HMG confused by its own TUPE laws

Finance directors planning to buy an insolvent business could have been
handed a big bonus as a result of a bungled change in the law on transfers of
undertakings – the provisions that used to protect employees’ salaries and
conditions when a company is sold on.

The new law may now make it even cheaper to buy the profitable bits of a
business that has gone bust, but only if the government’s interpretation of its
own regulations is correct. Some lawyers think there’s a doubt about that.

Currently, most insolvent businesses are sold in administration. But the
government says the new rules mean that a company in voluntary liquidation can
be sold – in some cases to a successor company owned and run by the same people
– without the successor having any obligation to take on any of the employees or
pay for their redundancy.

Under this new arrangement, the original company can unload its
responsibility to pay arrears of pay and other employee entitlements, which
means they don’t pass – as transfers of undertakings (TUPE) legislation
originally intended – to the successor company. Instead, the National Insurance
Fund (NIF) picks up the tab.

As a result, the buyer of the business could pick and choose which, if any,
of the employees it wants to take on. There is also nothing to stop the new
employer making the terms, conditions and benefits of the re-employed staff less
costly than they were originally.

But there could be a benefit for some employees in all of this. Every
employee of the insolvent company is entitled to claim redundancy pay from the
NIF – even if they’re re-employed by the new company. But if they’re not
re-employed, redundancy pay is all they’ll get.

There is little sign of insolvent companies adopting this approach yet. But
that’s because few FDs are aware of the seeming change in the law. And there is
a fly in the ointment. Insolvency lawyers are not certain that a tribunal would
interpret the law in the same way as the government. It’s up to disgruntled
employees to challenge the government’s interpretation at some stage in the
future.

Good intentions

When the regulations were introduced in April, the government was trying to
promote its concept of a ‘rescue culture’. Insolvency practitioners had been
complaining for years that the cost of the TUPE regulations was a barrier to
rescuing ailing companies.

The European Union, which drafts the directives on which individual EU
countries’ regulations are based, recognised as long ago as 2001 that there was
some justification in this point of view. It introduced a directive as a guide
for national governments that wanted to bring in regulations.

The directive relieved new employers of some, or all, of the redundancy
burden from taking over insolvent companies. But when the UK government sought
to incorporate the directive into UK law, it failed to make clear which of the
UK insolvency proceedings would be affected by it.

The new regulations divide insolvency proceedings into two types: “bankruptcy
proceedings and any analogous insolvency proceedings, which have been instituted
with a view to the liquidation of the assets of the transferor” and “insolvency
proceedings, which have been opened in relation to the transfer or not with a
view to the liquidation of the assets of the transferor”.

Whether the NIF picked up some of the employee claims depended on which
category the insolvency fell into. But critics claimed the distinction made no
sense in UK insolvency because all UK insolvency regimes lead to the liquidation
or realisation of assets.

Uncertainty rules

Insolvency practitioners have warned that, in such an uncertain situation,
likely purchasers of insolvent firms could be frightened off because they could
not be sure what liabilities they might or might not be taking on.

As criticism mounted, Gerry Sutcliffe, Minister for Employment Relations and
Consumer Affairs at the time, conceded that the regulations weren’t as clear as
they might be, but that courts would iron out the ambiguities as case law built
up.

This brought a withering riposte from Ron Robinson, the then president of R3,
the Association of Business Recovery Professionals. “What the minister’s reply
amounts to is – yes, I know we got it wrong but we’re going to leave it to the
courts to sort out,” he said. R3 condemned Sutcliffe’s attitude as “a wholly
irresponsible approach to legislation”.

The row escalated and the government’s damage limitation machine went into
overdrive, but only added further confusion. In February, before the regulations
were in force, the DTI issued a ‘guidance note’ seeking to lay to rest one
important bone of contention – what payments the NIF would make to employees
affected by a transfer of their company. The DTI said that, even though the
regulations would ensure that employees of companies in some forms of insolvency
procedure would pass over to the new employer, it would still pay them
prescribed amounts covering salary arrears and redundancy pay.

But, on 3 April the Redundancy Payments Office, which administers the NIF,
put out its own version which contradicted the DTI. The RPO said that where the
regulations applied and workers moved over to a new employer, they would only be
entitled to claim set amounts from the NIF in respect of arrears of pay. Despite
what the DTI had said a month earlier, the workers would not be receiving any
redundancy pay from the NIF.

Pragmatic response

The statement seemed to accept that even the RPO was not certain where the
regulations should apply and that it was inevitable that an employment tribunal
would eventually determine the point. In the meantime, the RPO said it would
take what it described as a “pragmatic” approach and be prepared to pay the
arrears of wages to all employees whose insolvent businesses were sold,
regardless of which insolvency procedure prevailed – with the exception of
compulsory liquidation.

By the time the House of Lords debated the issue on 3 May, it seemed that
there were few inside or outside government who could say with any certainty
what the regulations were supposed to mean. In a vote to annul the regulations,
the government scraped home with a majority of two.

The debate was followed in June by another statement from the RPO, changing
its earlier approach and saying that it now doesn’t believe compulsory
liquidation is the only insolvency procedure where the regulations will not
apply. The RPO now says that employees who get transferred by a business sale
effected by a company in voluntary liquidation will also fall outside the
regulations.

So can the RPO’s latest note lay the problem to rest? Tony Supperstone, the
current president of R3, says the note does make it clearer which kinds of
insolvency proceeding new TUPE relief is supposed to cover.

Perhaps some FDs will find buying an insolvent business under these terms
very tempting. But if a court finds the government’s approach to its own muddled
thinking bizarre, it could prove to be an expensive temptation.