This case concerns TUPE and insolvency and more particularly whether the Secretary of State is liable for debts that accrue after the date of transfer.
There are essentially two forms of insolvency proceedings catered for in Reg 8 of TUPE. Reg 8(7) applies where the transferor is subject to proceedings analgous to bankruptcy proceedings that are instituted with a view to the liquidation the assets of the transferor and are under the supervision of an insolvency practitioner. This essentially deals with cases where the transferor’s business cannot be saved and will be wound up. Reg 8(1) to (8(6) are concerned with cases where the transferor is subject to insolvency proceedings which are opened not with a view to the liquidation of assets – essentially in a corporate context this means administration.
In an ordinary case Reg 4 has the effect that any debts owed by the transferor to employees transfer to the transferee on transfer. In Reg 8(7) cases employee debts do not transfer from the transferor to transferee as Reg 4 is disapplied. Therefore the transferee takes the business free of any debts owed to employees. In Reg 8(1) to 8(6) case the transferee is not liable for sums due to employees under Part XII of the Employment Rights Act 1996 but is liable for sums owed in excess of those due under Part XII.
Response FM was a motorway maintenance company went into administration on the 14 June 2011. (This was therefore a Reg 8(1) to 8(6) case.) Two hours later the business was sold to the majority shareholder, WS, an individual and the transfer occurred at that date. Three days later, on the 17 June, the business ceased to trade. There was no evidence as to whether WS was insolvent or bankrupt. The employees brought claims under Part XII of the ERA in respect of unpaid holiday pay, notice pay and redundancy payments. There was no dispute that BIS was liable to pay sums due under the statutory schemes as at the date of transfer. At issue was whether BIS were also due to pay sums due to employees as a consequence of their dismissal three days later.
The ET decision
The ET held that whilst WS was prima facie liable to pay the sums due and owing in respect of the 3 days after the transfer, BIS was also liable. It reached this decision because of the wording of Reg 8(3) which provides that Part XII of the ERA “shall apply in the case of a relevant employee irrespective of the fact that the qualifying requirement that the employee’s employment has been terminated is not met and for those purposes the date of the transfer shall be treated as the date of the termination and the transferor shall be treated as the employer”. The ET held that this had the effect that debts accrued after the transfer date were to be treated as if they were incurred on the transfer.
The EAT decision
The EAT , Langstaff P, allowed the appeal. It held, following Pressure Coolers v Malloy (2012), that Reg 8(3) did not have the effect that the statutory scheme under Part XII of the ERA applied to any relevant employee whose employment had not in fact been terminated at the date of transfer. Its purpose was to adapt Part XII to to achieve the policy behind Reg 8 which is to promote the rescue culture by minimising the burden on transferees acquiring insolvent businesses. Its effect is to freeze liabilities as at the date of transfer. It followed that liabilities that have accrued after the date of transfer were the responsibility of the transferee and not BIS.