent transferor. The intention is that some liabilities will be met by the National Insurance Fund instead of passing to the transferee. The new regulations have caused so much concern that a motion to revoke them was debated in the House of Lords on 3 May, and defeated by only two votes.

The new regulations use the vague generic language of the European directive which these regulations implement, allegedly to avoid legal challenges to the UK’s implementation of the directive, although the directive expressly permits member states to tailor implementation of the insolvency provisions to their own circumstances. The regulations seek to distinguish between insolvency proceedings “opened with a view to the liquidation of the assets of the transferor”, and “bankruptcy proceedings or any analogous insolvency proceedings opened not with a view to the liquidation of the assets of the transferor”. In the former case, certain pre-transfer debts will be paid from the National Insurance Fund and will not pass to the transferee. However, assets may be realised in any type of insolvency proceedings in the UK and so it is difficult to ascertain the circumstances in which the insolvency provisions are intended to take effect. Is the “view” with which the insolvency proceedings are opened to be assessed on a case by case basis? Who takes the view? Is it to be assessed when the proceedings are “opened”? What is “opened”?

These difficulties are compounded by apparently conflicting statements made by government agencies. The regulations appear to say that, in the case of employees transferring to the purchaser, the liabilities to be met from the National Insurance Fund will be those payable under the insolvency provisions of the Employment Rights Act (”ERA”) as if the employees had been dismissed at the date of the transfer, but that the Fund will not meet liabilities to employees under the redundancy provisions of that Act. The DTI in its guide to the regulations appeared to say that the Fund would pay sums due under both the redundancy and the insolvency provisions of ERA. The Redundancy Payments Directorate has indicated that only arrears of wages and holiday pay would be met from the Fund. If correct, that would give less relief from transferred liabilities than might have been expected from the DTI guidance.

In the revocation debate, the government appeared to argue that administration was not a collective proceeding, and that the principal purpose of administration was not a realisation of assets for distribution among creditors, but the rescue of a company. This appears to be based on an incorrect understanding. Administration has three purposes arranged hierarchically, in which the first objective is to rescue the company, the second is to achieve a better result for creditors than would be likely if the company were wound up (and hence a collective proceeding), and the third is to realise property to make a distribution to secured or preferential creditors. The first objective can be achieved only in rare circumstances. In most cases, the second objective is the principal reason for the administration. Can it then be right to say that administrations in all cases are proceedings which are entered into “not with a view to the liquidation of the assets of the transferor”. Surely not!

The government also argued that to list specific UK insolvency regimes would cause difficulties where there was a transfer of an undertaking located in the UK which was part of a European registered business entity the subject of insolvency proceedings in its own country. In this, the government appears to have failed to take account of the EC Regulation on Insolvency Proceedings, article 10 of which specifically provides that “the effects of insolvency proceedings on employment contracts and relationships shall be governed solely by the law of the member state applicable to the contract of employment”.

Regulation 8 refers to Chapter VI of Part XI of the ERA (which deals with redundancy pay) and Part XII of ERA, which covers a number of payments: arrears of pay, holiday pay, statutory pay in lieu of notice and a basic award for unfair dismissal. The regulation expressly states that the relevant statutory schemes shall apply even if the qualifying requirement (that the employee’s employment has been terminated) is not met. Apparently, the Redundancy Payments Office does not know what this means and has admitted that there is scope to challenge its interpretation. It seems unfair that it should be left to employees of insolvent companies to have issues such as this determined in the tribunals or the courts when one of the main purposes of the regulations was to clarify their entitlement on transfers in insolvent situations.

Two further aspects of the regulations cause difficulties for insolvency practitioners. Regulation 11 requires the transferor to provide detailed information about employees to the transferee not less than 14 days before the transfer. Regulation 13 requires an employer contemplating a transfer to provide employee representatives with detailed information about the proposed transfer, including “the legal, economic and social implications” of the transfer and measures which the employer envisages it or the transferee will take in connection with the transfer in relation to any affected employees, a category which is wider than those who transfer and includes any staff of transferor or transferee affected by the transfer or the measures taken. The transferee will be jointly and severally liable with the transferor for any compensation awarded for failure to comply with these requirements. In most insolvency cases it will be impossible for the officeholder to comply because of the constrained circumstances in which they work. A potential transferee will not want to be jointly and severally liable with an insolvent company for any failure to comply. The government’s response was simply that a tribunal could waive the award of compensation where it considered that just and equitable, and that there was no reason why consultation could not be carried out properly in the extreme situation of insolvency.

The government’s position appears to be that it is impossible to achieve complete certainty in the drafting of legislation and it will be for courts and tribunals to determine the effect of the legislation. Voters might be justified in asking if the government is serious in making such a claim, and whether it is fair to expect citizens whose livelihoods are at risk to have to engage the services of the legal profession and resort to courts or tribunals in order to achieve clarity when the government is unwilling to deliver clarity of drafting in the first instance.