UK: Pre - Pack Sales In Administrations - An Employment Perspective

Last Updated: 1 September 2009
Article by Daniel Oakland

The term "pre-packaged sale" (or pre-pack) refers to an arrangement under which the sale of all or part of a company's business or assets is negotiated with a purchaser prior to the appointment of an administrator, and the administrator effects the sale immediately on, or shortly after his appointment.

We are in difficult economic times, and one of the goals of the increased emphasis on "rescue culture" is to find ways in which troubled and insolvent businesses can be made more attractive to potential purchasers.

A significant determining factor in a purchaser's decision to buy an insolvent business is likely to be the extent of the liabilities that the purchaser will take on. Often the most significant liability in this regard will be the employees of the failing business.

Since the Transfer of Undertakings (Protection of Employment) Regulations ("TUPE") were introduced in the UK in 1981 the general position has been that the rights of workers are safeguarded on a transfer of a business or undertaking (a "relevant transfer"). The Regulations have since been updated in 2006, but the general position remains – namely that contracts of employment run with the undertaking, and the transferee cannot take the business without the employees and must take those employees subject to existing employment rights and obligations. .

Regulation 4 of TUPE provides that a relevant transfer does not operate to terminate the contract of employment of employees who are working in the business at the time of the transfer but transfers their contracts to the transferee.

Regulation 7 provides that a dismissal by reason of a relevant transfer (which is not an "economic, technical or organisational reason") is automatically an unfair dismissal.

Regulation 8(7), however, may provide the saving grace for potential purchasers of moribund businesses. Regulation 8(7) disapplies the above regulations in relation to any transfer where there is what has been called a 'terminal insolvency', ie 'the transferor is the subject of bankruptcy proceedings or any analogous insolvency proceedings that have been instituted with a view to the liquidation of the assets of the transferor and are under the supervision of an insolvency practitioner'.

In essence, therefore, if a pre-pack sale by an administrator is regarded as arising out of "bankruptcy or analogous insolvency proceedings", then the transferee may acquire the business without its employees and accordingly without the expense of or the potential liability of claims from employees of the transferor.

The converse, of course, is that if the pre-pack sale is not regarded as arising out of such bankruptcy or analogous insolvency proceedings, then all the employees of the transferor will transfer automatically to the transferee under TUPE with associated wage bills and potential for claims.

Clearly, the question as to whether a purchaser of a business from administrators is also going to acquire its entire workforce is a matter of some considerable importance.

Clarity is (as ever) not particularly aided by conflicting positions in the case law and in the guidance from the Department for Business, Enterprise and Regulatory Reform (formerly the DTI, now recently renamed BIS).

The BERR guidance provides that a pre-pack sale by administrators will always result in a TUPE transfer. It states that '... regulations 4 and 7 will always apply in relation to a relevant transfer that is made in the context of an administration as administration is not analogous to bankruptcy ... the correct approach is to look at the main or sole purpose of the procedure rather than its outcome in a particular instance. The main purpose of bankruptcy proceedings is to realise free assets and expenses amongst all the debtor's creditors. This is not the main purpose of administration...'. This guidance is not binding and has attracted considerable criticism – in particular as it restricts rather than enhances the rescue culture which is so important in the current environment, and is at odds with the recent judicial decisions.

So, what appears to be welcome news for purchasers of insolvent businesses has now arrived in the form of the recent judgment of the Employment Appeals Tribunal (EAT) in the case of Oakland –v- Wellswood (Yorkshire) Ltd UKEAT/0395/08.

In Oakland (note: not the writer of this article) it was held that a pre-pack administration business sale did not result in the employees automatically transferring under Regulation 4 of TUPE. Contrary to BERR's guidance, the EAT held that the transferor employer, in administration, was in a form of 'terminal insolvency' as being subject to 'bankruptcy proceedings or... analogous insolvency proceedings... instituted with a view to the liquidation of the assets of the transferor'. Therefore regulation 8(7) of TUPE applied and the transferor's employees did not automatically transfer.

The brief facts of the case are as follows.

Mr Oakland was a director, shareholder and employee of Wellswood Ltd (referred to in the judgment as "Oldco"), a food wholesale business. When Oldco ran into financial difficulties, Mr Oakland consulted an insolvency practitioner and also sought a potential buyer for the business. A buyer was identified, but was not willing to purchase Oldco as a going concern because of the size of the company's debts.

It was agreed that Oldco would be put into administration, and that the buyer would incorporate a new company ("Newco"). Newco would purchase the assets of Oldco, and would take on some of its employees, but would not be liable for the existing book debts.

The directors of Oldco appointed two insolvency practitioners as joint administrators of Oldco. On the same day, the sale of assets to Newco took place. Newco then took the lease of Oldco's premises and took on some (but not all) of its employees, including Mr Oakland.

In their report dated January 2007 the joint administrators set out the three statutory objectives of administration:

  1. Rescuing the company as a going concern;
  2. Achieving a better result for the creditors as a whole than would be likely on a winding up of the company; or
  3. realising any property in order to make a distribution to one or more secured or preferential creditors.

The administrators' report concluded that the first objective was not achievable for Oldco. In considering the second, they observed that any further period of trading to allow the marketing of the business and assets for sale would be likely to result in further losses and so reduce the funds available to creditors. They therefore anticipated that the company would move from administration to a creditors' voluntary liquidation.

Not long after the transfer, Newco dismissed Mr Oakland, and he brought a claim for unfair dismissal. Newco argued that regulation 8(7) of TUPE applied, and so there was no automatic transfer of Mr Oakland's employment to Newco.

In dismissing Mr Oakland's claims, the Tribunal held that (i) There had been a relevant transfer of an undertaking from Oldco to Newco; (ii) On the date of the transfer, Oldco had been the subject of insolvency proceedings under the supervision of an insolvency practitioner; and (iii) The insolvency proceedings fell within regulation 8(7).

Mr Oakland appealed the Tribunal's decision, but that appeal was dismissed. The EAT 's view was that this accorded with the policy behind regulation 8(7), specifically to facilitate a rescue culture whereby a purchaser is not put off by the effects of TUPE. In this case it led to an outcome where some (but not all) jobs were preserved and the creditors benefited from the best available option.

His Honour Judge Peter Clark accepted the general position that where administrators continue to trade the business with a view to its sale as a going concern any relevant transfer will attract TUPE protection for those employees under regulation 4. Nevertheless, he distinguished that situation from the facts of this case where it had rapidly become apparent to the administrators that it was not possible for them to continue to trade the business. Instead, immediately on appointment they took steps to sell the assets to Newco. Judge Clark held that the tribunal at first instance was entitled to conclude that the appointment of the joint administrators was with a view to the eventual liquidation of the assets of Oldco by way of a creditors' voluntary liquidation, and that Regulation 8(7) would therefore apply.

The decision increases the likelihood that a transfer as part of a pre-pack sale by administrators will benefit from the Regulation 8(7) exception. However, there still remains some uncertainty as to what view a tribunal might take of administrations in which it is unclear at the outset whether rescue is still a viable option. Where genuine rescue still appears to be a possibility at the time of the administrators' appointment, Regulation 4 may still apply, and any buyer would have to take a view about its potential liability in respect of the transferor's employees.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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