Employees' rights are secure but pre-packs will continue

Philippa Dempster
Thursday, March 10, 2011

The Employment Appeal Tribunal (EAT) has determined that the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) do apply to businesses bought out of administration. This includes the pre-pack administrations that have become the vogue in the last five years or so. Employees will now have the right to transfer to the new business and not be cast aside.

While this decision does not affect the way in which businesses conduct themselves on a day-to-day basis, it does mean that for those looking to purchase businesses out of administration, and tempted by doing so under a pre-pack administration – possibly in order to evade employees’ rights to transfer under TUPE – will now have to factor employee costs into their financing arrangements, with the ‘loophole’ now closed.

It is unlikely to be revolutionary; pre-packs are likely to stay in vogue, but it will affect the value achieved for such businesses.

When the TUPE regulations were revised in 2006, the government provided a specific exemption where the seller was the subject of bankruptcy proceedings or "any analogous insolvency proceedings which had been instituted with a view to liquidation of the assets of the seller".

When the Regulations first came into force on 6 April 2006, it was generally assumed that this exception would apply only in the case of businesses where a liquidator had been appointed. However, in a 2009 case (Oakland versus Wellswood (Yorkshire)) the EAT held that in that particular case, a business that had been bought out of a pre-pack administration was a business which had been subject to "analogous insolvency proceedings instituted with a view to the liquidation of the assets of the transferor" and therefore TUPE did not apply to the transaction. The employees therefore had no right to transfer.

The reasoning of the Oakland decision was that, because the purpose of the administration was to sell the assets immediately, rather than to continue to operate the business while a purchaser was sought, then it was an insolvency instituted with a view to liquidation of assets.

Conflicting regulation
The Oakland decision was viewed with some scepticism because it potentially offered little or no protection to employees of businesses purchased out of pre-pack administrations. On the face of it, it potentially enabled purchasers to buy an on-going business with no obligation to take on the employees, which conflicts with the ethos of TUPE. 

Last month the EAT (in OTG versus Barke and others) disagreed with the decision in Oakland. The EAT found that businesses bought as a going concern out of any form of administration, whether as part of a pre-pack arrangement or not, will be subject to TUPE. Employees will therefore have the right to transfer to the buyer.

While technically, there are now two conflicting decisions at EAT level, it is our view that tribunals will follow the recent decision in OTG versus Barke.

Philippa Dempster is partner at Freeth Cartwright LLP

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