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TUPE – What is it and what effect does it have on insolvency?

If you have ever been involved in a sale of a business, a purchase, a takeover or generally have some knowledge surrounding these areas you may have heard of TUPE when dealing with employee rights.

What exactly is TUPE?

The Transfer of Undertakings (Protection of Employment) Regulations 2006, commonly referred to as TUPE, exists primarily to protect the rights of employees in the event of the ownership of the business changing hands.

In its simplest form if the business that you work for is taken over then TUPE sets out to make sure that your employment contract is transferred, this includes your terms and conditions, salary and even your start date for the purposes of calculating your redundancy in the future.

There are some exceptions; changes to terms and conditions of employment may be made for specific reasons entailing changes to the workforce, but such changes need very detailed reasons behind them.

What happens in an Insolvency situation?

When entering into an insolvency process, whether that be an administration or a liquidation, the effect of TUPE will need to be taken into account well in advance of the process, particularly if there is hope of a business sale.

In an administration TUPE would apply on any business sale if the administrator has kept the employees engaged during any short period of trading. This would result in the purchaser for the business, whether he needs all of the employees or not, having to employee all of the personnel from the previous company.

However, administration is generally the go-to procedure for Insolvency Practitioners to assist with the rescue of failing businesses. As a result of TUPE we are finding that potential purchasers may be deterred from rescuing distressed businesses because of the cost of employing inherited employees, the cost of the employment-related liabilities that will transfer to them, and the potential need to undergo a redundancy process and make redundancy payments once the relevant business has been acquired. On these occasions the sale process generally concludes with prolonged negotiations and the sales price being lowered by the purchaser taking account of these ongoing liabilities.

In a liquidation scenario some of the most fundamental TUPE protections for employees are removed in order to facilitate the purchase by the buyer. The automatic transfer principle does not apply and therefore the seller’s employees will not automatically transfer to the buyer. As a result the buyer may cherry-pick which, if any, employees it would like to employ following the purchase of the business. It is important to note however, that any employees that are kept on will retain their continuity of employment.

Additionally the buyer will be free to employ any or all of the seller’s former employees on entirely different terms in accordance with normal contractual principles, save that the employees will retain their continuity of employment.

Liquidation does however tend not to include any prolonged period of trading which is generally required whilst negotiations for the sale are carried out, as this is more akin to administrations. Therefore unless the deal is completed at the very outset of the liquidation there is a danger that the liquidation could include a period of non-trading which could affect the goodwill of the business due to the brief interruption of trade.

It goes without saying that if the business is sold prior to an insolvency procedure then TUPE would apply.

Conclusion

It is probably fair to say that insolvency law is skewed more towards protection of creditors, rather than the preservation of employees’ jobs.

That said, insolvency practitioners, when acting as administrators, are tasked with trying to rescue the company as a going concern, which does save jobs. Additionally, employees are often creditors and are given preferential status for arrears in wages and accrued holidays, for example.

Employment law is constantly being changed and updated, the crucial point is for directors to have early discussions with an advisor to understand the procedures available for the company and the advantages and disadvantages to both. At Portland we have extensive experience of advising all parties in such transactions and we are happy to partner you through all the stages of the transaction and beyond.

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