OTG v Barke is the most recent judgment by the Employment Appeal Tribunal (EAT) on whether the Transfer of Undertakings (Protection of Employment) Regulations 2006 (known as ‘TUPE’) apply to sales by companies in administration under schedule B1 to the Insolvency Act 1986.
The EAT decided on 16 February 2011 that an administration could not be a bankruptcy or analogous proceeding instituted with a view to the liquidation of the transferor’s assets. Therefore regulation 8(7) of TUPE did not apply to sales of a business by administrators – with the result that employees of a company in administration will automatically transfer under regulation 4 of TUPE to the buyer of the business.
In reaching its decision the EAT disagreed with an earlier EAT judgment given in 2008 in the case of Oakland v Wellswood (Yorkshire) Ltd. There, the EAT held that on the facts of that case (involving a pre-pack) the transferor employer in administration was in an insolvency proceeding that was a form of ‘terminal insolvency’. Therefore regulation 8(7) did apply and employees did not automatically transfer.
In practice the later decision in OTG vs Barke is likely to be followed by an employment tribunal. This will make a marked difference to sales of a business by administrators because purchasers will take the costs of the transferred employees into account and it can be expected that some sale prices could be materially reduced as a result of the decision.
Whether a transfer of a business by a company in administration falls within TUPE was considered in five joined appeals, all consisting of similar facts.
In OTG Ltd v Barke, a pre-pack administration occurred and the business of the company in administration was transferred to a different company. The claimants (employees of the company in administration) were dismissed at the time of the transfer and brought proceedings for unfair dismissal. The fact pattern in the joined cases of Olds v Late Editions Ltd and The Secretary of State for Business, Innovation and Skills v Coyne and others are identical. Both of these cases also involved a pre-pack administration sale.
The facts in Key2Law (Surrey) LLP v Antiquis are slightly different – here a pre-pack administration had been envisaged but fell through. The administrators entered into a management contract with the transferee company within days of the administration and the claimant was made redundant.
Head Entertainment LLP v Walker concerns the administration of Zavvi Retail, which went into administration in 2008. In early 2009 Head agreed to buy the stock and essential equipment of the Zavvi stores and started trading. Head also employed the previous Zavvi staff. The issue was whether the contracts of employment of the previous Zavvi staff had automatically transferred to Head and thus whether these staff were entitled to bring claims against Head on their redundancy.
As the EAT set out, the facts are in some way non- material to the underlying question that was on appeal – namely, do the automatic transfer of employee provisions contained in TUPE apply to a sale by an administrator of the business?
The relevant provisions of TUPE
TUPE applies to transfers of the whole or part of a business or undertaking or a change of service provider (a relevant transfer), subject to certain exceptions. Regulation 4 provides that a relevant transfer does not operate to terminate the contract of employment of employees who are working in the business at the time of the transfer but transfers their contracts to the transferee.
Regulation 7 provides that a dismissal because of a relevant transfer or for a reason connected with it that is not an economic, technical or organisational one is automatically an unfair dismissal.
Regulation 8(7), however, disapplies these regulations to any transfer where there is what has been called a ‘terminal insolvency’ – ie ‘the transferor is the subject of bankruptcy proceedings or any analogous insolvency proceedings that 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 wording ‘bankruptcy proceedings or any analogous insolvency proceedings which have been instituted with a view to the liquidation of the assets of the transferor’ was directly copied from article 5(1) of the Acquired Rights Directive 2001, which in turn reflects European Court of Justice case law on the previous directive.
The position in administrations
The Department for Business, Innovation & Skills (BIS) issued guidance on regulation 8(7) in June 2009. Its view was that ‘“relevant insolvency proceedings” means any collective insolvency proceedings in which the whole or part of the business or undertaking is transferred to another entity as a going concern. That is to say, it covers an insolvency proceedings in which all creditors of the debtor may participate, and in relation to which the insolvency office-holder owes a duty to all creditors.’
Earlier guidance stated that BIS takes the view that regulations 4 and 7 will always apply in relation to a relevant transfer that is made in the context of an administration. The earlier guidance stated that ‘the correct approach is to look at the main or sole purpose of the procedure rather than its outcome in a particular instance. The main purpose of bankruptcy proceedings is to realise free assets and expenses amongst all the debtor’s creditors. This is not the main purpose of administration.’
The BIS guidance is not binding and has been widely criticised in the market.
The 2008 decision in Oakland v Wellswood (Yorkshire) Ltd
In 2008 the EAT held in Oakland (a case where the claimant was dismissed by reason of redundancy following a pre-pack sale of the business by the administrators to a new company) that where administrators are not able to trade the business with a view to its sale as a going concern one could conclude that the administrators’ appointment was with a view to the eventual liquidation of the company’s assets by way of a creditors’ voluntary liquidation. Therefore regulation 8(7) applied and employees did not automatically transfer to the new company.
The judgment in OTG
In OTG the EAT reached a different conclusion from the one in Oakland. It favoured what was called the ‘absolute approach’, ruling that administration proceedings can never constitute insolvency proceedings instituted with a view to the liquidation of the transferor’s assets and that therefore TUPE would always apply. The EAT preferred the absolute approach over what was termed the ‘fact-based approach’ – in which the application of TUPE’s automatic transfer provisions would depend on the individual circumstances of each administration.
The EAT gave the following reasons for favouring the absolute approach.
- The legislator of the Acquired Rights Directive on which TUPE was based was likely to have intended the distinction of insolvency proceedings instituted with a view to the liquidation of the assets to depend on the legal character of the relevant procedure – in other words, the object of the procedure rather than the object of the individuals operating it.
- The distinction was explicitly concerned with the object of proceedings when instituted. An administrator must always consider first whether the primary objective of rescuing the company as a going concern is overridden by the second or third objective – namely, achieving a better return for creditors as a whole or realising property with a view to making a distribution to secured or preferential creditors. The EAT concluded therefore that at the moment of institution of administration proceedings their object is not to liquidate the assets.
- There is no requirement for an administrator at the outset of the administration to state which objectives he is pursuing. The first occasion on which these have to be declared is when the statement of proposals is filed. There is thus no authoritative way in which an employee or other person affected by a transfer by an administrator can establish whether regulation 8(7) applies.
- The fact-based approach inevitably increases the likelihood of disputes over who is liable for the transferor’s obligations, resulting in costs, delay and uncertainty. The EAT concluded that a bright-line rule has clear advantages.
- The purpose of TUPE is to protect employees in the event of a transfer. The absolute approach safeguards this objective whereas a fact-based approach means that in many cases employees will be left without the protection afforded by TUPE.
Two conflicting EAT decisions
There are now two conflicting decisions of the EAT. Without a clarifying appeal, the existence of two conflicting EAT decisions on the same point has potential to cause uncertainty. However, the EAT panel in OTG included Underhill J, the EAT president, and so it would seem likely that it is this decision that future employment tribunals will follow.
Bright-line rule
The decision itself has the merit of providing a bright-line rule – TUPE’s automatic employee transfer provisions will apply to all cases of administration. This at least gives certainty to administrators, employees and potential buyers of businesses from a company in administration.
Protection of employees
There will certainly be some circumstances in which employees will be better off as a result of the OTG decision, because TUPE will apply and if employees are made redundant they will be able to bring a claim for unfair dismissal against the new employer. However, this is to be balanced by the possibility of fewer businesses being bought from a company in administration due to the TUPE costs – thus leaving those employees without a job where on the fact-based approach employment may have continued.
Impact for administrators
The bright-line rule means that the cards of the seller in administration and the buyer are on the table at the outset, which is likely to prevent some dispute over whether TUPE applies after a sale. It may be harder for administrators to sell the business given that any potential buyer will reflect the TUPE cost in the offer price.
Impact for creditors
Creditors (apart from employees) are likely to feel the biggest impact from this decision, because any buyer of the business will reflect any redundancy-related TUPE costs in the offer price. Depending on the size of the business these costs may stifle any sale.