Mark Shulman & Rachel Taylor, Cumberland Ellis

Recent statistics from the Insolvency Service show that company insolvencies have decreased over the past year, coming down from a significant peak in mid-2009. Nonetheless, in the final quarter of 2010 there were nearly 4,000 liquidations and 650 companies went into administration.

The interplay between company insolvency and rights granted to employees under the Transfer of Undertakings (Protection of Employment) Regulations 2006 ("TUPE") has been clarified in two important decisions in recent months.

TUPE and "pre-packs"
[OTG Ltd v Barke & Ors]() UKEAT/0320/09/RN concerned five consolidated appeals heard together. The case has determined that where there is a pre-pack sale of a business or part of a business by an administrator, the benefits of TUPE will still apply. A pre-pack in this context means a pre-arranged sale of the business and assets of a company in administration which is made either immediately upon or shortly after the appointment of the administrators (as opposed to the standard procedure of marketing the business after the administrators' appointment).

Normally, where there is a transfer under the TUPE Regulations, an employee's contract of employment will not be terminated, but transfers to the new business which will take on the liabilities of the transferring employees.

However, Regulation 8(7) of TUPE disapplies the normal rules in a situation where:

".. the transferor is the subject of bankruptcy proceedings or any analogous insolvency proceedings which have been instituted with a view to liquidation of the assets of the transferor and are under the supervision of an insolvency practitioner."

The issue to be decided in OTG was whether company administration proceedings under the Insolvency Act 1986 fell within the exception contained in Regulation 8(7). This can be crucial in practice to determine whether any liabilities remain with the transferring employer, or whether such liabilities have transferred to the transferee under the TUPE Regulations. Where there is no transfer under TUPE, the Secretary of State is required to guarantee from the National Insurance Fund, various obligations to employees of an insolvent employer (claims for unpaid redundancy payments and other similar payments).

In Oakland v Wellswood (Yorkshire) Limited [2009] IRLR 250, the EAT had decided that whether Regulation 8(7) applied was a question of fact to be decided in each case. However, in OTG, the EAT decided that it ought to approach the question with "a clean slate". It referred to the earlier case of Abels v. Bedrijfsvereniging voor de Metallindustrie en de Electrotechnische Industrie [1985] ECR 469 to explain the distinction between two kinds of insolvency. First, there is liquidation, the object of which is to dispose of all of the assets of the undertaking. On the other hand, administration proceedings have a different purpose - their objective is not to dispose of the undertaking, but to keep as much of it as possible going in the same hands.

Under Schedule B1 of the Insolvency Act 1986, the broad policy aim was to promote a "rescue culture" preserving the company as a going concern. However, in practice, the Schedule B1 provisions can be used as a quick and convenient way of liquidating the assets of the business by way of "pre-pack" sales. An explanation of this practice was presented to the EAT as follows:

"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…  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 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."

The EAT had to consider competing submissions. On the one hand there was the "absolute approach" which suggested that Schedule B1 proceedings were always aimed at rescuing a company and accordingly would never fall within the exceptions set out in Regulation 8 (7) of the TUPE Regulations. On the other hand, under the "fact-based approach", a rescue of the company was not always the intended purpose or even practical in every administration and so whether the TUPE exemption applied was a question to be decided in each case.
The EAT decided that the "absolute approach" was the correct one because:

(1) A distinction of the kind made in the Acquired Rights Directive (Council Directive 2001/23/EC from which the TUPE Regulations are derived) was more likely to be intended by the legislator to depend on the legal character of the relevant procedure, rather than the objectives of the individuals operating it.

(2) The Directive is explicitly concerned with the object of the proceedings when instituted. Therefore, it cannot be said at the moment of the institution of any administration proceedings that their object is automatically to liquidate assets.

(3) The first occasion when the administrator has to declare which of the statutory objects he is pursuing (i.e. administration or liquidation) is when he files his proposals and the administrator has up to eight weeks to do so. That would mean that on the "fact-based approach" there is no authoritative way in which an employee can establish whether Regulation 8(7) of TUPE applies until the proposals are made.

(4) A "fact-based approach" would inevitably increase the likelihood of disputes as to who is liable for the transferor's obligations. Such disputes generate cost, delay and uncertainty. Therefore, a bright-line rule had clear advantages.

(5) The intended purpose of the Directive was to protect employees in the event of a transfer and ensure that their rights are safeguarded. The absolute approach is plainly the preferable construction from the point of view of achieving that purpose since it results in a TUPE transfer taking effect; otherwise employees would be left only with the lesser protection afforded by the Secretary of State's guarantee.

**The unknown transferor
The second decision of relevance in this context is [Spaceright Europe Ltd v Baillavoine & Anor]()** UKEAT/0339/10/SM.

A company was placed into administration and the CEO was dismissed on the same day. The company's business and assets were sold as a going concern and it was common ground that this amounted to a transfer under the TUPE Regulations.

An Employment Tribunal upheld the former CEO's claim of unfair dismissal as the reason for that dismissal was connected with the transfer. The liability for that unfair dismissal then passed to the transferee company. The transferee appealed to the EAT on the questions of:

(i) whether the CEO's dismissal was connected to the transfer given that no specific transferee was apparently envisaged at the time of his dismissal; and

(ii) if his dismissal was connected to the transfer, whether or not it was for an ETO reason.

The relevant part of Regulation 7 of TUPE provides:

"7 Dismissal of employee because of relevant transfer

(1) Where either before or after a relevant transfer, any employee of the transferor or transferee is dismissed, that employee shall be treated for the purposes of Part X of the 1996 Act (unfair dismissal) as unfairly dismissed if the sole or principal reason for his dismissal is -

(a) the transfer itself, or

(b) a reason connected with the transfer that is not an economic, technical or organisational reason entailing changes in the workforce.

At first instance, an Employment Tribunal had found that his dismissal was connected to the transfer. The Tribunal discussed two conflicting lines of reasoning: Harrison Bowden Limited v Bowden [1994] ICR 186 and Ibex Trading Co Limited (in Administration) v Walton & Ors [1995] IRLR 499.

The Tribunal in Harrison Bowden held that a dismissal by administrators could be by reason of the transfer even where no particular transfer was in contemplation when the dismissal was carried out. This can be contrasted with the decision in Ibex which held that there must be a specific transfer in mind at the time of the dismissal.

The EAT in Spaceright chose to follow Harrison Bowden rather than Ibex and cited a key part of the Harrison Bowden judgment:

"We cannot see that it is of importance that the transferee has been identified at or before the moment of dismissal".

In addition the EAT referred to the decision in Morris v John Grose Group which posed the question:

"Why, for instance, should employees, who are dismissed by reason of a particular anticipated transfer which does not go through but which is promptly replaced by another comparable transfer in circumstances where a transfer to someone was inevitable, not have the benefit of [TUPE]?"

It seems reasonable to assume that for the EAT to have decided otherwise would provide a potential 'back-door' to companies and administrators wishing to escape TUPE liabilities.
The second issue to be considered related to whether the CEO's dismissal had been for an economic, technical or organisational ("ETO") reason. The Tribunal at first instance had found that the dismissal of the Claimant had not been for an ETO reason because it had not involved "entailing changes in the workforce". The company argued that there could be a workforce of a single employee (as in the present case) and so changes could still be made to that workforce.

The EAT agreed with the Tribunal, relying on the Court of Appeal decisions in Berriman v Delabole Slate Ltd [1985] ICR 546 and Whitehouse v Chas A Blatchford & Sons Ltd [1999] IRLR 492. Specifically, in Berriman the Court had stated that:

"First, the phrase 'economic, technical or organisational reason entailing changes in the workforce' in our judgment requires that the change in the workforce is part of the economic, technical or organisational reason.  The employers' plan must be to achieve changes in the workforce.  It must be an objective of the plan, not just a possible consequence of it."

And in Whitehouse, Buxton LJ had said:

"The reason for dismissal must be related to the conduct of the business and a dismissal that is simply related to the sale of the business does not so qualify."

The Tribunal at first instance had found that, whilst there may have been an economic reason for the respondent's dismissal (i.e. to dispense with the requirement to pay his relatively high salary as Chief Executive Officer) and even arguably an organisational one, it did not entail changes in the workforce.

The EAT's conclusion was that:

"Applying those principles, it is in our judgment plain that the administrator's reason as found by the Tribunal… was not an ETO reason entailing changes in the workforce. The reason did not relate to the conduct of the business as a going concern; the business was always going to need a managing director.  It did not contemplate a diminution in the number of employees in the ongoing business, for it was contemplated that the Claimant would be replaced (as indeed he was). The reason was related to the sale of the business."

This makes clear that a dismissal to make a business or part of one more attractive to potential buyers will not be for an ETO reason and almost certainly that replacing management with more marketable individuals for the same reason will not qualify to justify such a dismissal.

These two decisions taken together appear to strengthen and widen the scope of protection available to employees under TUPE in relation to insolvent companies. The Conservative party had indicated prior to the 2010 election that it intended to review TUPE, particularly with regard to its application to changes in service provision, but for the time being it seems that the benefits of TUPE are alive and well for employees in relation to companies in administration.

**The end of 'TUPE-plus'
**As expected, the Code of Practice on Workforce Matters in Local Authority Service Contracts was withdrawn (with immediate but not retrospective) effect on 21st March 2011. Under the Code, local authorities were obliged to ensure that contractors providing them with services under outsourcing arrangements were offering any new staff terms which were no less favourable that those who had transferred to the provider under TUPE.

The Government's view is that the removal of the Two-Tier Code will help provide a level playing field, ensure more opportunities for innovation and help ensure better value for taxpayers' money for the provision of public services.