TUPE passes the buck

The Transfer of Undertakings (Protection of Employment) Regulations 2006 replaced from 6 April the 1981 Regulations of that name. One purpose is to provide some relief from the transfer of liabilities where the transferor is insolvent. The new regulations caused so much concern that a motion to revoke them was defeated in the House of Lords by only two votes.

The regulations use the vague generic language of the European directive which they implement, allegedly to avoid legal challenges to the implementation of the directive – though member states are permitted to tailor implementation of the insolvency provisions to their own circumstances. The regulations seek to distinguish between insolvency proceedings “opened with a view to the liquidation of the assets of the transferor” and “bankruptcy proceedings or any analogous insolvency proceedings opened not with a view to the liquidation of the assets of the transferor”. In the former case, certain pre-transfer debts will be paid from the National Insurance Fund and will not pass to the transferee. However, assets may be realised in any type of insolvency proceedings in the UK and so it is difficult to ascertain the circumstances in which the insolvency provisions are intended to take effect. Is the “view” to be assessed on a case by case basis? Who takes the view? At what stage is the view to be assessed?

Conflicting advice

These difficulties are compounded by apparently conflicting statements by government agencies. The regulations appear to say that, in the case of transferring employees, the liabilities to be met from the National Insurance Fund will be those payable under the insolvency provisions of the Employment Rights Act (”ERA”) as if the employees had been dismissed at the date of the transfer, but that the Fund will not meet liabilities to employees under the redundancy provisions of that Act. The DTI guide to the regulations appeared to say that the Fund would pay sums due under both sets of provisions. The Redundancy Payments Directorate has indicated that only arrears of wages and holiday pay would be met from the Fund – which would give less relief than might have been expected from the DTI guidance.

In the revocation debate, the government seemed to argue that administration was not a collective proceeding, and that its principal purpose was not a realisation of assets but the rescue of a company. This appears to be based on an incorrect understanding. Administration has three purposes arranged hierarchically: first, to rescue the company; secondly, to achieve a better result for creditors than would be likely if the company were wound up (and hence a collective proceeding); and thirdly, to realise property to make a distribution to secured or preferential creditors. The first objective can be achieved only in rare circumstances. In most cases, the second is the principal reason. Can it then be right to say that administrations in all cases are proceedings entered into “not with a view to the liquidation of the assets of the transferor”? Surely not!

More practical issues

Regulation 8 refers to Chapter VI of Part XI of ERA (which deals with redundancy pay), and Part XII, which covers a number of payments: arrears of pay, holiday pay, statutory pay in lieu of notice and a basic award for unfair dismissal. The regulation expressly states that the relevant statutory schemes shall apply even if the qualifying requirement (that employment has been terminated) is not met. Apparently, the Redundancy Payments Office does not know what this means and has admitted that there is scope to challenge its interpretation.

Two further aspects of the regulations cause difficulties for insolvency practitioners. Regulation 11 requires the transferor to provide detailed information about employees to the transferee not less than 14 days before the transfer. Regulation 13 requires an employer contemplating a transfer to provide employee representatives with certain detailed information about the proposed transfer and its effect on employees. The transferee will be jointly and severally liable with the transferor for any compensation awarded for failure to comply with these requirements. In most insolvency cases it will be impossible for the office-holder to comply because of the constrained circumstances in which they work. A potential transferee will not want to be jointly and severally liable with an insolvent company for any failure to comply. The government’s response was simply that a tribunal could waive the award of compensation where it considered that just and equitable, and that there was no reason why consultation could not be carried out properly.

The government’s position appears to be that it is impossible to achieve complete certainty in the drafting of legislation and it will be for courts and tribunals to determine its effect. Voters might be justified in asking whether it is fair to expect citizens whose livelihoods are at risk to have to litigate in order to achieve clarity which the government is unwilling to deliver in the first instance.

Alistair Burrow, Partner and Head of Recovery, Tods Murray LLP