ABSOLUTELY INSOLVENT

OTG Ltd v Barke and ors

The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) state that employees' contracts transfer automatically to the new employer in the event of a transfer, except in certain insolvency situations. In OTG Ltd v Barke and ors, the Employment Appeal Tribunal (EAT) decided that TUPE always applies to sales of insolvent businesses involving administrators.

Basic facts

The case involved five conjoined appeals looking at whether there was a TUPE transfer when a company which had gone into administration under schedule B1 of the Insolvency Act, was then transferred to another company.

If TUPE applied, the new employer would become liable under regulation 4 for all the employees transferred over, along with any accrued liabilities in relation to any employees dismissed prior to, but because of, the transfer.

The question, however, was whether administration proceedings under Schedule B1 constituted "insolvency proceedings” within the meaning of regulation 8 (7) of TUPE.

Relevant law

Regulation 8(7) states that regulation 4 does not apply if:

“… the transferor is the subject of bankruptcy proceedings or any analogous insolvency proceedings which have been instituted with a view to the liquidation of the assets of the transferor and are under the supervision of an insolvency practitioner”.

Tribunal decision

The tribunal had to decide whether administrations never fall within 8(7) - the absolute approach; or whether they may do if, as a matter of fact, it found that the administration was instituted with a view to the liquidation of the transferor's assets - the fact-based approach.

It followed the decision of the EAT in Oakland v Wellswood (Yorkshire) Ltd (Weekly LELR 111) which said that tribunals had to decide the question as a matter of fact, depending on the reason that the company went into administration.

The tribunal therefore decided that regulation 4 of TUPE was disapplied by regulation 8 (7) because the administrator in this case had clearly been appointed with a view to the liquidation of the assets.

EAT decision

The EAT, however, disagreed.

It considered both the European directive which gave effect to TUPE and the relevant case law, including the case of Abels v Bedrijfsvereniging voor de Metallindustrie en de Electrotechnishche Industrie which distinguished between liquidation proceedings and other types of insolvency.

It decided that its earlier decision in Oakland had been wrong and that instead tribunals should adopt an "absolute approach" when considering the application of regulation 8(7) in administrations for the following reasons:

• the distinction in the directive was more likely to be a distinction between the object of the procedure, rather than the intention of the individuals operating it 
• every administrator must, first and foremost, consider whether the primary objective of rescuing the company as a going concern is overriden by one of the other considerations which means they cannot say, as soon as administration proceedings start, that their objective is to liquidate the assets
• administrators do not have to state, at the beginning of an administration, which objective they are pursuing
• a fact-based approach inevitably increases the likelihood of disputes as to who is liable for the transferor's obligations
• the purpose of the directive is to protect employees in the event of a transfer, and in particular to ensure that their rights are safeguarded, and the absolute approach was more likely to achieve that aim in cases where a transfer had actually occurred