19 November 2008 23:36

TUPE and the Insolvent Business

On 6 April 2006, the revised Transfer of Undertaking (Protection of Employment) Regulations came into force. These Regulations provide employment rights to employees when their employer changes as a result of a transfer of an undertaking. They implement the European Community Acquired Rights Directive (77/187/EEC, as amended by Directive 98/50 EC and consolidation in 2001/23/EC).

Broadly speaking the effect of the Regulations is to preserve the continuity of employment and terms and conditions of those employees who are transferred to a new employer when a relevant transfer takes place. Consequently, the new employer takes over all rights and obligations arising from that contract of employment, but what if the transferor is insolvent and can’t pay pre-existing debts to his employees, does the new employer obliged to pay these debts as well?

TUPE 2006 contains new provisions which apply where the transferor is subject to insolvency proceedings that are under the supervision of an insolvency practitioner and are not with a view to the liquidations of its assets (regulation 8 and 9). To assist the rescue of failing businesses, the Regulations make special provision where the transferor employer is subject to insolvency proceedings.

First, the Regulations ensure that some of the transferor’s pre-existing debts to the employees do not pass to the new employer. Those debts concern any obligations to pay the employees statutory redundancy pay or sums representing various debts to them, such as arrears of pay, payment in lieu of notice, holiday pay or a basic award of compensation for unfair dismissal. In effect, payment of statutory redundancy pay and the other debts will be met by the Secretary of State through the National Insurance Fund. However, any debts over and above those that can be met that way will pass across to the new employer.

Second, the restriction on varying contracts because of the transfer  is in effect waived, allowing the transferor, the new employer or the insolvency practitioner in the exceptional situation of insolvency to reduce pay and establish other inferior terms and conditions after the transfer. However, in their place the Regulations impose other conditions such as the transferor, new employer or insolvency practitioner must agree the ‘permitted variation’ to the contract with representative of the employees or a ‘permitted variation’ must be made with the intention of safeguarding employment opportunities by ensuring the survival of the undertaking or business.

Mali Smith

January 2008

 

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