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The effect of Insolvency on the TUPE regulations

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The normal rules under the TUPE regulations do not apply when there is a relevant transfer of a business whereby the transferor is the subject of insolvency proceedings and the business and its assets are under the supervision of an insolvency practitioner. 

If TUPE applies, the way in which it normally works is modified. In effect, the provisions are adapted to reduce or limit the liability that is transferred to the transferee. These provisions apply where there are either “non-terminal” or “terminal” proceedings under the supervision of an insolvency practitioner. Broadly speaking, “non-terminal” describes a situation where the aim is to rescue a business and allow it to continue trading, whereas “terminal” proceedings describe a situation where the aim is to liquidate the assets of the business. 

Liquidation (terminal proceedings)

Liquidators are appointed to wind up an insolvent company. If, during the process, they locate a suitable buyer for the business, then the buyer will take on very little under the TUPE rules. Of particular importance is that any liabilities or claims will not transfer. There is also no obligation on the buyer to take on the existing employees and the buyer will not be responsible for any dismissals that the seller makes. Even in situations where the buyer chooses to hire existing employees, they are not bound by their existing terms and conditions. This is a stark contrast to the normal rules under the TUPE regulations. 

For those employees who are taken on by the buyer, the rule surrounding continuous service still applies. As such, employment with the insolvent seller will be taken into consideration when calculating an employee’s continuous length of service. This is important as many employment rights do not kick in until an employee has at least two years continuous service. 

Administration (non-terminal proceedings)

The impact of administration on the TUPE rules is somewhat different to liquidation. Whereas a liquidator’s role is to wind up a company, an administrator’s role is to try and rescue the company as a going concern. If this is not possible, the administrator will attempt to sell the business in order to maximise the assets for the protection of its creditors. In such circumstances: 

  • Certain “normal” TUPE rules will apply. Namely, employees will automatically transfer to the buyer and will receive protection for unfair dismissal;
  • Certain “Special” rules will also apply in that: 
  • some of the seller’s debts in respect of the employees will not transfer to the buyer, but will instead be taken on by the Secretary of State and paid out of the National Insurance Fund (NIF)
  • in addition, the buyer will have greater scope than normal to vary the employees’ terms and conditions of employment. 

The above provisions help make a failing business more attractive to prospective buyers. Importantly, liability for sums payable to a relevant employee under the relevant statutory schemes do not transfer to the buyer, but will instead be paid by the Secretary of State out of the NIF. Therefore, only debts falling outside of the statutory scheme, or which exceed the statutory limits, will pass on the buyer. A prospective buyer should therefore seek to ascertain full details of the liabilities that fall outside the statutory scheme or its limits.

What is covered by the Statutory Scheme?

Employees that transfer to the buyer will be paid out of the NIF for arrears of wages and for any holidays that have already been taken. They will not receive statutory redundancy payments, payment in lieu of accrued but untaken holiday or notice pay, as they have not been dismissed. The buyer will remain liable for any residual contractual debts or for any sums exceeding the statutory cap or limits.

Employees that are unfairly dismissed because of the transfer will also be paid arrears of wages and any holiday pay from the NIF. They will not be paid statutory redundancy payments and notice pay, as they were not dismissed by reason of redundancy. If they bring a successful claim for unfair dismissal or breach of contract, it will be for the employment tribunal to determine joint and several liabilities between the buyer and the seller.  Any employees who are dismissed for a genuine ETO reason, will be considered redundant and will be paid redundancy payments, arrears of wages, holiday pay and notice pay out of the NIF. 

Whilst the statutory scheme provides some relief for prospective buyers, there remains a risk that buyers will still be liable for substantial sums. Payments are subject to weekly limits, and those covered by the fund include:  

  • Up to eight weeks’ wages
  • Up to six weeks holiday pay
  • Statutory notice pay if an employee has worked their notice period but hasn’t been paid
  • Unpaid contributions to a workplace pension.

The weekly pay is also subject to the statutory cap of £538. Any sums in excess of the above limits or the statutory cap will be the buyer’s responsibility. 

Flexibility over changes to employment terms

As above, the second change to the TUPE rules in an administration is that the seller, insolvency practitioner or buyer can agree to “permitted variations” to an employees’ contract of employment. The variation must aim to safeguard employment by ensuring survival of the business. For instance, this could be a variation in respect of pay or a reduction in their holiday entitlement.

The buyer does not need the agreement of each individual employee, but must agree the variation with appropriate representatives (i.e. a trade union or employee representative). 

Information and Consultation

Regardless of whether a company is in administration or liquidation, the normal rules on information and consultation under TUPE apply.

The seller is obliged to provide employee representatives with prescribed information on matters relating to the transfer and any proposed measures. It must then consult on any measures proposed in connection with the transfer. The buyer must also provide information to the seller about any proposed measures it intends to take after the transfer has taken place.

Any failure to comply with the rules on information and consultation can result in a penalty of up to 13 weeks’ pay per affected employee. Claims can be brought against the parties individually or on a joint basis; although, a buyer is jointly liable to pay any penalty, regardless of whether they were at fault. 

If you are an insolvent business and require any information or support on the effect of TUPE in either an administration or liquidation, then please get in touch with the employment team at Monarch Solicitors on 0330 127 8888.

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