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Around 13,000 companies become insolvent each year and in many of these cases the best chance of saving jobs or recovering any of the investors' capital is to find a buyer for the business.
New owners can often find value in a firm where others have failed, but such rescue bids face a major barrier in the form of the new Transfer of Undertakings (Protection of Employment) Regulations 2006 (Tupe) rules. The original Tupe regulations were introduced in 1981 to protect the pay and conditions of employees upon the sale or transfer of a business.
Business recovery professionals have been warning ever since that the burdens they impose put off potential purchasers who would otherwise be willing to take on the risk of buying a failed business by imposing on them uncertain liabilities for employee debts and onerous obligations, such as pre-purchase terms and conditions with regard to employees.
So with the new Tupe regulations, which came into force on 6 April 2006, the Government attempted to address these concerns. The overriding principle under Tupe 1981 was that any kind of variation to terms and conditions in the context of a transfer was void. The new rules provide a mechanism for businesses that are subject to certain insolvency proceedings to be exempted from some of the provisions that would ordinarily apply.
They limit the transfer of certain liabilities in formal insolvency proceedings. In some cases debts to employees can be met by the National Insurance Fund (NIF). They also allow changes to be made to the employment terms.
However, far from inspiring buyers with a newfound sense of confidence, the new regulations have created widespread confusion. The main problems are that they are very badly drafted, the language vague and confusing, it is impossible to determine when exactly they apply and the Department of Trade and Industry's (DTI's) guidance contradicts the regulations. The regulations have already received serious criticism from the corporate recovery community, particularly R3, the Association of Business Recovery Professionals, which continues to lobby Parliament for them to be revoked, or at least amended.
R3 feels that the DTI ignored its consultation recommendations and argues that consequently the regulations are worded poorly and offer little or no certainty. Lord Hunt of Wirral argues that the rules both fail to specify the types of UK insolvency proceedings to which they are intended to apply and fail to make clear which liabilities will pass to a purchaser.
One of the key questions is what is meant by 'relevant insolvency proceedings'. The definition provided by Tupe 2006 is cut from the Acquired Rights Directive. Different government bodies have provided conflicting interpretations. The Redundancy Payments Office has provided some guidance pending the emergence of case law.
It says that Regulations 4 and 7 of Tupe do not apply in the case of bankruptcy, compulsory liquidation and creditors' or members' voluntary liquidation. It notes that bankruptcies are specifically excluded by Regulation 8(7), while case law provides that, upon the making of a winding-up order, employment contracts are terminated.
Creditors' voluntary liquidations are liquidation proceedings subject to the supervision of an insolvency practitioner and are analogous to bankruptcy proceedings, therefore generally the regulations will not apply, contracts of employment will be terminated and redundancy payments will be made by the NIF.
The Secretary of State has also provided guidance outlining that Regulations 4 and 7 will apply to a relevant transfer made in the context of administrations, voluntary arrangements and administrative receiverships. Unfortunately, this guidance is not held out as an authoritative interpretation of the provisions.
The DTI and the Redundancy Payment Directorate (RPD) have different views on the liabilities to be met from the NIF. The DTI guide seems to suggest that the NIF would pay sums due under the provisions of the Employment Rights Act, including the redundancy payments, while the RPD has indicated that only wage arrears and holiday pay would be met by the NIF.
Criticism of new measures
Meanwhile, the new measure allowing changes to terms of employment has been criticised for being incompatible with the Acquired Rights Directive. And despite the attempt to limit acquirers' liability, the rules impose a completely new set of obligations.
Transferors are now expected to provide detailed information about employees to the transferee 14 days before the transfer, unless there are 'special circumstances'; but again there is little guidance on what these circumstances might be. They are also obliged to consult employees on the transfer. Both the transferor and the buyer are liable for any breach of the rules. These measures are impractical, unachievable in terms of logistics and financially detrimental to insolvency practitioners operating in a constrained environment.
Tupe has always deterred purchasers and the new regulations have done little to promote a rescue culture. In many cases it is only possible to save certain parts of a business and certain jobs. Imposing liabilities on a purchaser will inevitably lead to a reduction in the purchase price, which means lower returns for creditors and, where a deal is called off entirely, there would be very little left to recover.
The general consensus is that Tupe has failed to achieve its objective of preserving jobs in going concern sales and that the legislation is in desperate need of clarification. Hopefully, when this happens, it will be formulated by professionals with real experience of the corporate recovery sector.
WHAT THE NEW RULES SAY:
Regulation 4 provides that a relevant transfer does not terminate the contract of employment of employees working for the transferor where their contracts are transferred to the transferee.
Regulation 7 provides that a dismissal because of the transfer, or a reason connected with it that is not an economic, technical or organisational, is deemed an unfair dismissal automatically.
Regulation 8(7) states that, where a transferor is subject to "bankruptcy or analogous insolvency proceedings" with a view to the liquidation of the assets, and such proceedings are under the control of an insolvency practitioner, then Regulations 4 and 7 do not apply. The transfer of a business can be made without employment obligations transferring.
Regulation 8(1-6) provides that, where insolvency proceedings are opened in relation to the transferor, not with a view to the liquidation of the assets of the transferor ("relevant insolvency proceedings") and under the supervision of an insolvency practitioner, then certain debts to employees are met by the National Insurance Fund. It also gives scope for the transferee to vary the provisions of terms of employment.
Regulation 11 creates a new obligation for a transferor or third party to supply detailed information about employees to the transferee 14 days before the transfer unless there are "special circumstances".
Regulation 13 obliges an employer contemplating a transfer to inform employees. Both Regulations 11 and 13 impose joint and several liability on the transferor and the transferee for failure to inform and consult.
•Andrew Gregory is head of business recovery at DWF