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TUPE transfers - formal appointment date is key

29 November 2007

The liabilities of an insolvent business will go over to the transferee if the TUPE transfer date precedes the date of formal appointment of an insolvency practitioner, unless the sale is made provisional on the appointment. This is the effect of the Employment Appeal Tribunals (EAT) ruling in the case of Secretary of State for Trade and Industry v Slater [2007] IRLR 928.

The TUPE insolvency rules

The Transfer of Undertakings (Protection of Employment) Regulations 2006 ("TUPE 2006") extended the previous 1981 TUPE Regulations and introduced a number of additional measures relating to insolvency situations, aimed at facilitating the sale of failing businesses. One of these is to give a degree of protection to the transferee of a business by providing that where there are "relevant insolvency proceedings" in existence in relation to the transferor, the liability for paying employees does not move across to the transferee but instead is met out of the Government insolvency fund.

Early transfer defeated exclusion of TUPE rules

The TUPE 2006 scheme draws a distinction between insolvency proceedings aimed at liquidating the assets, which are covered by Regulation 8(7) and insolvency proceedings that are not begun with this objective, dealt with under Regulation 8(6). In the former case there is no transfer of employees and therefore no liability transferred and in the second case there is a transfer but there is a limit on the extent of liability taken on by the transferee. In both cases the legislation requires the insolvency proceedings to have been commenced as at the date of the transfer and to be under the supervision of an insolvency practitioner. Regulation 8(7) uses the expression "proceedings which have been instituted" and Regulation 8(6) refers to "proceedings which have been opened".

In Slater the EAT had to decide when the insolvency proceedings had been commenced for the purposes of TUPE, i.e. was it was before or after the date on which the undertaking was transferred? On 25 July 2006 the directors of the company in question, CFG Site Services Limited, had decided that the company was insolvent and should be put into creditors voluntary liquidation. The following day, pending the shareholder and creditors meetings, Deloittes were called in to give redundancy notices to the staff and to value the stock. A consortium of the former directors formed a company and on 27 July 2006 purchased the business. Deloittes were formally appointed liquidators for the transferor following the creditors meeting on 16 August 2006.

The transferees argued that the insolvency proceedings had commenced when the directors took the preparatory steps to wind up the company on 25 July 2006. The EAT rejected this and ruled in favour of the Secretary of State. It said that the relevant date had to be the same under TUPE as under the insolvency legislation. There was no basis in law for fixing a different starting point for TUPE. TUPE does not provide for this and it would lead to considerable uncertainty if this were the case. In Slater, therefore, the EAT found that the insolvency proceedings had not been commenced by the time of the TUPE transfer and so the liabilities would not be met under the Secretary of States guarantee. The purchaser picked up all those liabilities.

How to avoid the problem

The EAT recommends (as do we), that the terms of any proposed sale before a transfer must make the sale provisional and conditional on the appointment and approval of the liquidator.

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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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