Vol 5 (2008) - Issue 4

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Slimming Down Businesses: When Are Dismissals Unfair or Not?

If the sale of a business occurs in an insolvency there are special provisions which affect employees arising under the Transfer of Undertakings (Protection of Employment) Regulations 2006 SI 2006/246 commonly called TUPE.

All insolvency practitioners must address the need to transfer the business over which they are appointed and this can take the form of two principal techniques. The first is by disposal of the business to an unconnected third party. The second is by virtue of the hive down procedure although the latter is perhaps less common nowadays in the light of a dwindling justification to pursue tax losses. In either case there may be a need for swingeing dismissals.

If TUPE apply, the general rule applicable to the relevant transfer is that all liabilities owed by the insolvent company to or in respect of the employees employed in the relevant business will automatically transfer to the purchaser. Again as a general rule the liabilities which pass to the purchaser/transferee will include liabilities incurred both prior to and following the transfer. This involves a form of statutory novation but under the predecessor regime to the present TUPE, ie TUPE 1981, this novation was limited under that regime to employees employed in the business by the transferor ‘immediately before the transfer’: see Regulation 5(3) TUPE 1981. In Litster v Forth Dry Dock [1990] 1 AC 546 the House of Lords interpreted the phrase ‘immediately before the transfer’ to mean ‘or would have been so employed if he [the employee] had not been unfairly dismissed in the circumstances’ as prescribed by the previous TUPE Regulation 8(1), a Regulation that will be dealt with in further detail below.

TUPE 2006 followed and applied the effect of the Litster decision. In the wake of Litster there has been much debate, not least in the cases, as to when dismissals by an insolvent company are to be regarded as being by reason of a subsequent transfer. If a proposed purchaser asks for the dismissals then the dismissals would clearly be regarded as having arisen by reason of a subsequent transfer.

The real debate has been about those cases in which the dismissals by the insolvency practitioner can be said to have been for operational reasons. In other words, what is the approach to take when the insolvency practitioner takes the view that the company simply cannot afford to transfer the workforce on and what about the position when such a view is taken prior to any contact with let alone transfer to the proposed purchaser?

The relevant Regulations are Regulation 7 and 8 of TUPE 2006. They were formerly in Regulations 7 and 8 of TUPE 1981.