In December 2008 we reported that the Employment Appeals Tribunal (“EAT”) had decided that an employee transferred from a company in administration to another company was not afforded the protection of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”). The Court of Appeal has now reversed this decision and, in the process, softened the impact of Regulation 8(7) of TUPE.

Background

Wellswood Ltd (“Oldco”), having started trading as a wholesaler in fruit and vegetables in 2003, found itself in financial difficulties by 2006. Upon consultation with an insolvency practitioner and a major creditor (“GTL”), Oldco entered into administration. GTL did not wish to purchase Oldco as a going concern as it would inherit Oldco’s book debts. Instead, GTL incorporated Wellswood (Yorkshire) Ltd (“Newco”) as a wholly owned subsidiary to purchase certain assets from Oldco, which included the lease of the premises and five out of seven of Oldco’s employees. Of these five, four took redundancy payments from the fund administered by the Secretary of State. This left Mr Oakwood.

Mr Oakwood was a salaried General Manager of Oldco and took a salary cut upon joining Newco, instead of seeking a redundancy payment. Mr Oakwood was subsequently dismissed by Newco having not completed one year’s continuous service with them. Mr Oakland brought a claim for unfair dismissal.

Law

Regulation 8(7) of TUPE

States that where bankruptcy or insolvency proceedings have been instituted with a view to the liquidation of the assets of the seller, the employees will not automatically transfer to the buyer.

Regulations 8(6) and 9 of TUPE

States that where bankruptcy or insolvency proceedings have been initiated but not with a view to the liquidation of the assets of the seller, the employees will transfer to the buyer.

Section 218(2) of the Employment Rights Act 1996 (ERA 1996)

States that, irrespective of the application of TUPE, if a trade, business or undertaking is transferred from a seller to a buyer, then the period of employment of an employee in the trade, business or undertaking at the time of the transfer counts as a period of employment with the buyer.

EAT Decision

Mr Oakwood’s claim for unfair dismissal was brought on the basis that his contract of employment had transferred under TUPE and was, therefore, continuing when he was transferred from Oldco to Newco.

Newco relied on Regulation 8(7) TUPE and stated that Mr Oakwood’s contract of employment did not transfer between Oldco and Newco upon the acquisition of the assets because of this Regulation; any rights that Mr Oakwood had accrued under his contract of employment with Oldco falling away when he  commenced, what was effectively, a new contract of employment for Newco.

The question to be decided by the Court was whether the transaction between the companies was one that attracted the application of Regulation 8(7). The EAT decided that due to Oldco’s weak financial position, the insolvency proceedings were instituted with a view to the liquidation of the assets of the company. Regulation 8(7) did, therefore, apply and Mr Oakwood was not protected by the provisions of TUPE that allow for the transfer of employees in a relevant transfer.

Court of Appeal Decision

The Court of Appeal openly stated that it did not wish to deal with the point of whether Regulation 8(7) applied or not, as Mr Oakwood had appealed against the EAT decision on reliance on section 218(2) of the ERA 1996, a new argument to the proceedings. The Court of Appeal allowed the inclusion of a new argument into the appeal as Newco had received plenty of notice of its intended use. In view of section 218(2) of the ERA 1996, the Court felt obliged to side with Mr Oakwood and confirmed that there had been no break in the continuity of his employment. Mr Oakwood was afforded all of his accrued rights in relation to unfair dismissal and redundancy pay rights.

Comment

The decision of the EAT went against the guidance provided by the Department for Business, Enterprise and Regulatory Reform, which stated that administrations do not fall within Regulation 8(7) TUPE. Parliament has so far failed to clarify what particular insolvency proceedings should be characterised as being ‘with a view to liquidation’ under TUPE and, coupled with the decision by the Court of Appeal in this case, it is now extremely uncertain when a buyer of a business and its assets from a company in administration can avoid the automatic transfer of employees under TUPE. Given the uncertainty and the undoubted number of companies in administration offering the sale of its business and assets immediately upon entering administration in the current climate, the point is sure to reach the Courts again soon. The opportunity should then be taken, if not before, to clarify the now muddied waters of when Regulation 8(7) of TUPE applies.

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