As part of our TUPE takeaways series, we consider a recent Employment Appeal Tribunal decision which explored how TUPE applies when a transferor is insolvent. How can TUPE be modified? And what conditions need to be met?

Employment protection in an insolvency context

The sale of a struggling business will often trigger TUPE. The usual tests will apply, looking at whether there is a transfer of an “economic entity” i.e. a grouping of resources which has the objective of pursuing an economic activity. 

If TUPE applies, employees will usually automatically transfer to the buyer. The buyer “steps into the shoes” of the seller, and the contracts of employment, as well as any liabilities or claims, will transfer to the buyer. However, TUPE is modified in an insolvency scenario – and the way it is modified depends on whether the business is in administration or liquidation. Administration aims to achieve survival of the business in some form; whereas liquidation is seen as a ‘terminal’ shut-down event.

By way of summary, under regulation 8 of TUPE:

  • Where insolvency proceedings have been opened under the supervision of an insolvency practitioner, but not with a “view to the liquidation of the assets of the transferor” – so for example, in an administration or “survival” setting –  some parts of TUPE are modified. 

The buyer does not become liable for any sums payable to the employees under the national insurance fund, such as certain arrears of pay, holiday pay and statutory redundancy payments. Changes to terms and conditions of employment can also be agreed with employee representatives, if they are designed to ensure the survival of the business.  Crucially, the automatic transfer of employment principle still applies.

  • Where bankruptcy or insolvency proceedings have been instituted under the supervision of an insolvency practitioner and there is a “view to the liquidation of the assets of the transferor” key aspects of TUPE will not apply. This is set out in regulation 8(7) of TUPE and was recently considered by the Employment Appeal Tribunal.

If these conditions are met, the employees will not automatically transfer and any liabilities stay with the seller. Dismissal protections are also disapplied, meaning employees can be dismissed because of the transfer.  Perhaps counterintuitively, information and consultation obligations do still apply.

We explore in more detail how TUPE works in different insolvency scenarios here.

Crust and bust

Morton’s Rolls Ltd was a bakery business that got into financial difficulties. They entered into a conditional business transfer agreement with Phoenix Volt Ltd on 3 March 2023. That same day, Morton stopped trading: its bank account was frozen and it lost the right to occupy its premises. All 230 of Morton’s employees were made redundant immediately. Morton’s three large supermarket customers took their business elsewhere.

HMRC, who were owed unpaid debts, petitioned for a winding up order and a provisional liquidator was appointed on 7 March 2023. A winding up order was later granted on 31 March 2023.

In the meantime, Phoenix secured occupancy rights to the premises, agreed lower payment terms for the plant and machinery and employed around 100 people, including some of Morton’s ex-employees. On 21 March 2023, Phoenix began production of bakery goods and sold its items to small local shops. 

Morton’s employees sought payments from the national insurance fund but the Secretary of State refused to make any payments. They believed that there had been a TUPE transfer prior to the winding up order being made and so Phoenix were responsible for the claimants. The employees brought a claim against the Secretary of State.

When did TUPE apply?

The Tribunal found that TUPE applied, and this wasn’t challenged. But there was disagreement between the parties about when the transfer took place. Determining the date TUPE applied was important to determine when the conditions in regulation 8(7) should be assessed. 

Assessing when TUPE applies is a question of fact – it will be the date when responsibility for carrying on the business transfers to the buyer. The date of completion of a sale, employment of staff and resumption of activities are all relevant factors to add to the mix.

The Tribunal found that the bakery business transferred to Phoenix on 21 March 2023. Even though a conditional business transfer agreement was entered into at an earlier date, that was not decisive. The business was not a going concern at that point and it would not have been possible for Phoenix to continue the business. Although it was recognised that a different Tribunal could have reached a different conclusion, the decision was upheld by the Employment Appeal Tribunal.

Did the employees transfer?

No. The conditions in regulation 8(7) were held by the Tribunal to have been met at the transfer date. The EAT agreed, focusing on four elements of the relevant test:

1. Was the transferor the subject of bankruptcy or analogous insolvency proceedings? Morton was subject to a compulsory liquidation, which amounted to bankruptcy or analogous insolvency proceedings. 

2. Were the proceedings under the supervision of an insolvency practitioner? The proceedings were under the supervision of a provisional liquidator, which fell within TUPE’s definition of an “insolvency practitioner”.

3. Had the proceedings been instituted? The Secretary of State’s view was that the conditions in regulation 8(7) could only be met once the winding up order had been made, on 31 March 2023. However, the Tribunal had been entitled to find that the presentation of HMRC’s petition on 7 March 2023 started the insolvency proceedings. 

4. Were the proceedings with a view to the liquidation of the transferor’s assets? The Tribunal had also been entitled to find that the liquidators primary concern was to safeguard assets, with a view to liquidating them, for the benefit of the creditors. Although the Secretary of State pointed out that the appointment of a provisional liquidator may not always lead to liquidation, there seemed to be no alternative reason here e.g. to simply put pressure on Morton to pay a debt.

So the employees did not transfer and the Secretary of State could be on the hook for payments from the national insurance fund (and a Tribunal will now consider these claims).

TUPE takeaways

Although you can bag a bargain when buying a business from an insolvent company, it is important that you do your homework. 

  • Do not make assumptions: TUPE will not always apply to the sale of a business. The usual tests must be met, focusing on whether there is the transfer of an economic entity. 
  • Consider the aims: Different insolvency procedures have different goals – this could be to continue the business as a going concern or to liquidate the assets. If you are buying a business from an insolvent company, find out early on what sort of insolvency procedure is underway. Is this an administration, a liquidation, a Company Voluntary Arrangement? This will  impact how TUPE is modified and whether or not the employees (and associated liabilities) will transfer.
  • Timing matters: Has an insolvency procedure formally started? This case emphasises that proceedings can commence once a petition is issued or an insolvency practitioner is appointed. So regulation 8(7) can apply even if a sale happens before the final winding up order.
  • Don’t forget to inform and consult! One aspect of TUPE which is not modified by the insolvency provisions, is the requirement to inform and consult with appropriate representatives. Sellers should ensure that they communicate clearly with employees about their rights and potential claims to the national insurance fund. Buyers may be jointly liable, so they should try and seek warranties confirming that the seller has complied with its obligations – though the chances of getting those may be slim in an insolvency setting.

Getting in a TUPE tangle? Contact our team for support.

Secretary of State for Business and Trade v Sahonta and others – read the full judgment here.

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