OTG Ltd v Barke & Ors UKEAT/0320/09/RN
Five appeals, listed together, concerning the correct approach on the issue of whether administration can disapply regulation 4 of TUPE.
The five appeals all touched on a primary issue as set out by Underhill J in para. 1:
"administration proceedings under Schedule B1 constitute, or may constitute, "insolvency proceedings … instituted with a view to the liquidation of the assets of the transferor" within the meaning of reg. 8 (7) (for short, "liquidation proceedings"), with the result that reg. 4 is disapplied. We say "may constitute" because it is accepted that not all administration proceedings will fall within reg. 8 (7). The competing contentions are, on the one hand, that they can never do so ("the absolute approach") and, on the other hand, that they may do so if it is found as a matter of fact that the administration was instituted with a view to the liquidation of the transferor's assets ("the fact-based approach"). "
In this judgment Underhill J first reviews the relevant TUPE legislation and ECJ case-law including the case of Abels, which made a clear distinction between liquidation proceedings and other types of insolvency and reflected the intention of article 5. He then analyses the Insolvency Act 1986 and the Enterprise Act 2002, noting the growth of "pre-pack" administration under these provisions and which was used in four of the cases subject to this judgment. He concludes that the absolute approach is correct as, among other reasons:
a) the distinction in art 5 is more likely to depend on the legal character of the procedure not the intention of the people operating it; b) Art 5.1 of TUPE is explicitly concerned with when the insolvency proceedings are instituted and at that point the administrator cannot know whether their object is to liquidate the assets. Furthermore the administrator does not have to state what route he may pursue: c) the absolute approach affords the employee greater protection, as the Directive intended.
He then applies this conclusion finding to each of the appeals listed.
Appeal No. (1) UKEAT/0320/09/RN (2) UKEAT/0321/09/RN (3) UKEAT/0444/09/RN (4) UKEAT/0493/09/RN (5) UKEAT/0302/10/RN
EMPLOYMENT APPEAL TRIBUNAL
58 VICTORIA EMBANKMENT, LONDON EC4Y 0DS
At the Tribunal
On 19-21 October 2010
Judgment handed down on 16 February 2011
THE HONOURABLE MR JUSTICE UNDERHILL (PRESIDENT)
MR I EZEKIEL
MR P SMITH
*UKEAT/0320/09/RN *OTG LTD (APPELLANT)
MR T BARKE; MRS M LUKE; DEPT OF BUSINESS ENTERPRISE & REGULATORY REFORM RESPONDENTS (RESPONDENTS)
*UKEAT/0321/09/RN *MISS A E OLDS (APPELLANT)
LATE EDITIONS LTD )RESPONDENT)
*UKEAT/0444/09/RN *KEY 2 LAW (SURREY) LLP (APPELLANT)
MS G D'ANTIQUIS; DRUMMONDS KIRKWOOD LLP; MR V PATEL (RESPONDENTS)
*UKEAT/0493/09/RN *THE SECRETARY OF STATE FOR BUSINESS INNOVATIONS & SKILLS (APPELLANT)
MR T A COYNE & OTHERS (RESPONDENTS)
HEAD ENTERTAINMENT LLP (APPELLANT)
MR J WALKER & OTHERS; SECRETARY OF STATE FOR BUSINESS ENTERPRISE & REGULATORY REFORM (RESPONDENTS)
Transcript of Proceedings
For the Appellant: MR MARTYN WEST of:
Peninsula Business Services Ltd 42 Riverside New Bailey Street Manchester M3 5PB
For the First Respondent: No appearance
For the Second Respondent: MR EDWARD TOWNSEND (of Counsel)
Instructed by: The Reece-Jones Partnership Epicurus House 1 Akehurst Lane Sevenoaks Kent TN13 1JN
For the Third Respondent: MR ASHLEY SERR (of Counsel)
Instructed by: The Treasury Solicitor One Kemble Street London WC2B 4TSOLDS (UKEAT/0321/09/RN)
For the Appellant: MR J AUSTIN (Representative)
For the Respondent: No appearanceKEY 2 LAW (UKEAT/0444/09/RN)
For the Appellant: MS MELANIE TETHER (of Counsel)
Instructed by: Key2Law (Surrey) LLP 18-19 Jockey's Fields London WC1R 4BW
For the First Respondent: MR JOHN HORAN (of Counsel)
Instructed by: Webster Dixon LLP 3-4 Holborn Circus London EC1N 2HA
For the Second and Third Respondents: No appearanceCOYNE (UKEAT/0493/09/RN)
For the Appellant: MR ASHLEY SERR (of Counsel)
Instructed by: The Treasury Solicitor One Kemble Street London WC2B 4TS
For the Respondent: No appearanceHEAD (UKEAT/0302/10/RN)
For the Appellant: MR MICHAEL DUGGAN (of Counsel)
Instructed by: Ashtons Solicitors The Stables Manor Road Staverton Daventry NN11 6JD
For the First Respondents: No appearance
For the Second Respondent: MR ASHLEY SERR (of Counsel)
Instructed by The Treasury Solicitor One Kemble Street London WC2B 4TS**SUMMARY**
TRANSFER OF UNDERTAKING – Insolvency
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 reg. 8 (7) of TUPE and art. 5.2 of the consolidated Acquired Rights Directive, with the consequence that on a sale by an administrator regs. 4 and 7 of TUPE will apply – Oakland v Wellswood (Yorkshire) Ltd.  IRLR 250 not followed.
Observations on application of reg. 8 (1)–(6) of TUPE.**THE HONOURABLE MR JUSTICE UNDERHILL (PRESIDENT)** **INTRODUCTION**
- There are before us five appeals which have been listed together because they raise the same issue. Stripped to its essentials, the point is as follows. A company goes into administration under Schedule B1 of the Insolvency Act 1986. All or part of its undertaking is then transferred to another company, giving rise to a relevant transfer within the meaning of the reg. 3 of the Transfer of Undertakings (Protection of Employment) Regulations 2006 ("TUPE"). Reg. 4 of TUPE provides that in the case of a relevant transfer the contracts of employment of employees assigned to the undertaking (or part) transferred are not – as would otherwise be the case – terminated but pass to the transferee, along with any accrued liabilities to the employee. The transferee also inherits any liabilities in relation to employees dismissed prior to, but because of, the transfer. However, reg. 8 (7) of TUPE disapplies reg. 4 where:
"… the transferor is the subject of bankruptcy proceedings or any analogous insolvency proceedings which have been instituted with a view to the liquidation of the assets of the transferor and are under the supervision of an insolvency practitioner".
The primary issue in these appeals is whether administration proceedings under Schedule B1 constitute, or may constitute, "insolvency proceedings … instituted with a view to the liquidation of the assets of the transferor" within the meaning of reg. 8 (7) (for short, "liquidation proceedings"), with the result that reg. 4 is disapplied. We say "may constitute" because it is accepted that not all administration proceedings will fall within reg. 8 (7). The competing contentions are, on the one hand, that they can never do so ("the absolute approach") and, on the other hand, that they may do so if it is found as a matter of fact that the administration was instituted with a view to the liquidation of the transferor's assets ("the fact-based approach").
- The issue is one of real importance in practice. It is true that in the pure case where the transferee is willing to take on the entirety of the workforce, on the same terms, it may not make much practical difference whether he does so "under TUPE" or whether there is a dismissal by the transferor immediately followed by a re-engagement by the transferee.1 But many cases are far from pure. It will of course be common for the transferor, being insolvent, to owe money to its employees; and further liabilities will accrue if, as will again be very common, the transfer gives rise to dismissals. It will in those circumstances be crucial to establish whether the liabilities in question have transferred to the (usually) solvent transferee or remain with the insolvent transferor. If they pass to the transferee the employee will have an enforceable claim. If they remain with the transferor the employee will simply be an unsecured creditor and will – subject to one important complication - to a greater or lesser extent lose out. The complication is that by statute, giving effect to the requirements of Council Directive 80/987/EEC, the Secretary of State is obliged to, in effect, guarantee, out of the National Insurance Fund, some of the obligations of an insolvent employer; and that obligation is, subject to the detailed provisions of regs. 8 (1)-(6) of TUPE, which we consider below, unaffected by the transfer of the employment under TUPE. The statutory guarantee provisions are twofold:
(1) Ch. VI of Part XI of the Employment Rights Act 1996 requires the Secretary of State to guarantee unpaid redundancy payments (and some other similar payments of which we need not give the details here) due from an insolvent employer.
(2) Ch. XII of the 1996 Act requires the Secretary of State to guarantee five kinds of debt specified in section 184 - arrears of pay (up to eight weeks); pay in lieu of the minimum statutory notice; holiday pay (including rights to pay for untaken holiday arising on termination) in respect of the last year (up to six weeks); any basic award for unfair dismissal; and reimbursement of premium paid by an apprentice or articled clerk. By section 186 any debts calculable by reference to a period of time are subject to a maximum amount (currently £380) in respect of each week. The conditions for payment are defined in section 182 as being that:
"(a) the employee's employer has become insolvent,
(b) the employee's employment has been terminated, and
(c) on the appropriate date the employee was entitled to be paid the whole or part of [the] debt …"
"The appropriate date" is defined differently for the purpose of different kinds of debt: see section 185.
We will refer to these as "the redundancy payments guarantee" and "the Part XII guarantee" respectively.
- It follows that in the case of a transfer by a company in administration it is in the interests of employees (or at least those with claims not, or not fully, covered by the statutory guarantee) and of the Secretary of State that reg. 8 (7) should not apply, and in the interests of the transferee that it should. Employees and the Secretary of State will thus in principle argue for the absolute approach and transferees for the fact-based approach.
- The question of the application of reg. 8 (7) in the case of a transfer by a company in administration has been considered by this Tribunal before. In Oakland v Wellswood (Yorkshire) Ltd  IRLR 250 HH Judge Peter Clark, sitting alone, held that the question of the application of reg. 8 (7) was one of fact. His decision was the subject of an appeal to the Court of Appeal: see [ EWCA Civ 1094](http://www.bailii.org/ew/cases/EWCA/Civ/2009/1094.html),  ICR 902. In the event the appeal was decided on another ground.2 In those circumstances the Court preferred not to deal with the reg. 8 (7) issue, not least because there was no representation on the part either of the transferee or of the Secretary of State; but Moses LJ made it clear that in his view there were strong grounds for thinking that Judge Clark's approach had been wrong (see pp. 905 G-H and 907 B-C).
- Against that background these five cases have been listed before us in order to obtain an authoritative decision (subject of course to any further appeal) on the correct approach to the application of reg. 8 (7) in the case of a transfer made by a company in administration. We would normally on ordinary principles have been slow to depart from Judge Clark's considered decision in Oakland; but in these particular circumstances we ought to approach the question with a clean slate.
- The facts of the individual cases are not material for the purpose of deciding the issue of principle, and we will not set them out at this stage. They can be found, at least in outline, in the section below where we apply our decision on that issue in the particular appeals.
- We heard submissions from Mr. Ashley Serr of counsel, for the Secretary of State, in the OTG, Coyne and Head Entertainment appeals; from Mr. Martyn West of Peninsula Business Services for the Appellant and from Mr. Edward Townsend of counsel for the Second Respondent in OTG; from Mr John Austin, a friend of the Appellant, in Olds; from Ms. Melanie Tether of counsel for the Appellant and Mr. John Horan of counsel for the First Respondent (the Claimant) in Key2Law; and from Mr. Michael Duggan of counsel for the Appellant in Head Entertainment. We are grateful to all of them, but particularly to Mr. Serr and Ms. Tether, who undertook the main burden of arguing the primary issue and whose submissions were conspicuously clear and careful. In the case of unrepresented parties, we should make clear that we had regard to all written representations lodged. We regret that for various reasons it has taken us longer than we had hoped to promulgate our decision.
- The TUPE Regulations were made in order to give effect to Council Directive 2001/23/EC, the "Acquired Rights Directive", which consolidated the original Acquired Rights Directive (77/187/EC) and a subsequent amending Directive (98/50/EC). That is accordingly the necessary starting-point. The structure of the Directive, so far as relevant for present purposes, is as follows:
(1) The recitals establish that the purpose of the Directive is "to provide for the protection of employees" in the event of an involuntary change of employer as the result of the transfer of the undertaking in which they are employed and "in particular, to ensure that their rights are safeguarded" (recital (3) read with recital (2)); and to reduce the differences in the extent of the protection afforded by employees in different member states (recital (4)). Any purposive construction of the Directive must start from this point.
(2) Ch. I, which comprises arts. 1 and 2, defines the scope of the Directive, and specifically the transfers to which it applies.
(3) Ch. II is headed "Safeguarding of Employees' Rights". The primary provisions are contained in arts. 3 and 4, which provide respectively for the contract of employment (and associated rights) of employees in a transferred undertaking to go with the transfer, and for dismissals in connection with the transfer to be (subject to specified exceptions) unlawful. It should be noted that even agreed variations of the contract of employment consequent on a transfer are ineffective, since they are treated as, in effect, contracting out of art. 3: see the Daddy's Dance Hall case  IRLR 315.
(4) Art. 5 provides for a two-fold exception (or potential exception) to the primary protection afforded by arts. 3 and 4, as follows:
"1. Unless Member States provide otherwise, Articles 3 and 4 shall not apply to any transfer of an undertaking, business or part of an undertaking or business where the transferor is the subject of bankruptcy proceedings or any analogous insolvency proceedings which have been instituted with a view to the liquidation of the assets of the transferor and are under the supervision of a competent public authority (which may be an insolvency practitioner authorised by a competent public authority).
2. Where Articles 3 and 4 apply to a transfer during insolvency proceedings which have been opened in relation to a transferor (whether or not those proceedings have been instituted with a view to the liquidation of the assets of the transferor) and provided that such proceedings are under the supervision of a competent public authority (which may be an insolvency practitioner determined by national law) a Member State may provide that—
(a) notwithstanding Article 3(1), the transferor's debts arising from any contracts of employment or employment relationships and payable before the transfer or before the opening of the insolvency proceedings shall not be transferred to the transferee, provided that such proceedings give rise, under the law of that Member State, to protection at least equivalent to that provided for in situations covered by Council Directive 80/987/EEC of 20 October 1980 on the approximation of the laws of the Member States relating to the protection of employees in the event of the insolvency of their employer, and, or alternatively, that,
(b) the transferee, transferor or person or persons exercising the transferor's functions, on the one hand, and the representatives of the employees on the other hand may agree alterations, in so far as current law or practice permits, to the employees' terms and conditions of employment designed to safeguard employment opportunities by ensuring the survival of the undertaking, business or part of the undertaking or business.
4. Member States shall take appropriate measures with a view to preventing misuse of insolvency proceedings in such a way as to deprive employees of the rights provided for in this Directive."
(5) Thus, by virtue of art. 5.1, in the case of "bankruptcy proceedings or any analogous insolvency proceedings … instituted with a view to the liquidation of the assets of the transferor" – liquidation proceedings in our shorthand - arts. 3 and 4 are excluded altogether. We should note a point about the phrase "bankruptcy proceedings". The equivalent terms in the versions of the Directive in other languages are generally not, like "bankruptcy", specific to personal insolvency. Using "bankruptcy" as the primary term reads a little oddly to an English lawyer, given that in most situations where the Directive applies the employer will be a corporate entity; but the "analogous insolvency proceedings" would of course cover corporate insolvency. The crucial point is that the proceedings, however described, should be instituted with a view to liquidation.
(6) Art. 5.2, by contrast, is applicable in "insolvency proceedings which have been opened in relation to a transferor (whether or not those proceedings have been constituted with a view to the liquidation of the assets of the transferor)" – in other words to all insolvency proceedings. It provides for member states to allow a partial derogation from the effect of arts. 3 and 4, in two respects, namely (a) as regards any debts covered by guarantee provisions pursuant to Directive 80/987/EEC and (b) so as to allow renegotiation of terms and conditions "designed to safeguard employment opportunities by insuring the survival of the undertaking", which would otherwise be outlawed by the Daddy's Dance Hall decision.
(7) Ch. III imposes obligations on the transferor and transferee to inform and consult the representatives of employees affected by a transfer. These obligations apply equally to a transfer by an employer subject to insolvency proceedings.
- Since it is not suggested that there is any incompatibility between the relevant terms of the Directive and those of TUPE, by which it is sought to be implemented, it is in practice the former with which we are primarily concerned. Nevertheless we should identify the relevant provisions of TUPE. Regs. 4 and 7, which we need not set out, give effect to arts. 3 and 4. Reg. 8, which is headed "Insolvency", gives effect to art. 5. Para. (7), which we have already set out at para. 1 above, reproduces the material part of art. 5.1 word-for-word3. As regards art. 5.2, the United Kingdom has chosen to implement both the options allowed, in the case of insolvency proceedings other than liquidation proceedings. Option (a) is given effect to by paras. (1)-(6) of reg. 8, and option (b) by reg. 9. These are not directly material to the primary issue in these appeals, though they form part of the context; but paras. (1)-(6) of reg. 8 have a bearing on the two of the individual cases, and we set them out at para. 30 below. Ch. III of the Directive, relating to information and consultation, is given effect to by regs. 13-16 of TUPE
- The distinction made in the Directive, and transposed in TUPE, between liquidation proceedings (the subject of art. 5.1 and of reg. 8 (7)) and other kinds of insolvency proceedings (the subject of art. 5.2 and of regs. 8 (1)-(6) and 9) originates in the case-law of the European Court of Justice in relation to the original Directive. This was silent on the question of its application to transfers made in the context of insolvency proceedings: what is now art. 5 was only introduced by an amending Directive (98/50/EC) in 1998. That question first fell for consideration in Abels v. Bedrijfsvereniging voor de Metallindustrie en de Electrotechnische Industrie  ECR 469. This decision needs to be analysed with some care. We do so as follows:
(1) Mr. Abels was employed in the Netherlands by a company called Thole. On 2nd September 1981 Thole was granted a provisional court order suspending its obligations to pay its debts. The relevant procedure in Dutch law is known as "surséance van betaling" ("SvB"). Its effect is summarised by the Advocate General, Sir Gordon Slynn, as follows (p. 476)
"As I understand it this order is made by the court provisionally on the application of a debtor who considers that he cannot pay his debts. An administrator is appointed and in the meantime debts (other than preferential or secured debts including those to employees) cannot be enforced. The administrator must approve all acts of administration including transfer of parts of the enterprise and dismissal of employees. This provisional order is made without a full investigation by the court, but after a further hearing, of which creditors and debtors must be given notice, the court may make a final or definitive order. It seems that in a large number of cases, if the financial difficulties are not resolved, the final suspension order is followed by bankruptcy."
(2) On 9th June 1982 Thole was put into liquidation. The following day the liquidator transferred the business as a going concern to a company called TTP.
(3) Mr. Abels brought proceedings against the Bedrijsvereniging (a form of trade association which apparently represented Thole) for unpaid wages and other debts in respect of the pre-liquidation period when he was employed by Thole. Its defence was that liability for those obligations had passed to TTP as the transferee of the business under (in effect) the Directive. The question whether the Directive applied in such a case was referred to the ECJ.
(4) As noted above, the Directive in its then form contained no express provision for the case of insolvency. The Advocate General's opinion was that it had no application to a transfer by a company which was subject to the SvB procedure or in liquidation. The Court agreed about the latter but not about the former.
(5) So far as transfers by a company in liquidation are concerned, the Court's reasoning and conclusion appear at paras. 8-23 of its judgment (pp. 482-5). In concluding that the Directive was not intended to apply to transfers in the context of a liquidation, it relied partly on the fact that if it had been so intended it could have been expected to say so in terms (see para. 17). But it also noted that, though the purpose of the Directive was "to ensure that restructuring of undertakings within the common market does not adversely affect the workers in the undertakings concerned" (para. 18), there was room for different views as to whether its application in the context of an insolvency would have that effect. At paras. 20-23 (pp. 484-5) it said:
" The Bedrijfsvereniging and the Danish Government consider that the directive is applicable to such a situation on the ground that employees whose employer has been adjudged insolvent are precisely those who are most in need of protection; moreover, where such protection is provided, both the workers and the liquidator are normally more inclined to ensure that the undertaking continues to operate until a transfer takes place.
 On the other hand, the Dutch Government and the Commission refer to certain economic consequences which would detract from the protection of workers if the directive were to be applied to transfers of undertakings in the event of insolvency or a surséance van betaling. In their opinion, such an extension of the scope of the directive might dissuade a potential transferee from acquiring an undertaking on conditions acceptable to the creditors thereof, who, in such a case, would prefer to sell the assets of the undertaking separately. That would entail the loss of all the jobs in the undertaking, detracting from the usefulness of the directive.
 That difference of opinion shows that, at the present stage of economic development, considerable uncertainty exists regarding the impact on the labour market of transfers of undertakings in the event of an employer's insolvency and the appropriate measures to be taken in order to ensure the best protection of the workers' interests.
 It is apparent from the foregoing considerations that a serious risk of general deterioration in working and living conditions of workers, contrary to the social objectives of the Treaty, cannot be ruled out. It cannot therefore be concluded that Directive 77/187 imposes on the member-States the obligation to extend the rules laid down therein to transfers of undertakings, businesses or parts of businesses taking place in the context of insolvency proceedings instituted with a view to the liquidation of the assets of the transferor under the supervision of the competent judicial authority."
(6) The Court dealt with the question of transfers by companies under the SvB procedure at paras. 24-30 (pp. 485-6), as follows:
"The application of the directive to cases of "surséance van betaling"
 Although in this case the transfer of the undertaking was effected in liquidation proceedings, the question submitted by the national court relates also to the case of a transfer taking place in proceedings such as a surséance van betaling (judicial leave to suspend payment of debts).
 The parties disagree as to whether such a transfer must conform to the same rules, as far as the application of Directive 77/187 is concerned, as a transfer effected as a result of a sale by a liquidator. In that respect, the Dutch Government and the Commission take the view that the reasons for not extending the scope of the directive to transfers of undertakings occurring in liquidation proceedings also militate against its application to a case where a court has given the transferor leave to suspend payment of debts.
 On the other hand, the Bedrijfsvereniging and the Danish Government appear to consider that Directive 77/187 should apply where the transferor has obtained leave to suspend payment of debts, even if the directive is not applicable to a transfer effected in liquidation proceedings. Otherwise, leave to suspend payment of debts might be applied for specifically with a view to a transfer, to the detriment of the rights of the workers.
 It is to be noted that proceedings such as those relating to a surséance van betaling have certain features in common with liquidation proceedings, in particular inasmuch as the proceedings are, in both cases, of a judicial nature. They are, however, different from liquidation proceedings in so far as the supervision exercised by the Court over the commencement and the course of such proceedings is more limited. Moreover, the object of such proceedings is primarily to safeguard the assets of the insolvent undertaking and, where possible, to continue the business of the undertaking by means of a collective suspension of the payment of debts with a view to reaching a settlement which will ensure that the undertaking is able to continue operating in the future. If no such settlement is reached, proceedings of this kind may, as in the present case, lead to the debtor's being put into liquidation.
 It follows that the reasons for not applying the directive to transfers of undertakings taking place in liquidation proceedings are not applicable to proceedings of this kind taking place at an earlier stage.
 For all those reasons, the reply to the first question must be that Article 1(1) of Council Directive 77/187 of 14 February 1977 does not apply to the transfer of an undertaking, business or part of a business where the transferor has been adjudged insolvent and the undertaking or business in question forms part of the assets of the insolvent transferor, although the member-states are at liberty to apply the principles of the directive to such a transfer on their own initiative. The directive does, however, apply where an undertaking, business or part of a business is transferred to another employer in the course of a procedure such as surséance van betaling."
- The reasoning in Abels thus makes a clear distinction between two kinds of insolvency proceedings: liquidation proceedings and what we will call "SvB-type proceedings"4. In the case of the former there are reasons why it may not be in the interests of the workers (viewed collectively) that the Directive should apply; but those reasons do not apply in the case of the latter. To spell out the Court's thinking:
(a) Liquidation proceedings. The object of a liquidation is to dispose of all the assets of the undertaking. It will be in the interests of the workers as a group that such disposal be on a going concern basis, because that maximises the chance of continued employment, though not necessarily for all and not necessarily on as good terms as before. That being so, it is not necessarily in the interests of workers as a whole that the Directive should apply, since the obligation to take on the entire workforce, on the same terms, might operate as a disincentive to potential purchasers of the business as a going concern. Although the non-application of the Directive may mean that some employees can be lawfully dismissed by the purchaser, or have their terms re-negotiated, that is better than the entire workforce losing their jobs because no-one will buy the business. The Court acknowledges that not everyone would accept that argument; but the very fact that it is not clear what would best safeguard the interests of workers is itself a reason why the Directive should not be interpreted as applying in such a case (paras. 22-23).
(b) SvB-type proceedings. Such proceedings are different from liquidation proceedings partly because of the lesser degree of judicial supervision but also, and more pertinently, because they have a different purpose: their object is not to dispose of the entirety of the undertaking (or its assets) but to keep it – or as much of it as possible – going in the same hands (para. 28). That being so, the considerations relevant in the case of liquidation proceedings do not apply.
- The validity of the distinction made by the Court in Abels may be debatable. In particular, it might be argued that one of the ways in which an administrator in SvB-type proceedings might wish to keep the undertaking going would be to sell part while retaining the remainder – in which case the same considerations would appear to arise as in the case of liquidation proceedings. Indeed the Advocate General made this very point (see p. 476). Be that as it may, however, it is quite clear that the Court made a deliberate and reasoned distinction between proceedings aimed at the disposal of the undertaking and/or its assets and proceedings aimed at its continuation in the same hands.
- We were referred to four later decisions of the ECJ concerning the applicability of the Directive to transfers in the context of an insolvency – D'Urso v Ercole Martelli Elettromeccanica Generale  ECR I-4105; Spano v Fiat Geotech SpA  ECR I-4321; Jules Déthier Équipement SA v Dassy  ICR 541; and Europièces SA v Sanders  ECR I-6965. These explore the application of the Directive in various different kinds of insolvency situation, but they contain nothing which qualifies the basic analysis in Abels. The only case to which we need specifically refer is D'Urso. In that case a transfer had been effected by a business which was in "special administration" under an Italian law covering "large undertakings in critical difficulties". The relevant procedure required the court to decide whether the undertaking was authorised to continue trading. The ECJ held that the Directive would apply if such authority were given but not if it was not. That distinction is entirely in line with Abels: if the undertaking was not authorised to continue to trade, liquidation would in practice be the only option, whereas where such authority was given the primary purpose was to allow the undertaking to survive in the same hands.
- In our view it is clear that the distinction in art. 5 of the Directive between liquidation proceedings (defined precisely as in para. 23 of the judgment of the Court) and other forms of insolvency proceedings is intended to reflect the reasoning in Abels. There is confirmation of that in the explanatory memorandum produced by the Commission at the time of the proposals which led to Directive 98/50/EC: paras. 22 and 23 of the memorandum refer explicitly to Abels and the intention to take into account the case-law of the Court.
- Section 8 of the Insolvency Act 1986, which gives effect to Schedule B1, was introduced by section 248 (1) of the Enterprise Act 2002, with effect from 15th September 2003. The administration procedure which it introduced replaced an earlier procedure, first introduced by the Insolvency Act 1985, which had for various reasons not been much used.
- The provisions which are particularly relevant for present purposes can be summarised as follows:
(1) By para. 2 an administrator can be appointed in one of three ways – by an order of the Court pursuant to an application made to it (see paras. 10-13); by the holder of a floating charge (see paras. 14-21); or by the company or its directors (see paras. 22-34). In the latter two cases notice of appointment must be filed with the Court (see paras. 18 and 29): the notice must contain certain specified information and be accompanied by a statutory declaration by the person making the appointment and a statement by the administrator. The appointment takes effect on such filing.
(2) An administrator must be a qualified insolvency practitioner (para. 6).
(3) The purpose of administration is defined in para. 3 as follows:
"(1) The administrator of a company must perform his functions with the objective of—
(a) rescuing the company as a going concern, or
(b) achieving a better result for the company's creditors as a whole than would be likely if the company were wound up (without first being in administration), or
(c) realising property in order to make a distribution to one or more secured or preferential creditors.
(2) Subject to sub-paragraph (4), the administrator of a company must perform his functions in the interests of the company's creditors as a whole.
(3) The administrator must perform his functions with the objective specified in sub-paragraph (1)(a) unless he thinks either—
(a) that it is not reasonably practicable to achieve that objective, or
(b) that the objective specified in sub-paragraph (1)(b) would achieve a better result for the company's creditors as a whole.
(4) The administrator may perform his functions with the objective specified in sub-paragraph (1)(c) only if—
(a) he thinks that it is not reasonably practicable to achieve either of the objectives specified in sub-paragraph (1)(a) and (b), and
(b) he does not unnecessarily harm the interests of the creditors of the company as a whole."
(4) By para. 49 the administrator shall as soon as reasonably practicable but in any event within eight weeks make "a statement setting out proposals for achieving the purpose of administration". By sub-para. (2) (b) such a statement must "where applicable, explain why the administrator thinks that the objective mentioned in paragraph 3 (1) (a) or (b) cannot be achieved".
- It is evident from those provisions that the primary purpose of an administration under Schedule B1 is to give the administrator the opportunity to manage the affairs of the company so that it can be – in the words of para. 3 (1) (a) – rescued as a going concern. The broad policy behind the introduction of both the Schedule B1 procedure and its predecessor was to promote and facilitate a so-called "rescue culture". But it is clear both from the facts of the particular cases before us and from the text-book materials and case-law which we were shown5 that that is not the only use which may be made of the procedure. It is very common for Schedule B1 to be employed as a quick and convenient means of liquidating the assets of the business in the interests of the creditors by way of a so-called "pre-pack". Four of the five cases with which we are concerned arise from pre-pack sales (though in one case the sale was abortive). Part of the note to para. 2 in Sealy and Milman's Annotated Guide to the Insolvency Legislation reads as follows:
"A practice has developed which is not expressly sanctioned by the legislation and, indeed, might have been regarded as of doubtful legitimacy – the "pre-pack" administration. The pre-pack is not altogether a new concept since it has regularly been used in receiverships for some time. In a pre-pack, the insolvency practitioner who, it is intended, is to become the administrator is involved in planning in advance an arrangement under which the business of the company is to be sold immediately after his appointment, bypassing the statutory procedure of a creditors meeting, and without any direction from the court. The pre-pack is most appropriate where the insolvency is such that there will be no surplus available for distribution to the company's unsecured creditors and the proposed sale is likely to be advantageous by comparison with what might be yielded if all the statutory formalities were followed.
The main advantage of the procedure is the saving of time and expense and the avoidance of possibly adverse publicity which the statutory formalities would involve. The continuity of the business may preserve goodwill and save jobs, and for this reason may enable the business to be sold for a better price. However, two aspects of the pre-pack have given rise to a degree of concern: in most cases, the company's unsecured creditors are likely to receive no dividend and, secondly, they will usually have had no advance notice of the pre-arranged sale and no opportunity to have a say in the decision-making process. These circumstances are all the more likely to arouse suspicion where, as in many cases, the sale is to the existing management of other "connected" persons. Despite these objections, the pre-pack is now regarded as firmly established. Its legitimacy has been upheld in DKLL Solicitors v HM Revenue and Customs  EWHC 2067 (Ch);  B.C.C. 908, Innovate Logistics Ltd v Sunberry Properties Ltd  EWCA Civ 1321;  B.C.C. 164 and Re Kayley Vending Ltd  B.C.C. 578. In each of these cases the appointment was made by the court, but the practice is now well established for out-of-court appointments … ."
As Sealy and Milman observe, the use of the administration procedure in this way does not appear to have been a primary object of the draftsman. A pre-pack sale may, to a greater or lesser extent, rescue the business as a going concern but it certainly does not rescue the company, which typically is left with no assets and has to be wound up or dissolved. To anticipate, the issue in these appeals has its origins in the mismatch between the ostensible primary purpose of the Schedule B1 procedure and the uses to which it is commonly put.**THE PRIMARY ISSUE: DISCUSSION AND CONCLUSION**
- The primary issue on this appeal is, as we have said, whether administration proceedings under Schedule B1 of the 1986 Act can ever constitute "bankruptcy or analogous proceedings … instituted with a view to the liquidation of the assets of the transferor".
- Mr. Serr's core submission in support of the absolute approach was that the purpose of proceedings under Schedule B1 is clearly prescribed by para. 3 of the Schedule (see para. 16 (3) above). This provides for a "hierarchy of objects" applicable to all administrations, and it is clear, in particular from sub-para. (3), that the default object – that is, the object that must apply unless one of the specified reasons to the contrary is shown – is that of "rescuing the company as a going concern". That purpose is entirely inconsistent with the liquidation of the assets of the company. Administration proceedings are in fact, he submitted, very close to the SvB procedure considered in Abels. Mr. Serr acknowledged that administration might in due course lead to liquidation, if the rescue failed; but that did not alter their character when instituted (and it was in fact expressly acknowledged in Abels that the SvB procedure might be the first step towards liquidation: see para. 10 (1) above).
- Ms. Tether's core submissions in support of the fact-based approach are clearly summarised at paras. 44-45 of her excellent skeleton argument, which read as follows:
"44 The existence of the hierarchy of purposes in paragraph 3 of Schedule B1 does not lead to the conclusion that rescuing the company as a going concern is the purpose of every administration. Such a conclusion would be divorced from reality, because in a substantial proportion of administrations it is clear from the outset that there is no realistic prospect of rescuing the company as a going concern. This is illustrated by the facts of Oakland, in which the ET found that rescuing the company as a going concern was not achievable due to the scale of the company's indebtedness.
45 This practical reality is recognised by the provisions of paragraph 3(3), which provide that the administrator is not required to perform his functions with the objective of rescuing the company as a going concern if he thinks that it is not reasonably practicable to achieve that objective or that the objective in paragraph 3(1)(b) would achieve a better result for the company's creditors as a whole. Paragraph 3(4) similarly allows the administrator to perform his functions with the objective of realising property in order to make a distribution to one or more secured or preferential creditors if he thinks that it is not reasonably practicable to achieve either of the objectives specified in sub-paragraphs 1 (a) and (b) and he does not unnecessarily harm the interests of the creditors as a whole."
She referred us to a number of decisions in the Chancery Division and the Court of Appeal where the Court endorsed the employment of the Schedule B1 procedure with a view to the second or third of the objectives specified in para. 3.1. Those objectives, as she points out, necessarily involve the liquidation of the company's assets. And pre-packs provide a vivid illustration of how administrations may be undertaken in circumstances where there is never any real prospect or intention of rescuing the company as a going concern.
- We prefer Mr Serr's submissions: that is, we believe that the absolute approach is correct. This is for a number of inter-related reasons, which we can state as follows:
(1) A distinction of the kind made in art. 5 is more likely to be intended by the legislator to depend on the legal character of the relevant procedure, in other words on the object of the procedure rather than the object of the individuals operating it. That conduces to legal certainty: the object of a procedure should be apparent from its terms, whereas the intention of a person is inherently less easy to ascertain or define.
(2) Art. 5.1 of TUPE is explicitly concerned with the object of the proceedings when instituted. As we understand para. 3 of Schedule B1, it is the obligation of every administrator at the point that his appointment takes effect to consider first whether the primary objective of rescuing the company as a going concern is over-ridden by either of the considerations identified at sub-para. (3). The reality may be that it is immediately clear that it is so over-ridden, but the question must nevertheless be asked and answered. Formally, therefore, it cannot be said at the moment of the institution of any administration proceedings that their object is to liquidate the assets.
(3) Quite apart from that formal point, there is no requirement for an administrator to state at the beginning of an administration which of the objectives under para. 3 he is pursuing. Neither the prescribed form of application to the Court (see rule 2.2-4 of the Insolvency Rules 1986) nor any of the papers that have to be lodged when the appointment is made out of Court (which we were taken through) raises this question. The first occasion when the administrator will have to declare which of the statutory objects he is pursing when he files his proposals: see para. 16 (4) above. That is of course consistent with the formal position as we understand it; but it also means that on the fact-based approach there is no authoritative way in which an employee or other person affected by a transfer by an administrator can establish whether reg. 8 (7) applies, and thus in turn whether regs. 4 and 7 apply. It may be that in the great majority of cases the position will in practice be clear: certainly if an administrator has sold the entire business as a pre-pack he will evidently have decided to liquidate the company's assets in pursuit of the second or third objective. But it will not always be so (what, for example, if he has sold only part of the business ?); and it is in principle important that persons affected are enabled to know where they stand in every case.
(4) For those reasons, the fact-based approach inevitably increases the likelihood of disputes as to who is liable for the transferor's obligations. Such disputes generate cost, delay and uncertainty. The outcome in simple pre-pack cases may be predictable, but even in a simple case evidence will be required about the administrator's intentions. And not all cases will be simple, as the facts of these individual appeals illustrate: in two – OTG and Coyne – reg. 4 was held to apply even though the transfer was pursuant to a pre-pack. A bright-line rule has clear advantages.
(5) Finally, the avowed purpose of the Directive is to protect employees in the event of a transfer, and in particular to ensure that their rights are safeguarded: see para. 8 (1) above. The absolute approach is plainly the preferable construction from the point of view of achieving that purpose in any case where a transfer has actually occurred, since it results in regs. 4 and 7 taking effect, whereas the fact-based approach means that in many cases employees will be left only with the lesser protection afforded by the Secretary of State's guarantee. It is true that art. 5.1 recognises that in some circumstances the safeguarding of the rights of individual employees must be subordinated to the greater interests of facilitating the survival of the undertaking; but that is a derogation from the primary purpose of the Directive, and it is the latter which in any doubtful case must prevail.
- We appreciate that this conclusion means that we are differing from the decision of Judge Clark in Oakland. That was a typical case of a pre-pack sale of a business by an administrator. The employment tribunal held that reg. 4 of TUPE was disapplied by reg. 8 (7) because the administrator had clearly been appointed with a view to the liquidation of the assets. Judge Clark agreed with that analysis. He did not state in any detail his reasons for treating the issue as one of fact rather than as depending on the character of the proceedings, and it is accordingly unnecessary that we set out the material parts of his judgment. Subject to one point, it is enough that we say that, with the benefit of the very full submissions which we have heard (which do not appear to correspond entirely to those advanced before him), we respectfully take a different view.
- The one point in Judge Clark's reasoning which we should specifically address is his view, expressed in the final paragraph of his judgment (p. 252), that the fact-based approach accords with the policy underlying art. 5.1, in that it promotes a rescue culture under which potential purchasers of an insolvent business are not deterred from taking it on by the prospect of inheriting the entire workforce on its previous terms. We agree that in principle we should take a purposive approach. But that approach does not yield a simple answer. The purpose of the Directive taken as a whole is avowedly to safeguard the rights of workers. We accept that there is in the case of an insolvency-related transfer a tension between safeguarding the rights of individual workers, namely those who are liable to be dismissed or have their terms downgraded on a transfer, and the interests of the workforce more generally, most of whom at least may preserve their jobs if the business is purchased but who will lose out if a potential purchaser is deterred by the prospect of the application of arts. 3 and 4 (i.e. regs. 4 and 7 of TUPE). The existence of this tension is self-evident, but it is in any case clearly acknowledged in Abels. "Promoting a rescue culture" may favour the interests of the workers generally (though no doubt there are benefits to the wider economy too), but the Directive plainly proceeds on the basis that a balance requires to be struck between those interests and the rights of individuals prejudiced by a transfer by an insolvent transferor. It is for that reason that it maintains the distinction, deriving from Abels, between liquidation proceedings on the one hand and other forms of insolvency proceedings on the other. In the case of the former, arts. 3 and 4 are simply disapplied, so that any disincentive to rescue (at least on this account) disappears altogether; whereas in the case of the latter the disincentives to rescue are only mitigated, by the derogations permitted by art. 5.2 (see para. 8 (6) above). Those derogations as implemented in the U.K. – specifically, the picking up of accrued liabilities by the Secretary of State (reg. 8 (1)-(6)) and the freedom to re-negotiate terms notwithstanding Daddy's Dance Hall (reg. 9) – do in fact go a considerable way to diminishing the disincentives to rescue. But the Directive chooses not to allow the rights of the employees to be trumped altogether.
- It may be thought, as we have observed above, that the distinction drawn by the Directive is somewhat blunt. Even leaving aside the extreme case of pre-packs, administrators seeking to rescue a business may need to sell off parts in order to permit the survival of the rest; conversely, liquidators sometimes continue to trade, occasionally for long periods. But it is the distinction which the Court, and subsequently the Directive, has chosen to adopt, and it must be respected.
- While Mr Smith agrees with the result and reasoning expressed above, he would wish to make a further point. He wishes to emphasise the importance, which was stressed in particular in the submissions of Mr. Horan, of adopting a purposive interpretation of the relevant provisions, and specifically of doing so in such a way as, in the terms of recital (3) of the Directive, "provides for the protection of employees in the event of a change of employer". He draws attention in particular to the judgment of Dyson LJ in ADI (UK) Ltd v. Willer  IRLR 542, at paras. 41 and 54 (pp. 551-2). He thus strongly endorses the point made at para. 21 (5) above. He believes that it would be wholly inconsistent with that purpose to deny employees in the position of the Claimants in the cases before us the benefit of the protections afforded by regs. 4 and 7 of TUPE on the basis that affording them those protections might – just might – deter a potential transferee from acquiring the undertaking. But he also believes that the right way of resolving the tensions referred to above between the protection of employees and the "rescue culture" lies in negotiations between transferor/transferee and the representatives of the employees, so that employees have the choice – hard as it may be - of, in effect, declining to transfer on terms that they judge unacceptable, in the knowledge that that could mean the loss of their jobs because the transfer will not proceed or the undertaking will go out of business. He believes that a right to such negotiations could be afforded to employees by a purposive interpretation of reg. 9 of TUPE – which, as noted above, allows binding variations in the contractual terms of employees affected by a transfer to be negotiated with their representatives; or in any event that the loss by employees of the protections of regs. 4 and 7 could be made dependent on whether proper attempts had been made to reach agreement with their representatives. This point was not, as he accepts, argued before us; and the President has to record that, though he acknowledges the importance of the involvement of employee representatives in transfer situations (which is however specifically addressed by the information and consultation provisions of regs. 13-16), he does not believe that reg. 9, or indeed art 5.2 of the Directive from which it derives, can be made the basis of the kind of expanded rights suggested. Mr. Smith however wishes to have his view recorded in case parties in other cases wish to consider it.
- Otford Tool and Gauge Ltd., to which we will refer as "Oldco", went into administration on 27th June 2008. On the same day, under a pre-pack arrangement, the entirety of the business was sold as a going concern, but leaving its debts behind, to a company called OTG Ltd. The two Claimants, Mr. Barke and Mrs. Luke, were employees of Oldco who were dismissed at or around the time of the transfer: as to the precise timings, see below. They brought claims for redundancy payments, pay in lieu of notice and in respect of untaken holiday: as regards the latter, it should be noted that this is a liability which only accrued on termination. The claims were brought in the alternative against the Secretary of State – on the basis that he was liable for Oldco's obligations under the guarantee provisions – and against OTG Ltd.
- The case was heard by an Employment Tribunal sitting at Ashford, chaired by Employment Judge Hildebrand, on 11th March 2009. By a Judgment and Reasons sent to the parties on 6th April 2009 it was held that OTG Ltd. was liable for the sums claimed (there being no dispute as to quantum), and it was ordered to pay £10,336.50 to Mr. Barke and £8,184.82 to Mrs. Luke. The Tribunal followed Oakland, as it was of course obliged to do, in adopting a fact-based approach, but it held that on the facts of the case the administration proceedings had not been instituted with a view to the liquidation of Oldco's assets: accordingly reg. 8 (7) did not apply, and reg. 4 did.
- OTG Ltd. has appealed. Carelessly, its representative gave the name on the Notice of Appeal as Otford Tool and Gauge Ltd., i.e. the name of Oldco, which led to some initial confusion when we were reading into the case. But the position was clarified at the hearing, and we gave leave to amend the Notice of Appeal.
- Our conclusion on the primary issue means that the Tribunal was right to hold that reg. 8 (7) did not apply, though it reached that result by the wrong route. However, there was some debate before us as to whether that fully resolved the claims in both cases. Agreement was eventually reached, but we need to set out the position.
- We take Mr. Barke first. It is common ground that he was not given notice of dismissal until 28th June, i.e. the day following the transfer. Prima facie, therefore, his employment transferred to OTG on 27th June and it was OTG who had dismissed him; and it would follow that OTG was liable for his claims, all of which were consequent on his dismissal. However, that is subject to the effect of reg. 8. In the light of our previous conclusion we can of course ignore para. (7). But what about paras. (2)-(6), which give effect to art. 5.2 (a) ? We need at this point to set these out in full. They read:
"(1) If at the time of a relevant transfer the transferor is subject to relevant insolvency proceedings paragraphs (2) to (6) apply.
(2) In this regulation "relevant employee" means an employee of the transferor—
(a) whose contract of employment transfers to the transferee by virtue of the operation of these Regulations; or
(b) whose employment with the transferor is terminated before the time of the relevant transfer in the circumstances described in regulation 7(1).
(3) The relevant statutory scheme specified in paragraph (4)(b) (including that sub-paragraph as applied by paragraph 5 of Schedule 1) shall apply in the case of a relevant employee irrespective of the fact that the qualifying requirement that the employee's employment has been terminated is not met and for those purposes the date of the transfer shall be treated as the date of the termination and the transferor shall be treated as the employer.
(4) In this regulation the "relevant statutory schemes" are—
(a) Chapter VI of Part XI of the 1996 Act;
(b) Part XII of the 1996 Act.
(5) Regulation 4 shall not operate to transfer liability for the sums payable to the relevant employee under the relevant statutory schemes.
(6) In this regulation "relevant insolvency proceedings" means insolvency proceedings which have been opened in relation to the transferor not with a view to the liquidation of the assets of the transferor and which are under the supervision of an insolvency practitioner."
- The effect of those provisions hardly leaps from the page. Elias P. said something about them in the course of his helpful guide to the workings of reg. 8 in Secretary of State for Trade and Industry v Slater  ICR 54 (see at paras. 15-22 (pp. 58-59)), but we will have to be a little fuller. The starting-point is of course to ascertain whether the transferor was the subject of "relevant insolvency proceedings", i.e. proceedings other than liquidation proceedings, so that reg. 8 (7) does not apply. Assuming that it was, the way that these provisions work is as follows:
(1) The first question is whether the claimant is a "relevant employee", as defined by para. (2). There are two kinds of relevant employee:
(a) those who have not been dismissed pre-transfer and whose employment has accordingly transferred under reg. 4 in the ordinary way (remember, this is not, ex hypothesi, a case where reg. 4 has been disapplied by reg. 8 (7));
(b) those who have been dismissed pre-transfer "in the circumstances described in regulation 7 (1)" – that is, in the usual shorthand, who have been dismissed for a transfer-related non-ETO reason6 and whose dismissal is accordingly automatically unfair.
(2) As regards (a) – those who have transferred – the broad result is that the Part XII guarantee (that being "the relevant statutory scheme specified in paragraph (4) (b)") applies, and the transferee is relieved of the corresponding liabilities: that is the effect of paras. (3) and (5) respectively. But it is important to understand how that is achieved. In this regard, para. (3) effects three specific modifications to the provisions of Part XII:
(i) The "qualifying condition that the employee's employment has been terminated" – i.e. section 182 (b) (see para. 2 above) – is disapplied: in other words, the employee is entitled to be paid any sums due at "the appropriate date" even though he is in fact, by virtue of reg. 4, still employed.
(ii) The date of transfer is treated as the date of termination. The reason why the date of termination matters is that it is part of the mechanism for calculating "the appropriate date".
(iii) The transferor is treated as the employer notwithstanding the transfer. That matters because it is the employer's obligations that the Secretary of State guarantees.
Thus the transferee acquires the employee without the baggage of past liabilities; but it is necessary to look to the detail to see exactly which liabilities count as past. It should be noted that para. (3) says nothing about the redundancy payments guarantee.
(3) As regards (b) – those who have been dismissed pre-transfer but for a non-ETO transfer-related reason (and thus unfairly) – the Secretary of State is of course prima facie liable under the Chapter XII guarantee; but the effect of para. (5) is that he is not relieved of liability by the effect of reg. 4.
- Mr. Barke comes under head (a). Reg. 8 plainly has no application to his claim for a redundancy payment: it was, as we have said, OTG who dismissed him and there is nothing in reg. 8 to affect its liability for the consequent redundancy payment. But nor does it affect his other two claims – for pay in lieu of notice and in respect of untaken holiday. The question as regards those is whether they were due on the appropriate date: see section 182 (c) (para. 2 above). The appropriate date is, by section 185 (c), the later of the date of the employer's insolvency and the date of the termination of the employment. However, as explained at para. 31 (2) (ii) above, in Mr Barke's case the date of termination is deemed to be the date of transfer: on that basis the two dates are in fact the same. As at that date neither of the obligations for which Mr. Barke claims had arisen, since, as noted above, these only accrued on termination: that is of course actual termination, since the deeming provisions in para. (3) do not apply to the accrual of the obligations themselves. Accordingly OTG remains liable for the full amount awarded by the Tribunal, albeit on a different basis.
- We turn to Mrs. Luke. There was a confusion as to the date of her dismissal. It was her case that she was dismissed orally prior to the transfer; but the administrator had asserted in correspondence that she, like Mr. Barke, was not dismissed until 28th June. Before us, however, the Secretary of State accepted that Mrs. Luke was indeed dismissed prior to the transfer. On that basis the original liability for the obligations in question rested with Oldco and is covered by the Secretary of State's guarantee obligations: Mr. Townsend, who appeared for Mrs. Luke, confirmed that none of them exceeded the statutory cap (see n. 2 above). Mr. Serr accepted that in those circumstances - since the dismissal was transfer-related (and it was not suggested that an ETO defence was available) - reg. 8 (5) took effect to relieve OTG of the corresponding liability.
- The result accordingly is that OTG's appeal is dismissed in the case of Mr. Barke and allowed in the case of Mrs. Luke; but that Mrs. Luke is entitled to a corresponding award against the Secretary of State.
- The Appellant was employed by a company called Richleys Ltd, which owned a chain of clothing stores. On 12th March 2008 Richleys went into administration. Immediately thereafter its business was sold as a going concern to a company called Late Editions Ltd. ("LE"). On 14th March she received a letter from Richleys' administrator purporting to dismiss her with immediate effect. She brought proceedings against LE for unfair dismissal on the basis that her employment had transferred to it on 12th March.
- The Appellant's claim was dismissed by an Employment Tribunal sitting at Cardiff, chaired by Employment Judge Davies, on 26th February 2009: the Judgment and Reasons were sent to the parties on 7th April. The Tribunal followed Oakland and held on the facts that the transfer had been instituted with a view to the liquidation of Richleys: accordingly reg. 8 (7) applied so that reg. 4 was disapplied and the Appellant's employment had never transferred.
- Although the Tribunal cannot be blamed for following Oakland, and its decision on that basis was unimpeachable, it follows from our conclusion on the primary issue that it was wrong to do so. The Appellant's claim must be remitted to it to consider on the basis that reg. 8 (7) did not apply. Since the issues that will now arise are different from those so far considered there seems to us no particular reason why the case should be heard by the same Tribunal, though there is equally no reason why it should not be.
- The Claimant is a solicitor. She was employed by a firm called Drummonds Kirkwood LLP ("DK") in the conveyancing department of its office in Epsom. On 21st July 2008 she was dismissed for redundancy with immediate effect. On 25th July DK went into administration. A pre-pack transfer had been planned but it fell through, and on 28th July the administrator entered into a "management contract" with the Appellants, who are another firm of solicitors, in respect of the Epsom office.
- The Claimant brought proceedings in the Employment Tribunal raising a variety of claims, specifically: for pay in lieu of notice; for pay in respect of untaken holiday; for pay in lieu of notice; for breach of the consultation obligations under TUPE or the collective redundancy provisions of the Trade Union and Labour Relations (Consolidation) Act 1992; for sex discrimination; and for unfair dismissal. The Respondents were DK, and two of its partners, together with the Appellants on the basis that they were liable for DK's obligations under regs. 4 and 7 as transferees of the Epsom office.
- On 28th and 29th May 2009 there was a pre-hearing review before Employment Judge Freer in the London South Tribunal to determine:
"whether there was a TUPE transfer from [DK] to [the Appellant] and if so whether the provisions of regulations 8(7) or 8(6) of the TUPE Regulations 2006 apply".
By a Judgment and Reasons sent to the parties on 20th August – which we should say were notably thorough and well-constructed – the Judge held (a) that there had been a transfer of the Epsom office to the Appellant; (b) that reg. 8 (7) did not apply; and (c) that reg. 8 (6) did apply. As regards (b), he followed Oakland in treating the application of reg. 8 (7) as a matter of fact and concluded that on the evidence the administration had not been instituted with a view to the liquidation of DK's assets.
- The Appellant appeals only in relation to element (b) in the Judge's decision. As in the OTG appeal, it follows from our conclusion on the primary issue that the Judge reached the right result albeit by the wrong route. The appeal must be dismissed.
- The Claimants, who are eight in number, were employed by a company called Mandale Reproductions Ltd. Administrators were appointed on 24th October 2007 and all the employees were told that they were dismissed. On the same day various assets of the business were sold, pursuant to a pre-pack arrangement, to a company called Collectables Retail Ltd. The dismissed employees were purportedly re-engaged by Collectables on different terms. The Claimants made claims to the Secretary of State under the guarantee provisions for redundancy payments and payments in relation to untaken holiday. He denied liability on the basis that there had been a transfer of the relevant part of Mandale's business to Collectables and that liability for the payments in question had transferred to Collectables.
- The Claimant accordingly brought proceedings in the Employment Tribunal against the Secretary of State pursuant to sections 170 and 188 of the 1996 Act (which are the sections giving it jurisdiction over disputes arising under ch. VI of Part XI and under Part XII respectively). The claim was heard by a Tribunal sitting at Thornaby on Tees, chaired by Employment Judge Pitt, on 30th April 2009. By a Judgment sent to the parties on 14th May the Secretary of State was held liable in principle, though the claims remained to be quantified. Reasons were supplied subsequently. The basis of the Tribunal's decision was (a) that the sale of the assets in question had amounted to a transfer of Mandale's undertaking and (b) that reg. 8 (7) applied so as to disapply reg. 4. As regards (b), the Tribunal followed Oakland and found that "the administrator in this case was unable to rescue the business as a going concern and therefore sought to realise the assets with a view to a better result for creditors".
- The amounts due, subject to this appeal, were subsequently agreed and made the subject of a formal consent Judgment sent to the parties on 22nd December 2009.
- There is no appeal against element (a) of the Tribunal's decision, but it follows from our decision on the primary issue that it was wrong to find that reg. 8 (7) applied. Quite where this leaves the claim, however, is unclear. The Secretary of State in his Notice of Appeal invites us "to substitute a decision that regulation 8 (6) applies". The apparent implication of that invitation is that if "regulation 8 (6) applies" he is under no obligation. But we are not sure that that is right. As explained in relation to the OTG case, in the case of a claim for redundancy payments the effect of reg. 8 (1)-(6) depends on whether the employees were dismissed before or after the transfer took effect. If they were dismissed prior to the transfer the dismissal was by Mandale (or, rather, the administrator on its behalf), and the Secretary of State is liable for the sums claimed under the guarantee provisions. It is only if they were dismissed post-transfer, in which case the dismissal was by Collectables, that the employees must pursue their claim against that company. Mr. Serr's skeleton argument proceeded on the implicit basis that the dismissals were indeed post-transfer, since he expressed regret that the Claimants had ignored advice from the Secretary of State to bring a claim against Collectables in the alternative. But it is not clear to us that that was the case. At para. 3 of its Reasons the Tribunal says:
"Administrators were appointed on 24 October and on the afternoon of that day all the employees were dismissed and at some point in the course of that afternoon a contract for sale … was concluded between the administrators and Collectables."
That is certainly not explicit on the times of dismissal, no doubt because on the arguments advanced to the Tribunal the point did not seem important, but we incline to read it as a finding that the dismissals pre-dated the transfer: certainly that is what we would have expected the administrators to wish to achieve.
- In these circumstances we are inclined to hold that the Tribunal reached substantially the right result, though for the wrong reason, and on that basis to dismiss the Secretary of State's appeal. But we accept that the analysis in the preceding paragraphs – and in particular the effect of the Tribunal's factual finding as to when the dismissal occurred – was not properly considered at the hearing before us. We will give the Secretary of State fourteen days to lodge written submissions with this Tribunal to show cause why the appeal should not be dismissed on the basis proposed, and we will make no order in the meantime. In default of such submissions the appeal will stand dismissed. We feel obliged to take this course as a matter of procedural fairness; but even if there may be an arguable point on the timing of the dismissals we would invite the Secretary of State to consider whether, in view of the history of the matter and the costs that would be involved in pursing it further, the better course is not simply – having won on the primary issue – to leave the Claimants the benefit of their judgment.
- Zavvi Retail Ltd. operated a chain of 126 shops. It went into administration on 24th December 2008. The administrators continued to operate the shops pending an attempt to sell them. In early 2009 Head LLP agreed to buy the stock and essential equipment of each of the stores and at the same time negotiated short-term licences from the landlords. It then started trading, employing the previous Zavvi staff. There was an issue as to whether the contracts of employment of the staff concerned had transferred to Head Entertainment in consequence of the arrangements with Zavvi outlined above; and thus whether they were entitled to bring claims against Zavvi, but more particularly against the Secretary of State, on the basis of a termination when Head Entertainment took over the stores.
- That issue was heard by Employment Judge Grazin sitting in Leeds on 15th March 2010. The hearing was in the context of some 118 claims brought by employees in a large number of different stores. He held (a) that the arrangements between Zavvi and Head gave rise to a relevant transfer for the purpose of TUPE and (b) that reg. 8 (7) did not apply, with the consequence that the Zavvi employees transferred to Head Entertainment and the claims against the Secretary of State failed. As regards element (b), he applied the fact-based approach as required by Oakland; but his conclusion was that on the facts the administration of Zavvi was not instituted with a view to the liquidation of its assets.
- Head Entertainment has appealed against element (b) in the Judge's decision, but not against element (a). As to element (b), it follows from our conclusion on the primary issue that the Judge reached the right conclusion, though as a result of loyally following Oakland he did so for the wrong reasons; and the appeal must fail.
1 Continuity of employment for the purpose of statutory employment protection rights will be preserved in the latter case by section 218 of the Employment Rights Act 1996: see the decision of the Court of Appeal in Oakland discussed at para. 4 below.
2 The issue in Oakland concerned continuity of employment. It was only in the Court of Appeal that it was appreciated that even if the claimant was not transferred under TUPE he had continuity of employment by virtue of s. 218 of the 1996 Act – see n. 1 above - and that accordingly there was no need for him to rely on TUPE.
3 One consequence of this cautious drafting technique is that the awkwardness about the term "bankruptcy" referred to at para. 8 (5) above is not eliminated; but this gives rise to no substantial problem.
4 It might be less clumsy to use the term "administration proceedings", since it appears that under the SvB procedure the Court appoints an "administrator": but we do not wish by use of the same label to appear to prejudge the question of the status of administration proceedings under the 1986 Act.
5 We should say that we were also helped by the experience of Mr. Austin, who appeared as the Claimant's representative in Olds, and who is in fact a retired insolvency practitioner.
6 Since no point arises in relation to them in these appeals we are content to use these jargon phrases, which are well understood by practitioners; but their meaning is elucidated in Harvey on Industrial Relations and Employment Law at [F] 156-166.
Published: 21/02/2011 08:56