EAT breaks ground with TUPE insolvency ruling

In an important case, the employment appeal tribunal has decided that a business transfer occurred prior to the commencement of insolvency proceedings, with the effect that the new employer, not the Secretary of State, was liable for employee debts.

One of the principal aims of the Transfer of Undertakings (Protection of Employment) Regulations 2006 ("TUPE 2006") was to clarify the application of TUPE in insolvency situations and promote a rescue culture. This was intended to be achieved by the introduction of new rules for insolvency situations providing that, subject to the type of insolvency proceeding that applies, either (a) regs 4 and 7 of TUPE 2006 do not apply; or (b) the Secretary of State (not the new employer) becomes liable for certain employee debts.

These provisions have now been considered in the case Secretary of State for Trade & Industry v Slater & others.

In that case, on 25 July 2006 the directors of CFG Site Services Ltd took a decision to commence a creditors' voluntary winding up. A liquidator was appointed on 16 August, following meetings of shareholders and creditors that day.

Accountants were appointed to assist the company in this period. On 26 July 2006 the accountants visited the company's premises and gave notice of redundancy to all staff. There followed an MBO of the company's business on 27 July.

The issue was whether the new TUPE 2006 insolvency provisions applied so that the Secretary of State would be liable for certain employee debts, or whether the new MBO company would be liable.

A condition of the TUPE 2006 insolvency provisions applying is that at the time a transfer takes place, "relevant insolvency proceedings" must apply, and those proceedings must be under the supervision of an insolvency practitioner. Essentially therefore, the outcome turned on whether "relevant insolvency proceedings" had been commenced by the directors resolving to wind up the company, or whether they were only commenced by the formal appointment of a liquidator.

The EAT held that the date on which a particular type of insolvency proceeding commences must be the same for TUPE 2006 as it is for general insolvency law, which in this case was not until 16 August 2006.

Further, even if the relevant insolvency proceedings had commenced earlier, they were not under the supervision of an insolvency practitioner until the liquidator was appointed on 16 August. Although the subsequently appointed liquidator had been involved in the business sale, he was not acting in the capacity of insolvency practitioner at the time of the transfer.

Practical advice

To be sure that TUPE 2006 will apply to a transfer, the transfer must take place after the insolvency proceedings have formally commenced. However, in many cases that may be difficult, particularly if it is intended to rescue some or all of the business and time becomes critical.

One solution suggested by the EAT is to make a transfer conditional on the subsequent appointment of a liquidator and the agreement of the liquidator to the transfer.

What are "relevant insolvency proceedings"?

In argument before the EAT, the Secretary of State conceded that a creditors' voluntary winding up was always analogous to bankruptcy, so that regs 4 and 7 of TUPE 2006 would not have applied had the transfer been under the supervision of an insolvency practitioner on 27 July 2006.

However, the EAT declined to confirm that view, on the basis that it was not directly relevant to the case and full argument would need to be heard.

Implications

Anyone involved in a potential TUPE/insolvency situation should check carefully that the conditions are satisfied before assuming that the TUPE 2006 insolvency provisions will apply in a given situation.

If there is any doubt as to whether insolvency proceedings have commenced or are under
the supervision of an insolvency practitioner, then agreements should be made conditional on the appointment of a liquidator and his consent.