FW: ILA Technical Bulletin: Bowater and RedWeb: two Reg 8(7) TUPE decisions

 

 

Andrew Cawkwell Head of Corporate Recovery and Insolvency Watson Burton LLP 1 St James' Gate Newcastle upon Tyne , NE99 1YQ England		Work: 0191 2444338 Mobile: 07973 502809 Fax: 0191 2444500 Email: andrewcawkwell@live.co.uk IM: andrewcawkwell@live.co.uk (MSN)  http://uk.linkedin.com/in/insolvencyandturnaround My Blog
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From: Insolvency Lawyers Association [mailto:ila@ilauk.com]
Sent: 12 August 2010 10:25
To: Andrew Cawkwell
Subject: ILA Technical Bulletin: Bowater and RedWeb: two Reg 8(7) TUPE decisions

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Bowater and RedWeb: two Reg 8(7) TUPE decisions Bulletin No 285

Case: Bowater & Ors v NIS Signs Ltd (in liquidation) & Ors (Leicester Employment Tribunal, 29-31 March 2010, Judge Lancaster); and Coombs & Anor v RedWeb Security Ltd & Ors (Birmingham Employment Tribunal, 20 April 2010, Judge Kearsley)     Synopsis: The Employment Tribunals in these two cases both concluded that Reg 8(7) of the Transfer of Undertaking (Protection of Employment) Regulations 2006 (“TUPE”) applied to sales of businesses by means of a pre-pack administration and a pre-pack CVL, respectively, so that vendors’ employment liabilities did not transfer to the purchasers. In the CVL case, the Tribunal further considered that the transaction was a legitimate use of a CVL, despite being contrary to the spirit of TUPE.     Topics Covered: Administration, CVL, employee claims, Reg 8(7) TUPE

Reg 8(7) of TUPE Reg 8(7) provides that Regs 4 and 7 (which provide for the automatic transfer of employees and employment liabilities such as unfair dismissal, respectively, in the event of a relevant transfer of a business), do not apply to any relevant transfer 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 and are under the supervision of an insolvency practitioner”. The wording of Reg 8(7) comes almost directly from the Acquired Rights Directive 2001/123. Regrettably, there is no definition either within the Directive or TUPE of what is meant by either “analogous insolvency procedure” or “instituted with a view to the liquidation of the assets of the transferor”. The questions addressed in both these cases were: 1. Was the administration (of RedWeb) and the CVL (of Bowater) an “analogous insolvency proceeding” within the terms of Reg 8(7) of TUPE? 2. If they were, then, at the time of the transfer: (a) had such proceedings been “instituted with a view to the liquidation of the assets of the relevant transferor company”; and (b) were the proceedings “under the supervision of an IP”? These questions were considered in the context of a pre-pack administration by the EAT in Oakland v Wellswood (Yorkshire) Ltd [2009] IRLR 250, which decided that whether or not the relevant proceedings are “analogous insolvency proceedings” is a question of fact for the tribunal in each case. The EAT in Oakland decided, rather controversially and contrary to BERR (as the government department was then known) guidance, that the Oakland pre-pack administration was an analogous insolvency proceeding and that Reg 8(7) did apply, so that the relevant employment liabilities did not transfer - see our earlier Bulletin #183. When the decision came before the CA, the appeal was allowed on different grounds and therefore the CA did not review the Reg 8(7) decision. However, the court did, in passing, cast considerable doubt on the correctness of the EAT conclusion on that point. Lord Justice Moses said (at [10] and [17]), “ There are strong grounds for thinking that both the Employment Tribunal and the EAT took the wrong approach to their construction both of Article 5 of the Directive and Regulation 8….It would seem to me most unwise for us to give a binding pronouncement on correctness or otherwise of the contention that administration necessarily excludes the application of Regulation 8(7). I would only for my part wish to emphasize that this is a strongly arguable point.” RedWeb The Facts RedWeb Security (UK) Ltd (“RedWeb”) ceased trading and dismissed its employees on 1 September 2009. Administrators were appointed on 11th September 2009, and the company’s business and assets were sold to a purchaser 3 days later in what the Tribunal described as a pre-packaged administration. In their proposals to creditors, the administrators cited achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first being in administration) as the purpose of the administration, which was stated to have been achieved by means of the pre-packaged sale. The claimants commenced proceedings seeking relief for a combination of claims for unfair dismissal, redundancy payments, breach of contract, unauthorised deduction from wages and holiday pay, and their claims were combined. The Tribunal addressed the preliminary issue of whether Reg 8(7) of TUPE operated to prevent employee claims transferring. The main question was whether the insolvency proceedings had been instituted with a view to the liquidation of the assets of the transferor. The RedWeb companies argued that the facts were on all fours with Oakland and therefore Reg 8(7) was engaged. The claimants argued that the facts could be distinguished from Oakland and, in any case, it had been disapproved by the CA. Further, the claimants submitted that the business had been sold as a going concern and that Art 5(4) of the Directive, which requires member states to take appropriate measures with a view to preventing misuse of insolvency proceedings in such a way as to deprive employees of the rights provided for in the Directive, should apply to prevent Reg 8(7) operating to disapply Regs 4 and 7. The Decision The Tribunal considered itself bound by the finding of the EAT in Oakland. It found that the only relevant factual difference was that in Oakland, the administrators contemplated exiting administration via a CVL, whereas in RedWeb, the insolvent company was to be dissolved. But both processes ended in the dissolution of the company, so this was not considered a significant difference. It therefore decided that Reg 8(7) TUPE did apply to the business sale, and dismissed the claims. Bowater The Facts NIS Signs Ltd (“NIS”) was a profitable company, but it was part of a group that was financially distressed and some group companies were on the verge of administration. NIS was at risk because it had given cross-guarantees for other group company liabilities. Various redundancy measures were considered, but eventually it was decided that NIS’s business would be sold to management using a pre-pack insolvency procedure. NIS’s bank, its largest creditor, agreed to back the purchasers, and prospective IPs were engaged. The purchasers wished to reduce the workforce from 48 to 23, which was done by NIS before the business sale, summarily, on 2 April 2009, in breach of the statutory dismissal procedures which were then in force. Initially it was intended that a pre-pack administration be used to effect a transfer of the business, but the purchasers’ solicitors advised that a CVL would be more advantageous because Reg 8(7) of TUPE would definitely be engaged in a CVL, and the redundancy liabilities would therefore not transfer to the purchaser. Accordingly, the members’ passed a resolution for a CVL on 22nd April, and on the same day the liquidator appointed sold the business to the purchaser and reported the sale to the creditors in the notice for the s.98 IA1986 creditors’ meeting, as being necessary to avoid significant erosion in the value of the goodwill. The employees brought claims against both companies, and the Tribunal agreed to deal with the application of Reg 8(7) as a preliminary point. The Decision It was an undisputed fact that, subject to Reg 8(7) TUPE, there had been a “relevant transfer” for the purposes of TUPE 2006. The Tribunal found that at the time of the transfer, NIS was subject to proceedings that were “under the supervision of an IP”. Further, the Tribunal concluded that the proceedings were “analogous insolvency proceedings which have been instituted with a view to the liquidation of the assets of the transferor”, both in law and in fact. The liquidation of assets is the only possible outcome of a CVL, and the sale of NIS’s business was a step towards achieving that outcome. Even though the purchaser was only willing to buy from a liquidator in order to avoid the effects of TUPE, and the whole transaction (including the choice of procedure) was primarily designed to protect the bank’s interest, it did not mean that those proceedings were not instituted with a view to the liquidation of the assets of the transferor, however unpalatable that conclusion may be. The CVL was not a sham in the sense that it purported to be something that it was not. CVL was a legitimate alternative to administration. Even if the company had gone into administration instead of CVL, the Tribunal considered that the facts would not have differed sufficiently from those in Oakland and, applying that decision, which was binding on it, the outcome would have been the same. Comment For TUPE to apply, there must be a relevant transfer of an economic entity (or undertaking) which retains its identity. A relevant transfer was conceded in RedWeb [para. 6] and Bowater [para. 5.1], as it was in Oakland [see para. 15 of the EAT decision]. In the employment law context, as identified by the Spijkers decision (Spijkers v Gebroeders Benedik Abattoir [1986]2CMLR 296), a relevant transfer involves ascertaining if the business was disposed of as a going concern, but the fact that at the date of transfer trading has ceased or been substantially reduced does not prevent there being a transfer of a business if the wherewithal to carry it on, such as plant, building and employees, are available and are transferred, nor is a gap before trading is resumed conclusive against there being a transfer within the meaning of the Directive. Reg 8(7) excludes the application of Regs 4 and 7 of TUPE if the conditions identified in it are satisfied in order not to discourage potential purchasers from acquiring businesses from insolvent companies because of TUPE liabilities following a relevant transfer, which would be to the detriment of employees. However, the Bowater case in particular shows that the open use of an insolvency process to avoid the operation of TUPE can be legitimate, notwithstanding that the Tribunal found that the same business sale could have been achieved without resorting to an insolvency procedure at all. Members know to draw a distinction between the meaning of "rescuing the company as a going concern" (which is rarely possible in administration) and the "transfer of a business as a going concern" (which is often possible in administration). The latter appears to be most relevant in a TUPE context (see Spijkers). An administration sale of a business as a going concern ought not to be automatically inconsistent with a relevant transfer and the application of TUPE. However, the employment judges who are required to interpret whether an administration is a process analogous to bankruptcy proceedings “instituted with a view to the liquidation of the assets of the transferor” under Reg 8(7) seem to be focussing on the primary limb of the purpose of administration (i.e. rescuing the company as a going concern, but not involving the sale of its assets or the business), and concluding that the inability to rescue the company as a going concern in each case means that the insolvency process is necessarily analogous to the liquidation of its assets, so that Reg8(7) applies. The judges do not seem be giving proper consideration to the effect of a going-concern business sale in the context of insolvency proceedings, and the interim nature of many administrations. A good illustration of this confusion between the two phrases “rescuing the company as a going concern” and “sale of the business as a going concern” in the context of “relevant transfers” appears in RedWeb. The Tribunal in  RedWeb decided that, since the company had ceased trading on 1st September 2009, and the business assets were not sold until 14th September, the business was not sold as a going concern [para 31]. Nevertheless, the parties had conceded [para 6] that there had been, subject to Reg 8(7), a “relevant transfer”. This is contradictory. If there is no transfer of the business as a going concern, then there can be no relevant transfer (as that phrase has become understood within the TUPE context following Spijkers) and the sale would be outwith the scope of TUPE altogether. One speculates whether the concession in RedWeb that there had been a relevant transfer (but for Reg 8(7)) was properly made, but once it was, the Judge was driven to consider whether Reg 8(7) applied. He mistakenly described the rescue of the business (as opposed to company) as the primary objective of administration, and misreported the administrators’ conclusion that the primary purpose could not be achieved. In the Judge’s own words, he said “the primary objective of the Insolvency Act namely the preservation of the business as a going concern could not be met” (despite the apparent contradiction with the concession of a relevant transfer) [para 30]. This led him to the conclusion that administration in Redweb was a procedure initiated with a view to the liquidation of the business and its assets, so as to be analogous to a bankruptcy proceeding. The meaning of the phrase “going concern” for the purposes of considering whether there has been a “relevant transfer” is not the same as “rescue of the company” for the purposes of Sch. B1 para 3(1)(a) IA 1986, and the two expressions should not be confused. Reg 8(6) already exists to mitigate the effect of TUPE in non-terminal insolvency proceedings, and so there is already a concession in existence to avoid discouraging buyers in non-terminal insolvency proceedings. If the employment judges continue to hold that administrations in which the rescue purpose is not possible are analogous to bankruptcy proceedings, then Reg 8(6) would appear to be superfluous, as rescues will rarely ever require a business transfer. The drafting of Reg 8(7), which is taken almost verbatim from the Directive, is couched in the generic vocabulary of European insolvency legislation. It operates conjunctively with Reg 8(6), which deals with non-terminal insolvency proceedings, and applies to procedures with terminal consequences such as bankruptcy or liquidation. Without translating the provisions of the Directive into the language of domestic insolvency, uncertainty has been created from the outset. We now have a situation where an EAT finding (which has been criticised by the CA but not overruled, and which conflicts with government guidance, but remains a precedent binding on the Tribunals), appears to allow avoidance of the operation of TUPE in cases that might seem to fall squarely within the intended purpose of the Directive. The cases due to be heard in October 2010 by the EAT (Olds v Late Editions , and other appeals), will provide an opportunity for the EAT to review the Oakland decision, which is to be welcomed. 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