Insolvency

Application of TUPE 2006 to administrations


“Administration proceedings pursuant to Schedule B1 of the Insolvency Act 1986 are not capable of constituting “bankruptcy … or … analogous insolvency proceedings which have been instituted with a view to the liquidation of the assets of the transferor” within the meaning of regulation 8(7) of TUPE and article 5.2 of the consolidated Acquired Rights Directive, with the consequence that on a sale by an administrator regulations 4 and 7 of TUPE will apply” Mr Justice Underhill

OTG Limited v Barke [2011] UKEAT 0320_09_1602

Regulation 4 of TUPE 2006 provides that on a relevant transfer of an undertaking the contracts and accrued liabilities of the employees are not terminated but passed to the transferee. Regulation 8(7) disapplies Regulation 4 where a company enters into proceedings with a view to the liquidation of the assets of the transferor. When TUPE 2006 first came into force the immediate question for insolvency practitioners was whether this exemption applied to companies in administration. The initial assumptions widely made that administrations fell within the insolvency exemption have since been twice challenged by the Employment Appeal Tribunal which in each case, but by different routes, has arrived at the conclusion that employees transferred by companies in administrations are protected by TUPE 2006.

This was a hearing of five cases where the EAT said it had been asked to provide an authoritative decision (subject to any further appeal) on the correct approach to the application of Regulation 8 (7) in the case of a transfer made by a company in administration: it is in the interests of employees that Regulation 8(7) should not apply, and in the interests of the transferee that it should.
The question for the EAT was whether administration proceedings may fall within Regulation 8(7).
The EAT recognised that this issue has been approached in two ways:

  • that in no circumstance can an administration fall within Regulation 8(7) (“absolute approach”), or
  • that an administration may fall within Regulation 8(7) if the facts demonstrate that the administration was commenced with the view to a liquation of assets (“fact-based approach”).

In Oakland v Wellwood (Yorkshire) Ltd [2009] IRLR 250 the fact-based approach was applied by the EAT.
There it was held that Regulation 4 of TUPE 2006 was disapplied by Regulation 8(7) because the
administrator had clearly been appointed with a view to the liquidation of the assets. Although this
point was not considered by the Court of Appeal when it subsequently heard the case, one judge
indicated that he thought the fact-based approach was wrong.

Rejecting its own approach in Oakland, in this case the EAT held the “absolute” approach to be
correct because:

  • The legal character of the relevant procedure, the objective of the procedure rather than the objective of the individuals operating it, is the determinative factor;
  • The primary objective of administration is the rescue of the business as a going concern, which is inconsistent with a liquidation of the assets;
  • TUPE 2006 is concerned with the character of the insolvency proceedings when they are instituted; at the moment of appointment the administrators will not have always determined whether or not to liquidate the assets. The administrator does not have to state what objective he has for the administration when he is appointed, so the primary objective can be presumed;
  • The absolute approach gives certainty and better protection for employees, which was the
    purpose of the Directive which gave rise to TUPE 2006.

This result is different from the outcome of Oakland, which the EAT considered to be a typical case of a pre-pack sale of a business by an administrator. Whilst the desire of the EAT to settle the uncertainty for administrators is welcomed, having two conflicting approaches of equal weight does not conclude the debate. This latest decision will not be welcomed by administrators: holding that a purchaser of a business from administrators acquires all the employee liabilities will not make such purchases attractive and may negatively impact on the price that can be achieved for such sales.