TUPE: what if the business is in administration?

TUPE protects the rights of employees when the business they work for is purchased by a new employer. It sets out that employees assigned to a business will generally have their employment transferred to that new owner – but what happens if their original employer is insolvent at the point that the transfer takes place? Does this make any difference?

A lot depends on the type of insolvency which the business has been placed into.

• Liquidation – intention to wind up business
  If a liquidator has been appointed then the intention is that the business will be wound-up and will no longer trade. If you purchase the assets of a business which has been placed into liquidation, then there will not have been a transfer of a business as a going concern and TUPE will not apply.
• Administration – primary aim to rescue the business
  If an administrator has been appointed then the primary aim of the insolvency proceedings is to rescue the business. If you purchase a business which has been placed into administration then TUPE will generally apply to transfer the employees in that business to the new owner.

There are certain special rules set out in TUPE where a business is bought out of administration (see below) but the principle of automatic transfer of employment will apply.

Is the business actually in administration?

If you are contemplating purchasing a business which is in distress then, in order to have a clear understanding of the TUPE implications of that purchase, you should ensure that the business being purchased is actually in administration. The special rules set out in TUPE to deal with business purchases out of administration only apply if the business is actually in administration at the point of purchase.

The legal state of ‘administration’ is not entered into by a business until insolvency proceedings have commenced and an administrator has been formally appointed. This is important as administrators will often work with an ailing business in an advisory capacity prior to being formally appointed.

The impact on TUPE where the company is in administration

The transfer of all rights and liabilities? There are some exemptions

Generally, where TUPE applies on the purchase of a business, assigned employees will transfer on their existing terms and conditions and all liabilities relating to their employment (for example, sums owing to them) will pass to the new employer.

Where a purchase is made out of administration, TUPE provides that certain liabilities (or part thereof) will not transfer to the new employer. These comprise the sums which an employee may be owed from their outgoing employer in the form of wages, pension contributions and holiday pay up to a cap of 8 weeks’ pay (with a week’s pay itself being capped at the level set for statutory redundancy pay – currently £571 per week). The ACAS Advice on ‘Managing TUPE when you are insolvent’ makes it clear that these sums can generally be claimed by the employee direct from the Insolvency Service. To the extent that employees are owed in excess of the capped amount that they are entitled to claim from the Insolvency Service then these remaining liabilities will transfer to the purchaser.

Changes to terms and conditions – subject to agreement

TUPE does not usually permit changes to be made to the employment terms and conditions of transferring employees if the reason for those changes is the transfer itself or a reason connected with it. However, where a business is in administration then TUPE permits the buyer, seller or administrator to agree changes to terms and conditions of employment with transferring employees even though the reason for those changes is the transfer, provided that the changes have the aim of safeguarding the survival of the business.

Such changes could include, for example, the removal of a benefit which makes the business less attractive for sale; an agreed pay cut or changes to working hours. Any changes must be agreed with ‘appropriate representatives’ of the affected employees. If a trade union is recognised by any of the transferring employees then agreement must be reached with them. If there is no recognised trade union then employee representatives can agree the changes but must sign to signify their agreement and all employees must be provided with a copy of the proposed changes in writing prior to them being agreed together with a document setting out guidance to ensure that they understand it.

Informing and consulting – still applies

The requirement to inform and consult set out in TUPE applies in full even if the business being purchased is in administration. Claims for up to 13 weeks’ pay per employee can be made if the obligations are not complied with and this can pose a substantial risk to the viability of any purchase of an already ailing business. TUPE does provide a defence to any failure to inform and consult where there are “special circumstances” which show that it was not reasonably practicable to consult. However, this defence is very narrowly applied and the fact that a business is in administration will not, on its own, be enough for it to be engaged. The Tribunal, if faced with a claim of failure to inform and consult, will look at what has been done and reduce any award accordingly. Both buyer and seller should therefore aim to do all that they are reasonably able to discharge their obligations in this regard as this is likely to limit the amount of any award made.

Likely limited protection in sale documentation

In a straightforward solvent business sale to which TUPE applies, the sale documentation is likely to include indemnities which, generally, provide that the seller will be liable for any acts and omissions up to the date of purchase by the buyer.

Where a business is being purchased out of administration the protection that a buyer is likely to obtain from the sale documentation is limited. Administrators are unlikely to offer indemnities. Even if they were offered, the fact that the seller is insolvent means that recovery under any indemnities offered is likely to be very limited or non-existent.

From a commercial point of view it therefore definitely does ‘matter’ that a TUPE transfer is occurring in the context of an administration as the normal ‘rules of engagement’ in relation to assignment of risk will go out of the window and, in terms of any skeletons hiding in the closet from the point of view of employees, the buyer is buying at increased risk. Such a risk is often compounded by the hurried nature of sales out of administration limiting the ability to conduct full due diligence.

The purchase of a business out of administration can be positive for both purchasers and employees: a buyer may well get a good deal, a business is saved as a going concern and jobs are likely to be safeguarded. However, TUPE will still apply in such circumstances (with the relatively minor tweaks set out above) so any buyer (who is unlikely to be able to share the risk commercially with the insolvent seller) should remain mindful of its application and the liabilities which go with it.