What you need to know and understand about TUPE regulations in insolvency

The question of what happens to employees when a business changes hands is a critical one for all concerned in the process. When a business changes ownership, TUPE regulations (Transfer of Undertakings (Protection of Employment) Regulations 2006) exist to protect UK employees’ rights during the sale or transfer of a business, whether it is all of the business or just part of it. As a business owner, this means that generally speaking, if you purchase a business and TUPE regulations apply, the employees of the business you are purchasing will transfer with the purchase as if there had been no change of employment circumstances at all.

However, if the business being purchased is insolvent, in certain conditions, TUPE regulations do not apply: they can be relaxed to facilitate the sale of the business. Ultimately, in the long term, this is supposed to make the business a more attractive prospect to the purchasers, and aid its recovery to normal operating procedures thereby protecting jobs. However, the conditions in which TUPE regulations can be relaxed are specific, and the consequences for new business owners and employees very different. So in this article, we look at TUPE in general and TUPE regulations in insolvency to help you better understand how TUPE might affect you.


When does TUPE not apply? TUPE regulations in insolvency

When do TUPE regulations normally apply?

In normal conditions, TUPE regulations apply to all employees based in the UK to protect their rights when a business, or part of a business, transfers from one company to another.

What do TUPE regulations mean for employees?

If you are an employee and TUPE applies, you will retain your continuity of employment, contractual rights, and your agreed terms and conditions during the sale or transfer of the business. As far as you are concerned, contractually speaking, it will be business as usual as if there had been no change.

What about redundancy? How do TUPE regulations affect redundancy rights?

As a new employer, where TUPE applies, you are unable to make employees redundant simply because there has been a transfer or sale of the business. It’s possible for you to make redundancies for economic, technical or organisational reasons, but not simply because of the transfer.

As an employee of a business changing ownership, as well as keeping the same terms and conditions of employment, you will retain the start date that you had with your original employer. This means that were you to be made redundant for economic, technical or organisational reasons, as long as you are eligible for redundancy, you will be able to claim a redundancy payment based on your start date with the original company, rather than the date that the company was taken over.

What happens to TUPE regulations in insolvency? 

There can be changes to all of the above, however, if the company being purchased is insolvent. As far as TUPE is concerned there are two general types of insolvency processes: non-terminal and terminal. TUPE regulations apply to each differently.

  • NON TERMINAL: Administration, administrative receivership and voluntary arrangements are considered non-terminal insolvency processes, and in these situations, TUPE provisions WILL continue to apply.
  • TERMINAL: Bankruptcy and liquidation, however, are considered TERMINAL, and in these situations, TUPE Regulation 8(7) applies. This means that ordinary TUPE provisions can be relaxed or disapplied.

Terminal Insolvency: what is TUPE Regulation 8(7) in Creditors’ Voluntary Liquidation?

When TUPE regulation 8(7) applies, employees will not automatically transfer to the company that is purchasing the assets. Therefore as an employee, there will be no continuity of service. If you do go on to work for the new company, you will be deemed a new employee under new contractual entitlements.

This means that:

  • As an employee, you would effectively be made redundant from the old company. Therefore, you would be able to make claims to the National Insurance Fund for any unpaid wages, notice pay, holiday pay owing from your previous employment, and redundancy pay where applicable.
  • As an employer, it is possible for you to change the employees’ contracts, and for example reduce pay, if it will ultimately prevent redundancies being made.

Technical points: applying TUPE Regulation 8(7) in insolvency

For TUPE regulation 8(7) to apply to terminal insolvencies, there is a technical requirement that must be fulfilled. Following case law: Ward Brothers (Malton) Ltd and others v Middleton and others, and Slater v the Secretary of State, the transfer must legally be “under the supervision of an insolvency practitioner” for regulation 8(7) to apply.

The case study below will help us understand this point in more detail.

Case study

Company A was struggling financially and the Director decided he wanted to place the company into liquidation. As well as owing suppliers and other creditors money, the employees had not been paid for over a month.

Company B was interested in carrying on the business of A. Prior to the liquidation meeting of company A, company B purchased the business and began to trade it. B made the assumption that because A was being advised by an insolvency firm then Regulation 8(7) would apply and the employees would not automatically transfer with the sale of the business. B was therefore expecting A’s employees to claim for any monies owed to them from the NIF and had also planned to make new offers of employment to A’s employees on different terms without having to pay any arrears.

As per the ruling in Ward Brothers, however, Company B’s position was incorrect. This is because the purchase had taken place before Company A was officially under the supervision of an insolvency practitioner, i.e. before the company was officially in liquidation. The result was that B had unwittingly taken on all the arrears owed to the employees, as well as their continuity of employment and contractual obligations. Because B misunderstood the impact of insolvency on TUPE, B was therefore liable for much more than originally planned.

Key points: TUPE Regulation 8(7) in insolvency for employers

Generally speaking, if you are the potential purchaser of an insolvent business, you must carefully consider the timing of any purchase.  If the insolvent company is entering liquidation, you may wish to wait until the company is officially in liquidation to avoid TUPE being applied and therefore becoming liable for all the outstanding employees’ arrears.

If the transfer takes place before the date of liquidation, it will be treated as a solvent transfer and the employees will unable to make a claim from the NIF for any arrears of wages or holiday pay. Instead your business will be liable for these.

If the transfer takes place after liquidation it will be deemed to have been under the supervision of an insolvency practitioner, and in this case TUPE will not apply, therefore your business will not be liable for any outstanding contractual obligations.

Key points: TUPE Regulation 8(7) in insolvency for employees

The impact of TUPE on you as an employee will depend upon the specific circumstances of each case. It is however almost certain that any purchaser wishing to vary the terms of your contract will be looking to reduce pay and negotiate terms that are less favourable, compared to the original contracts.

If TUPE doesn’t apply, you will be able to make claims up to certain limits from the NIF for any outstanding entitlements from your old employer. However, you will also have been effectively made redundant. You may have an offer of work from the purchaser, but potentially on less favourable terms than you previously had.

Generally speaking, you are likely to be better off when TUPE does apply. Even though your contract could be revised, you should still receive all money owing to you, as well as retaining your original start date.  Should you unfortunately be made redundant at a later date, you will receive more from a redundancy pay out from having a longer period of service than a shorter one.

If, as business purchaser, you take over the business prior to the date of the liquidation, you’ll be liable for all employee arrears and you’ll need to continue to offer the same terms and conditions. It’s crucial you’re aware of this, and that you plan for this, to avoid confusion for all concerned in the short term.

In summary

TUPE can be a complex, technical area and we would always recommend that any party intending to purchase the business of an insolvent company seek independent legal advice anyway, but particularly where employees are involved. Please contact us if you are considering how liquidation may affect your business and employment rights.

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