Pursuant to the TUPE Regulations (Transfer of Undertakings (Protections of Employment) Regulations 2006) employees have a number of rights if a business is sold. For example, employees have the right to be told about the proposed sale of the business in advance. All the employees employed in that business will also automatically transfer from the seller to the buyer.
Where a business has become insolvent and is then sold however, the transfer of employees from the seller to buyer depends on whether the business is subject to “terminal proceedings’ or “non-terminal’ proceedings.
“Terminal proceedings’ are bankruptcy proceedings or any other analogous insolvency proceedings which have been instituted with a view to liquidation. In this situation, it has been said that the employees of the business will not automatically transfer to the buyer of the business and any dismissals by reason of the transfer will not be automatically unfair.
“Non-terminal proceedings’ are insolvency proceedings which have been opened without a view to the liquidation of the assets of the seller.
The Employment Appeal Tribunal (EAT) in OTG Ltd v Barke & Ors handed down a decision on 16 February 2011 which held that administration proceedings are not “terminal proceedings’. This means that the contracts of employment of employees of the seller, along with any accrued liabilities, will pass to the buyer. Any dismissal of employees made on the sole grounds of the business transfer will therefore be unlawful and employees may be able to claim for unfair dismissal .
The EAT thankfully declined to follow the controversial decision in Oakland v Wellswood (Yorkshire) Limited . Surprisingly, it went against government guidance (and what usually happens in practice) and suggested that a buyer could acquire an insolvent company’s business and assets without also taking on the company’s employees.
This recent decision is to be welcomed by corporate recovery solicitors as it re-introduces certainty into this area. TUPE will apply to sales by Administrators, like ordinary sales of solvent businesses, and buyers need to comply with their obligations to ‘inform and consult’ the appropriate representatives in relation to the transfer of the employees prior to any sale.