Legal
Obviously, not all businesses survive, particularly in a recession. However, fewer would go to the wall (and fewer jobs would be lost) if it wasn’t for the employment legislation designed to protect employees in the first place. Case in point: I recently advised on a deal whereby a food manufacturing company went into administration. A buyer was found by the administrators (for whom I was acting) for the ailing company. The prospective purchaser understandably needed to make changes to the old business in order to make it a viable proposition, which included closing down two of three factory sites and consolidating the workforce. However, because of statutory consultation requirements, the potential for unfair dismissal claims, TUPE Regulations and other assorted employment law red tape, the purchase went pear-shaped. The buyer’s solicitors, just doing their job properly, calculated that as a worst case scenario the potential employment liabilities added up to over £5 million. The remote prospect of such a huge bill was enough to kill the deal, so 125 people lost their jobs when the purchaser walked away and no other buyer could be found.
So why does this happen? There are provisions within the TUPE Regulations 2006 (regular readers of this column know this is my absolute favourite piece of legislation) which are theoretically supposed to make it easier to purchase insolvent companies. This is part of the so-called ‘rescue culture’ which has been promoted by the Government for some years now, but it just doesn’t work properly. These provisions state that if a transferor business is subject to ‘relevant insolvency proceedings’ (more about which in a moment), then certain pre-existing debts owed by the transferor to the employees will not pass to the transferee and will instead be paid from the National Insurance Fund. However, the payments are capped at relatively low levels and only relate to statutorily prescribed debts such as holiday pay, redundancy pay, arrears of pay, notice pay and the basic award for unfair dismissal. Therefore, any unpaid debts owed to the employees over and above the statutory upper limit or which fall outside of these provisions (for example, enhanced redundancy payments – very popular in public sector contracts – or contractual bonuses, car allowances, etc) will still fall to the buyer of the business. The standard way of dealing with this is for the buyer to reduce his offer commensurately once the employment liabilities have been established, and, where a business is solvent, to take indemnities from the seller. But where you have a business hanging on by a thread and even if you’ve only offered a fiver for it, if you are advised there is a potential £5m liability over your head and the numbers don’t add up, you are going to gather your toys and go home. And everyone loses their job anyway.
The sticking point is that phrase ‘relevant insolvency proceedings’. Basically, the draftsmen fudged it. A few years on, after a bit of interpretation from the courts and BERR, ‘relevant insolvency proceedings’ have been taken to mean proceedings which have been instituted in relation to the transferor but not with a view to liquidate the assets of the company and which are under the supervision of an insolvency practitioner. BERR guidance notes state that ‘relevant insolvency proceedings’ means any collective insolvency proceedings in which the whole or part of the business or undertaking is transferred to another entity as a going concern. Thus, if a business is being liquidated, then TUPE doesn’t apply, the business can fold, the employees are out of work and the vultures can swoop down to pick over the bones. But if the insolvency practitioners have come in to try to save the business and jobs, then any potential buyer finds himself in the same situation as our chap with the £5m headache. And the business folds and the employees are out of work.
If you are selling a solvent, viable business then of course TUPE should apply, no question. But the Government could have implemented the European Directive in a way that, although respecting the intention behind it, also facilitated the spirit behind their ‘rescue culture’ which, let’s face it, these days badly needs a shot in the arm.
Source: Robin Williams is principal of rwLaw, a specialist employment law consultancy in Horsham, West Sussex robin.williams@rwlaw.co.uk
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So why does this happen? There are provisions within the TUPE Regulations 2006 (regular readers of this column know this is my absolute favourite piece of legislation) which are theoretically supposed to make it easier to purchase insolvent companies. This is part of the so-called ‘rescue culture’ which has been promoted by the Government for some years now, but it just doesn’t work properly. These provisions state that if a transferor business is subject to ‘relevant insolvency proceedings’ (more about which in a moment), then certain pre-existing debts owed by the transferor to the employees will not pass to the transferee and will instead be paid from the National Insurance Fund. However, the payments are capped at relatively low levels and only relate to statutorily prescribed debts such as holiday pay, redundancy pay, arrears of pay, notice pay and the basic award for unfair dismissal. Therefore, any unpaid debts owed to the employees over and above the statutory upper limit or which fall outside of these provisions (for example, enhanced redundancy payments – very popular in public sector contracts – or contractual bonuses, car allowances, etc) will still fall to the buyer of the business. The standard way of dealing with this is for the buyer to reduce his offer commensurately once the employment liabilities have been established, and, where a business is solvent, to take indemnities from the seller. But where you have a business hanging on by a thread and even if you’ve only offered a fiver for it, if you are advised there is a potential £5m liability over your head and the numbers don’t add up, you are going to gather your toys and go home. And everyone loses their job anyway.
The sticking point is that phrase ‘relevant insolvency proceedings’. Basically, the draftsmen fudged it. A few years on, after a bit of interpretation from the courts and BERR, ‘relevant insolvency proceedings’ have been taken to mean proceedings which have been instituted in relation to the transferor but not with a view to liquidate the assets of the company and which are under the supervision of an insolvency practitioner. BERR guidance notes state that ‘relevant insolvency proceedings’ means any collective insolvency proceedings in which the whole or part of the business or undertaking is transferred to another entity as a going concern. Thus, if a business is being liquidated, then TUPE doesn’t apply, the business can fold, the employees are out of work and the vultures can swoop down to pick over the bones. But if the insolvency practitioners have come in to try to save the business and jobs, then any potential buyer finds himself in the same situation as our chap with the £5m headache. And the business folds and the employees are out of work.
If you are selling a solvent, viable business then of course TUPE should apply, no question. But the Government could have implemented the European Directive in a way that, although respecting the intention behind it, also facilitated the spirit behind their ‘rescue culture’ which, let’s face it, these days badly needs a shot in the arm.
Source: Robin Williams is principal of rwLaw, a specialist employment law consultancy in Horsham, West Sussex robin.williams@rwlaw.co.uk
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