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Guide to TUPE and Insolvency

Transferees of insolvent businesses will find that the TUPE rules which generally apply to all transfers are relaxed or completely removed. Costs associated with employment are often one of the biggest overheads for most businesses, so this will come as a welcome relief for transferees who are seeking to rescue a failing business.

However, the extent of the variation to the normal TUPE rules will depend on the kind of insolvency proceedings which apply to the transferor. For TUPE, there are two kinds of insolvency proceedings:

  1. Terminal proceedings, where the aim is to liquidate the assets of the business only, and
  2. Non-terminal proceedings, where the aim is to rescue the business and allow it to continue trading.

Terminal proceedings

If the transferor is the subject of bankruptcy proceedings or other similar proceedings with a view to liquidation, employees will not automatically transfer to the transferee, and dismissals by reason of the transfer will not be automatically unfair.

Non-terminal proceedings

There is some argument about the scope of non-terminal proceedings, which TUPE defines as “relevant insolvency proceedings”.

The Department for Business and Trade provided a guide, which is not legally binding, which suggested that administration, administrative receivership, and voluntary arrangements would all amount to non-terminal proceedings.

In non-terminal proceedings, the employees will still automatically transfer to the transferee, and they will be protected against dismissals connected with the transfer. However, certain liabilities associated with any affected employees (e.g. holiday pay and unpaid salary) will be taken over by the Secretary of State.

Additionally, the transferee will also have more leeway than usual to vary transferring employees’ terms and conditions. There are still requirements that must be met (e.g. the variations must be permitted).

Pre-pack sales and TUPE

The term “pre-pack” is used in this scenario to describe the process when a company is put into administration and its business or assets (or both) are immediately sold by the administrator under a sale that was arranged before that administrator was appointed. In this situation, the business is often sold as a “going concern” however, sometimes it just involves the sale of some or all of its assets with the remainder either being sold off separately or being put into liquidation.

Generally, TUPE applies to pre-pack sales. This means the transferring employees’ existing terms and conditions and length of service are preserved although certain pre-existing debts will be met by the Secretary of State.

Further, any dismissal because of the transfer (whether taking place before or after the transfer) will usually be automatically unfair. There are exceptions though! The law in this area is complex and should be thoroughly considered in respect of any proposed pre-pack.

Please also see our Guide to TUPE.