Miller’s Gers newco won’t pay penalty - limited sanctions.

[jack1690 793]

Seems clear enough Miller's idea is a no-goer.

The aftermath of Oakland vs Wellswood (Yorkshire) Ltd

Overview:

Statutory purpose

The statutory objectives (*1) of an administrator, in order of priority, are to either:

a) rescue the company as a concern;

b) achieve a better result for creditors than on a winding up; or

c) realise assets for secured / preferential creditors.

These objectives are in order of priority and an administrator can only move from one objective to the next if it is not reasonable practicable to achieve that objective.

TUPE Protections

The 2006 TUPE (*2) regulations grant various protections to employees where a business is transferred from one party to another. Namely, in the Oakland case, regulation 4(1) means that the contracts of employment between the transfer (“OldCo”) and its employees are automatically taken over by the purchaser (“NewCo”) following the transfer. The remainder of regulation 4, along with regulation 7, means that NewCo takes on the liabilities of OldCo under that contract of employment (subject to some exceptions), that any dismissal solely connected with the transfer will be automatically unfair (unless is can be shown to have been an ETO reason(*3) ) and that NewCo will be liable for any unfair dismissal claims arising as a result (even if the dismissal was made by OldCo).

Regulation 8(1)-(6) provides exceptions to the liabilities taken on by NewCo where there are ‘relevant insolvency proceedings' in place. Relevant insolvency proceedings are those opened in relation to OldCo ‘not with a view to the liquidation' of OldCo's assets. Where there are relevant insolvency proceedings then various liabilities (mostly capped) for statutory redundancy payments and insolvency payments under the Employment Rights Act 1996 will remain in OldCo and not automatically transfer to NewCo. In reality they will be paid by the National Insurance Fund, who will claim in the administration of OldCo.

Regulation 8(7) dis-applies regulations 4 and 7 where those insolvency proceedings were instituted “with a view to the liquidation” of OldCo's assets. This means that, where 8(7) applies then regulation 4 and 7 will not apply and the contracts of employment / liabilities under them will not automatically transfer, but remain with OldCo.

Whether 8(7) applies or not will affect the liabilities that NewCo takes on in respect of employees, which will affect the ultimate price OldCo can sell the business for. By way of example; if an administrator were to dismiss an OldCo employee, where the dismissal is made to facilitate the sale it will automatically be deemed unfair and, where regulation 4 applies, liability for the compensatory element of that unfair dismissal claim (not the basic award (*4)) will transfer to NewCo (*5). The basic award will remain with the OldCo under 8(1)-(6). If regulations 4 and 7 do not apply then the full liability for any such claim would remain with OldCo.

Issue

By virtue of the priority of the statutory objectives, it is questionable whether administrations can be opened with a view to the liquidation of assets, as statutory objective a) takes priority. However, a sale of OldCo's business / assets means that purpose a) is not possible and in reality most administrations (particularly pre-packs) are opened with purpose b) as their aim. The issue is therefore whether or not the statutory purpose allows an administration to be opened with a view to the liquidation of OldCo's assets and, therefore, whether or not the exemption under regulation 8(7) applies.

The Facts

Mr Oakland (“O”) was director and 50% shareholder in Wellswood Ltd (“OldCo”). He was employed as general manager.

Prior to their appointment the administrators had assessed the affairs of OldCo and concluded that it was not possible to save the company as a going concern, so agreed to concentrate their efforts on achieving a better result for creditors than winding up.

It was intended that following the sale OldCo would go into CVL the book debts were to say in OldCo.

The administrators were appointed on 6 December 2006 and sold the business and various assets to Wellswood (Yorkshire) Ltd (“NewCo”) following their appointment on the same date, they did not trade the company and took the view that to do so (and market the business) would erode its value. It was a pre-pack.

O was transferred to NewCo with the assets of OldCo and along with other employees. There was then a dispute over his terms of remuneration and he was dismissed by NewCo within 12 months of the transfer from OldCo to NewCo.

O claimed unfair dismissal against NewCo.

The First Decision: The Employment Tribunal

The tribunal held that O did not have 12 months continuous employment with NewCo so could not claim unfair dismissal. This was because the appointment of the administrators and the sale by them was with a view to a subsequent CVL of OldCo and therefore regulation 4 did not apply and the period of employment had been terminated by the sale and a new period started with NewCo; on which basis it would follow that the liabilities did not transfer either. Their focus was on the fact that the main aim of the administrators when they were appointed was to sell the business with a view to liquidating its assets thereafter. On this basis they held that the exemption under regulation 8(7) did apply, meaning that there was no automatic transfer of employment from OldCo to NewCo under regulation 4.

O argued that:

1. the exemption under 8(7) could not apply as, by definition (i.e. the statutory purpose) the appointment of an administrator could not constitute the commencement of insolvency proceedings with a view to the liquidation of assets;

2. further, the business continued to trade under the auspices of NewCo just as it had under OldCo (i.e. there was no real change); and

3. the statutory objective focussed on by the administrators was different to bankruptcy or liquidation situation.

He appealed the decision.

The Second Decision: The Employment Appeal Tribunal – January 2009

The appeal Tribunal held that where administrators continue to trade a company with a view to selling it as a going concern then regulation 4 will apply. However, because in this case administrators had been appointed with a view to immediately selling the business and then putting OldCo into CVL, the tribunal were right to find that the exemption under regulation 8(7) applied as the administration was with a view to a liquidation of assets on which basis regulation 4 did not apply.

The Tribunal took it upon itself to consider what it saw as the government's policy behind the enactment of regulation 8, being to promote a ‘rescue culture'.

O appealed.

Department for Business Innovation & Skills Guidance – June 2009

The government issued guidance following the Employment Appeal Tribunal decision, expressing the view that “relevant insolvency proceedings” as defined in regulation 8 (i.e. those instituted not with a view to a liquidation of assets, being the opposite of those where the exemption under 8(7) applies) would include those in which the whole or part of a business is transferred to another party as a going concern; they specifically exclude a winding up where there is no transfer.

On this definition, a pre-pack sale by an administrator, would not fall within the exemption under 8(7) and regulations 4 and 7 would apply; therefore the relevant liabilities to employees will transfer with the sale.

There is now a direct contradiction between the Employment Appeal Tribunal's decision and the government's guidance. It was hoped that the Court of Appeal would resolve this; sadly they did not.

The Third Decision: The Court of Appeal.

To date there is still no transcript of the actual decision, only summary reports of the decision.

At the Court of Appeal, O submitted a new argument; he argued that the TUPE argument was academic as under section 218 of the Employment Rights Act 1996, the transfer of his employment with the business of OldCo to NewCo did not break his continuity of employment, therefore he had over 12 months continuous employment. Section 218 of this act states that where a business is transferred from one person to another the transfer does not break the continuity of employment of its employees. NewCo had no defence to this point.

The new point was a knock out blow for NewCo meant that the decision of the Employment Appeal Tribunal had to be reversed on a point of law. As a result no argument was heard by the Court on the TUPE issue and the issues arising from it were not directly addressed. The divergence of opinion between the government guidance and the Court therefore remains.

The Court did state that they felt there was strong argument that regulation 4 of TUPE would still apply in the case of a pre-pack and that the exception under 8(7) would not. However, as no argument was heard on this point no definitive ruling was given.

The problem

TUPE 2006 was introduced to update previous regulations to make exceptions in insolvency situations and make the obligations on purchasers less onerous in these situations; with the aim of encouraging a ‘rescue culture'. R3 made extensive representations to the government when the amended regulations were proposed and later to parliament when they were debated. The representations were to the effect that TUPE should not apply to administrations at all. Parliament would not agree to this.

R3 also pointed out that the terminology used in the regulations was unclear (as a result of it being imported from an EU directive) and suggested that it make reference to the UK's insolvency schemes (i.e. liquidation, administration etc.) to avoid confusion. Parliament refused to amend the wording on the basis that the Court would clarify any issues arising from any unclear wording in case law. This situation arose in Oakland and that clarification has not been given - the Court side stepped the issue.

Practical effects of Oakland

It is apparent that where a purchaser takes on an employee from a company in administration then they will take on the continuity of employment under the Employment Rights Act. Those employees dismissed by the purchaser in reliance upon the Employment Appeal Tribunal's decision may therefore have claims for unfair dismissal against purchasers, however the time for them to be made is limited as unfair dismissal claims generally have a three month limitation.

However, the result of Oakland is wholly unsatisfactory as there is still no binding guidance on whether or not the protection given to employees under regulations 4 and 7 of TUPE will apply on a pre-pack administration sale and, more importantly, whether a purchaser may find themselves liable for liabilities existing before the transfer such as unfair dismissal claims made by employees dismissed by an administrator. The comments of the Appeal Tribunal state that in the case of a trading administration TUPE will apply, but not a pre-pack. The Court of Appeal's comments suggest it will apply in both cases, although their comments are not binding!

Given the wording of TUPE, the government's guidance and the Court of Appeal's comments the Employment Appeal Tribunal's decision must be treated with extreme caution as it is at odds with the Court of Appeal's comments and government guidance; save that it seems to be agreed by the two Courts that the TUPE protections afforded to employees will apply in trading administrations (although this is not yet definitive). It also seems likely the same will apply in a pre-pack and in practice purchasers from administrators should expect to incur TUPE liabilities whether they purchase a business via a trading administration, a pre-pack or from a liquidator.

*1 - Para 3 Schd B1 to the Insolvency Act 1986

*2 - Transfer of Undertaking (Protection of Employment) Regulations 2006

*3 - ETO = Economic, technical or organisational. In essence - a genuine redundancy

*4 - There are two elements to an award for unfair dismissal, the basic award and the compensatory award

*5 - In theory there may be circumstances where NewCo may be able to cross claim against OldCo / the administrator for this, therefore the terms of the sale and purchase agreement should protect them from these.

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Aye, thats clear enough to me

[Blue corn flakes 1,282]

If this American takes over? maybe he could get us some good sponsors from the states.

[nachothelegend 1,932]

Aye, thats clear enough to me

Aye me tae .

So I take it that means game over for Bill Miller then.

Is that it? Eh excuse me if I dont digest that , but ma dinners ready Mate