Vol 8 (2011) - Issue 6

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TUPE and Insolvency: The Division of Liabilities

Background

The Employment Appeal Tribunal (the 'EAT') handed down its judgment in Pressure Coolers Ltd v (1) Mr J Molloy, (2) Maestro International Ltd, (3) The Secretary of State for Trade and Industry on 9 June 2011.

The EAT considered the issue of who, in law, was liable to pay an unfair dismissal basic award and notice pay to an employee who was dismissed following a transfer of a business in administration as a going concern.

The EAT upheld the Employment Tribunal’s decision on review, that where an employee had been dismissed after a transfer had taken place, the transferee, and not the Secretary of State, would be liable to pay the basic award and notice pay arising from an employee’s unfair dismissal.

TUPE and accompanying legislation

The Transfer of Undertakings (Protection of Employment) Regulations 2006 ('TUPE'), implement the provisions of the Directive 2001/23/EC (the 'Acquired Rights Directive'). TUPE applies to 'relevant transfers', being transfers of undertakings and businesses situated in the UK or parts of them and service provision changes (subject to specific exceptions). Where TUPE applies, Regulation 4 of TUPE operates to transfer the contracts of employment of employees in the transferor, together with all rights and liabilities in connection with their employment, to the transferee. Regulation 7 of TUPE protects employees who are affected by such relevant transfers, against transfer-related dismissals. It provides that an employee is treated as having been unfairly dismissed for the purposes of Part X of the Employment Rights Act 1996 (the 'ERA 1996') where he/ she is dismissed before or after the relevant transfer and the sole or principal reason for it is the transfer itself or a reason connected with it that is not an economic, technical or organisational one.

Regulation 8 of TUPE sets out two alternative regimes applicable to circumstances in which the transferor is subject to insolvency procedures. The regime provided by Regulation 8(7) of TUPE, which is a reflection of Article 5(1) of the Acquired Rights Directive, applies to relevant transfers where the transferor is the subject of 'bankruptcy proceedings or any analogous insolvency proceedings which have been instituted with a view to the liquidation of the assets of the transferor'. In these circumstances, the transferee will not acquire the employees of the transferor on a relevant transfer as Regulations 4 and 7 of TUPE are disapplied. Conversely, under Regulation 8(6) of TUPE, a different regime is applied where the transferor is the subject of 'relevant insolvency proceedings' (being insolvency proceedings opened not with a view to the liquidation of assets) and Regulations 8(1)-(6) of TUPE apply. These provisions give effect to Article 5(2) of the Acquired Rights Directive. Where Regulations 8(1)-(6) of TUPE apply, the employees will be transferred from the transferor to the transferee.

Pursuant to Regulations 8(3) and (4) of TUPE, which apply the ERA 1996, certain of the liabilities connected to the employees will not be transferred to the transferee but will be paid out of the relevant statutory scheme (the 'National Insurance Fund Guarantee Scheme') by the Secretary of State.

Part XII of the ERA 1996 provides that in certain circumstances, the Secretary of State shall pay specific debts owed at the appropriate date by an insolvent employer to an employee whose employment has terminated. Where there are 'relevant insolvency proceedings' and Regulations 8(1)-(6) of TUPE are applicable, Regulation 8(3) has the effect of applying the National Insurance Fund, whether or not the employee’s employment has been terminated, with the date of transfer being treated as the date of termination and the transferor being treated as the employer.