TUPE, Administration and Liquidation

The Transfer of Undertakings (Protection of Employment) Regulations, commonly known as TUPE, is a crucial piece of legislation in the United Kingdom that safeguards employees’ rights when a business or service changes ownership.  Understanding TUPE is essential, particularly in scenarios involving administration or liquidation, where the stakes for employees are high and the transition process can be complex.

What is TUPE?

TUPE is designed to protect employees if the business they work for is sold or transferred to another entity.  The regulations ensure that employees retain their existing terms and conditions of employment, including salaries, working hours, and benefits under the new employer.  Essentially, it protects employees who are unfairly dismissed or are having their employment conditions worsened due to the transfer.

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Administration and Liquidation overview

When a company is struggling financially, typically an Administrator is appointed to help manage the Company’s affairs with the goal of restructuring or selling the business as a going concern.  If the Administrator is unsuccessful in rescuing the business, then it will move into liquidation.  Pre-pack administrations are becoming more common.  This is where a buyer is lined up before the business is placed into Administration and the Administrator is appointed to finalise the sale.

Liquidation occurs when a company is insolvent, and its assets are sold off to pay creditors.  There are two main types of liquidation: voluntary and compulsory.  In voluntary liquidation, the company’s shareholders or directors initiate the process.  In compulsory liquidation, it is forced by court order, usually at the behest of creditors.

TUPE in the Context of Administration and Liquidation

When a company enters Administration, TUPE should apply.  The Administrator has stepped into the shoes of the previous owners and is managing the business as a going concern.  Therefore, all of the employees’ rights are protected under TUPE and they have continuity of service.  If they sell the business, then the employees’ rights should continue to transfer under TUPE to the new buyer.

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The difficulty arises in Administration where there are redundancies.  This can occur either from the Administrator who is attempting to make the business attractive to any potential buyer or by the buyer deciding to reduce numbers of staff. In either event, if there is not an ETO reason (economical, technical, or organisational reason) then the redundancy will be automatically unfair.  There is often a dispute that arises at this point.  If an Administrator is trying to make redundancies in advance of the business being purchased when there is a buyer in mind, then this will almost certainly be an automatic unfair dismissal as it would not be a sufficient ETO reason.  Unfortunately, it is not always simple to determine if this is the case.

If the business cannot be salvaged in Administration, then it will move on to Liquidation.  The Administrator and the Liquidator are not necessarily the same people and unfortunately in these circumstances, the future of the employees becomes uncertain.  The application of TUPE in liquidation scenarios depends on whether the insolvency is deemed terminal or non-terminal.

With non-terminal insolvency proceedings such as company voluntary arrangements, company administration, and pre-pack administration, TUPE regulations apply.  Terminal insolvency, on the other hand, includes proceedings such as compulsory liquidation and creditors’ voluntary liquidation and TUPE regulations will not apply.

In cases of compulsory liquidation, the rationale is that the business is being wound up entirely, and therefore, there is no continuing undertaking to transfer to a new employer.  Employees are usually made redundant, and their contracts end when the company is dissolved.  Whereas TUPE is more likely to apply in voluntary liquidation scenarios, particularly if the business or part of it is sold as a going concern.  This means that if a buyer acquires the business and intends to continue its operations, the employees should transfer to the new owner with their existing employment terms intact.

It is also important to note that if during Liquidation the business assets are sold off individually, then TUPE will not apply.  The employees would likely face redundancy and will not automatically transfer to any new employers who buy those assets.

Challenges and Considerations

The intersection of TUPE and Administration and Liquidation presents unique challenges.  For the Administrators or Liquidators, ensuring compliance with TUPE while trying to maximise returns for creditors can be complex.  For employees, the uncertainty can be distressing, and they must stay informed about their rights.

This means that for someone interested in buying a business which is going into Liquidation, they may want to consider the appropriate time for that purchase to take place with special consideration being given  if TUPE applies and the effects that has.  A cynical potential buyer may first want the business placed into liquidation to avoid TUPE but that buyer may also need a workforce.

Navigating TUPE in the context of Administration or Liquidation requires a careful balance of legal compliance and practical considerations.  For businesses, understanding the nuances of TUPE can aid in smoother transitions and better handling of employee relations.  For employees, being aware of their rights and the potential impact of liquidation is crucial in safeguarding their interests during these turbulent times.  Ultimately, while TUPE provides robust protections, the complexities of liquidation demand thorough preparation and informed decision-making from all parties involved.

For individual advice about how this might apply to your business, contact davidgreen@fraserdawbarns.com  or natashagalvin@fraserdawbarns.com, or call your nearest office here:

Wisbech: 01945 461456

March: 01354 602880

King’s Lynn: 01553 666600

Ely: 01353 383483
Downham Market: 01366 383171

This article aims to supply general information, but it is not intended to constitute advice. Every effort is made to ensure that the law referred to is correct at the date of publication and to avoid any statement which may mislead. However, no duty of care is assumed to any person and no liability is accepted for any omission or inaccuracy. Always seek advice specific to your own circumstances.  Fraser Dawbarns LLP are always happy to provide such advice.