Pressure Coolers: TUPE and dismissals after a pre-pack

Pressure Coolers: TUPE and dismissals after a pre-pack Bulletin No 353

Case: Pressure Coolers Ltd v Malloy, Maestro International Ltd and SoS for Trade and Industry 2011 WL 203 9903 (Employment Appeal Tribunal, Cox J, 9 June 2011) Synopsis An Employment Appeal Tribunal (EAT) held that, under reg 8(3) of TUPE, it was the transferee purchaser, and not the Secretary of State (SoS), who was liable to pay the Claimant employee’s basic award and notice pay following his unfair and wrongful dismissal by the transferee after a “pre-pack” administration TUPE transfer. Topics Covered: TUPE, Administration, Pre-pack, Employment

The Facts Maestro sold its business as a going-concern using a pre-pack administration procedure. Although the Claimant had been identified for redundancy by the Buyer before administration, he was not actually dismissed until a few hours after the pre-pack sale had completed. The dismissal was effected by the Buyer. There was no consultation. He received no notice of dismissal and no pay in lieu. The issue on appeal was who should pay the Claimant’s basic award and notice pay where he had been unfairly and wrongfully dismissed by the Buyer after a “pre-pack” TUPE transfer of a business from a transferor in administration. Reg 8 of TUPE relaxes some of the usual effects of TUPE for relevant transfers by transferors who are subject to insolvency proceedings.  The reason for relaxing the effects of TUPE in insolvency is to incentivise purchasers to acquire businesses from insolvent transferors in order to promote business rescue. TUPE differentiates between two types of insolvency proceedings.  The first type is insolvency proceedings instigated with a view to the “liquidation” of the company’s assets (“liquidation proceedings”).  The second type is other (i.e. non-liquidation) proceedings referred to in TUPE as “relevant insolvency proceedings”.  Administration is a “relevant insolvency proceeding”. In a TUPE transfer by a transferor that is subject to “relevant insolvency proceedings”, all the relevant employees still automatically transfer to the transferee, but regs 8(1)-(6) of TUPE modify some of the other provisions of TUPE to mitigate the burden on the transferee.  Under reg 8(3), it is the SoS, rather than the transferee, who is liable for certain of the employee’s pre-transfer claims, up to statutory limits, by reference to s184 Employment Rights Act 1996 (“ERA”).  There is a deemed dismissal at the date of the transfer so as to engage the State Guarantee Scheme, which is the scheme set up to safeguard minimum rights of employees of insolvent employers.  Similarly, reg 8(5) has the effect of making the SoS rather than the transferee liable to meet any redundancy liabilities (again, up to statutory limits).  These will typically arise where there are dismissals for redundancy that are not for economic, technical or organisational reasons. Thus the transferee from a transferor in relevant insolvency proceedings acquires the employee, but without the baggage of past liabilities. The Decision This Judge looked at the detail of reg 8 of TUPE and s184 ERA to see exactly which liabilities count as “past”.  In particular it was the deemed termination provision of reg 8(3) that required interpretation. The Judge decided the issue by reference to the corresponding provisions of the EC Acquired Rights Directive 2001/23/EC. The effect of Art 5(2)(a) of the Acquired Rights Directive is that the debts of the transferor that are within the scope of the State Guarantee Scheme (i.e. those listed in s184 ERA) are frozen at the time of transfer, and paid by the SoS, and they do not pass to the transferee.  In order to fall within this State Guarantee Scheme, the debts have to arise before the transfer.  Any debt or liability arising after transfer is beyond the scope of the State Guarantee Scheme.  The deeming provision in reg 8(3) to provide a deemed dismissal for relevant employees whose employment have transferred (so as to engage the State Guarantee Scheme) should be interpreted accordingly. In the present case the Claimant’s employment was terminated only after the transfer, and so liabilities arising out of the termination did not arise before the transfer and were not payable by the SoS from under the State Guarantee Scheme. Comment This was not a case in which the Claimant was adversely affected by either outcome.  His rights, as an individual worker, had been safeguarded whether the transferee or the SoS were liable for the amounts claimed. Coming relatively soon after the TUPE case of OTG v Barke (see our bulletin 340) this case provides useful further clarification of how TUPE operates in the context of an insolvency.  In both cases the Judge deferred to the originating EC Directive to decide upon the correct interpretation of the English TUPE Regulations. The purpose of the Acquired Rights Directive is to protect employees’ rights in a business transfer scenario.  As we have noted before, this objective comes into direct conflict with the objective of promoting business rescue where the transferor is insolvent.  A balance needs to be struck.  If the employees’ rights are so heavily protected that a business purchaser is deterred from buying the business, then the business is unlikely to be rescued and the employees will lose their jobs. Such protection would be self-defeating.  And so reg 8 of TUPE (which is derived from Art 5 of the Acquired Rights Directive) attempts to mediate a compromise between the various levels of employee protection and the degree of insolvency facing the transferor.  But as the Judge in OTG v Barkeobserved (see our bulletin 340): “the effect of those provisions hardly leaps from the page”.  We understand that one of the conjoined cases in OTG v Barke is being appealed and will be heard by the CA in October.  It is therefore likely that we will soon have the benefit of further judicial scrutiny of the provisions of reg 8. Law Debenture sponsor of the Insolvency Lawyers Association If you wish to be removed from the ILA mailing list and not receive any further updates pleaseclick here