TUPE applies to administrations

Application of TUPE in administrations

OTG v Barke is the latest case from the Employment Appeal Tribunal (EAT) to consider how the Transfer of Undertakings (Protection of Employment) Regulations (TUPE) apply in the context of the sale of a business in administration. The case largely resolves the uncertainty in that context and affirms the general practice of administrators and purchasers of businesses from them.

Regulation 8(7) of TUPE stipulates that the rule providing for the automatic transfer of employees (Regulation 4 of TUPE) does not apply 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".

In the 2008 case of Oakland v Wellswood (Yorkshire) Ltd the EAT held that the question of the application of Regulation 8(7) was one of fact, depending on the purpose of the administration. The judgment was controversial in part because it meant that the application of Regulation 8(7) was dependent on the objectives of the insolvency proceedings when instituted.

An appeal to the Court of Appeal in Oakland was decided on a different point of law, but the Court of Appeal said that there were strong grounds for thinking that the EAT's approach had been wrong. So in this most recent case, the EAT approached the issue with a "clean slate". It had to decide between two possible approaches to Regulation 8(7):

a fact-based approach, endorsed by the EAT in Oakland, which would mean that the application of Regulation 8(7) is, in each case, a question of fact depending upon whether the particular administration had as its purpose the liquidation of the transferor's assets; or

an absolute approach, focussing on the object of the particular type of insolvency proceedings, rather than the objects of the individual practitioner operating the procedure in each particular case.

The EAT preferred the legal certainty of the absolute approach. This means that Regulation 8(7) of TUPE will not apply to sales of businesses that are in administration, even where it is immediately clear to the administrator on appointment that there is no real chance of rescuing the company as a going concern. Consequently, employees of a company in administration will, subject to normal TUPE rules, automatically transfer to the purchaser of the business.

There are now two conflicting EAT decisions (it will be for the Court of Appeal to determine the matter definitively). However, the likelihood is that future tribunals will follow the decision in OTG. This is consistent with the widely held view prior to this case that Oakland was wrong and provides a welcome level of certainty.

The decision will not prevent administrators dismissing redundant employees in the course of the administration (see, for example, the case of Page v Lakeside). In addition, administration will amount to a "non-terminal" insolvency to which the provisions of regulation 8(6) of TUPE will apply. This means that, when a business is sold by administrators, certain liabilities owed to the employees at the date of transfer (or their dismissal if that is earlier) will not pass to the purchaser, but will be taken over by the Secretary of State and the purchaser of the business will also have more flexibility than usual to agree changes to the terms and conditions of the employees that it inherits.

Administrators and potential purchasers of businesses in administration must now proceed on the basis that TUPE will apply in the normal way to any sale of a business by an administrator. Given that sales of businesses by administrators prior to the decision tended to proceed on the basis that TUPE applied, the decision should not have a significant effect in practice.

The decision does, however, provide a useful reminder that the type of insolvency proceedings that should be used should be considered in each case. If a business cannot be rescued as a going concern, liquidation, which should fall within Regulation 8(7), may be a more attractive option in certain circumstances.

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