Employees in distress

alleged employer.2 As for the status of a director, it appears that a nonexecutive director who acts on his own account cannot be a company employee3 but that an executive director may be. In the Bottrill case,4 it was said that where a director held a controlling interest in the company, this did not rule out his being an employee but was merely one factor to be taken into account. Directors who were controlling owners have been held not to be employees in certain instances5 but, in the Nesbitt decision of the Employment Appeal Tribunal,6 a husband and wife with written employment contracts, salaries, a 99 per cent shareholding and a history of managing the company were held to be employees. The Tribunal stated that a majority shareholding and directorship did not affect a person’s status as an employee unless the company was a ‘mere simulacrum’.7 Further guidance from the Employment Appeal Tribunal came in Clark v. Clark Construction Initiatives Ltd8 when the Tribunal pointed to three sets of circumstances in which it might be legitimate not to give effect to an allegedly binding contract of employment: where the company was a sham; where the contract was entered into for an ulterior reason (e.g. to secure a statutory payment); and where the parties did not in fact conduct their relationship according to the terms of the contract. Clark also listed factors that might be considered in deciding whether to give effect to a contract of employment and emphasised: that the onus rested on the party seeking to deny the contract; that a controlling shareholding, or role as founder of, lender to, or guarantor of the company, did not rule out a contract of employment; and that a history of acting in accordance with the contract was a strong indicator of its validity. Factors that militated against attributing the status of employee included: not acting in accordance with the alleged employment contract and a failure to reduce the terms of the contract to writing.

2Ivey v. Secretary of State for Employment [1997] BCC 145, 146. Other relevant factors mentioned in Ivey are whether there is mutuality of obligation between the person and the alleged employer and the respective bargaining powers of the person and the alleged employer. (In Montgomery v. Johnson Underwood Ltd (The Times, 9 March 2001) the Court of Appeal indicated that an employee must be under the control of the employer.)

3Keay and Walton, Insolvency Law, p. 470.

4Secretary of State for Employment v. Bottrill [1999] BCC 177.

5Brooks v. Secretary of State for Employment [1999] BCC 232.

6PG Nesbitt & AE Nesbitt v. Secretary of State for Trade and Industry (UKEAT/0091/07/ DA), [2007] IRLR 847.

7See also Lee v. Lee’s Air Farming Ltd [1961] AC 12 PC (NZ).

8[2008] IRLR 364. See R. Parr, ‘A Lifeline for the Controlling Shareholder Director?’ (2008) 21 Insolvency Intelligence 108.

756 the impact of corporate insolvency

Protections under the law

At common law, employees are merely unsecured creditors of a company but a company’s directors may be entitled to consider employee interests when dealing with corporate troubles. Thus, in Re Welfab Engineers Ltd 9 the directors of a troubled company sold it on terms that they hoped were conducive to the business’s survival as a going concern and the court held that, in doing so, it was lawful for the directors to take such employment considerations into account.10

The Insolvency Act 1986 provisions on preferential debts are also of some assistance to employees.11 In chapter 14 it was noted that these provisions give preferential priority to unpaid wages and accrued holiday pay owed.12 The effect is that such payments are payable out of the available assets of the company in advance of unsecured claims and claims secured by floating charges but after relevant insolvency expenses and other secured claims. In addition, however, two pensions debts are treated as preferential.13 Unpaid employee contributions are preferential to the extent of sums deducted from pay by the employer in the last four months but not yet paid to the pension scheme. There is no ceiling limit set on the amount that can be preferential under this heading. In the case of unpaid employer contributions, the preferential status is limited, firstly, to amounts owing in the last twelve months to a contracted-out occupational pension scheme14 and, secondly, to the amount of the national insurance rebate applicable. The preferential amount is thus restricted to a percentage of relevant earnings.15

9[1990] BCC 600.

10See also the Court of Appeal decision in Re Saul D Harrison & Sons plc [1994] BCC 475.

11Insolvency Act 1986 s. 386 and Sch. 6.

12Insolvency Act 1986 Sch. 6, Category 5 (limited, in the case of pay arrears, to payments due regarding the four months before the relevant date (up to a maximum of £800) under Sch. 6 para. 9(b)); Insolvency Proceedings (Monetary Limits) Order 1986 (SI 1986/1996).

13Insolvency Act 1986 Sch. 6, Category 4. See D. Pollard and I. Carruthers, ‘Pensions as a Preferential Debt’ (2004) 17 Insolvency Intelligence 65.

14The preferential status thus does not attach to sums owing to personal pensions or non- contracted-out schemes.

15Pollard and Carruthers (‘Pensions as a Preferential Debt’) thus calculate that, on 2003–4 figures, the maximum preferential amount per employee would be £1,240 – if the employee had earned over the upper earnings limit of £30,940.

MLR 895; H. Collins, K. Ewing and A. McColgan, Labour Law Text and Materials (2nd edn, Hart, Oxford, 2005) ch. 10.

17 Employment Rights Act 1996 s. 186(1)(a); Employment Rights (Increase of Limits) Order 2007 (SI 2007/3570), increasing, inter alia, the maximum compensatory award for unfair dismissal to £63,000 and the maximum amount of a week’s pay (for calculating the basic or additional award for unfair dismissal or redundancy payment) to £330.

18The law here implements EC Directive 80/987/EEC on the approximation of the laws relating to the protection of employees in the event of the insolvency of their employer. For an example of such a claim see McMeechan v. Secretary of State for Employment

[1997] ICR 549 (CA). On the European aspects (and when a company is in insolvency) see Mann v. Secretary of State for Employment [1999] IRLR 566 (discussed by Clarke and Rajak, ‘Mann v. Secretary of State’); Collins et al., Labour Law, pp. 1028–33; Everson and Barrass v. Secretary of State for Trade and Industry and Bell Lines Ltd (in liquidation)

[2000] IRLR 202 (ECJ).

19Claimants on the National Insurance Fund do, however, have to establish their redundancy claims before a tribunal: see R. Morgan, ‘Insolvency and the Rights of Employees’ [1989] Legal Action 21.

20See Clarke and Rajak, ‘Mann v. Secretary of State’, p. 89, who also noted the danger that increasingly wide drafting of fixed charges tended to reduce the value of statutory preferential status; see further ch. 9 above.

continuation of their paid e mployment. When th e employer comp

Insolvency Intelligence 7.

22[2005] 2 All ER 122, [2005] BCC 289.

23See H. Lyons and M. Roberts ‘Administration Expenses – Friday Afternoon Drafting and the Rescue Culture’ (2005) 16 Sweet & Maxwell’s Company Law Newsletter 1; G. Stewart, ‘Legal Update’ (2005) Recovery (Summer) 6.

24Krasner (Administrator of Globe Worsted Co. and Huddersfield Fine Worsteds Ltd) v.

McMath [2005] BCC 896.

25The joined case: Re Huddersfield Fine Worsteds Ltd, Re Ferrotech Ltd and Re Granville Technology Group Ltd [2005] BCC 915.

paragraph 99 of Schedule B1,26 there was no significant change of priorities regarding employment liabilities and that protective awards under section 189 of the Trade Union Labour Relations (Consolidation) Act 1992 were not payable in priority to the expenses of the administration.27 Such awards were not sums covered by the term ‘wages or salary’ per paragraph 99(6).28 It was clear that, in taking this view, the Court of Appeal was mindful that a construction of the statute that rendered the adoption of employment contracts more expensive would undermine the rescue culture by tending to lead the administrator to dismiss workers during the first fourteen days of the administration rather than to keep them on and seek to implement a strategy of continued trading.29

26Notably, introducing (in para. 99(6)(d)) the reference to liabilities ‘treated as earnings under an enactment about social security’. For a critique of the revised (and confused) wording resulting from the transposition of s. 19 to paragraph 99 see Neuberger LJ in Re Huddersfield Fine Worsteds and Lyons and Roberts, ‘Administration Expenses – Friday Afternoon Drafting and the Rescue Culture’.

27In Day v. Haine [2007] EWHC 2691 (Ch) the High Court stated that employees who become entitled to a protective award after the onset of liquidation cannot claim against their employer or liquidator. Their only remedy is against the Secretary of State for BERR under the Employment Rights Act 1996: see R. Nicolle, ‘Employee Rights in a Restructuring’ (2008) Recovery (Spring) 37.

28The respondents failed on another front also. The court stated that there were two conditions for super-priority: the sum had not only to be ‘wages or salary’, it had also to be a ‘liability arising under a contract of employment’. A protective award under the employment protection legislation at issue did not, according to the court, arise from a contract of employment.

29Echoing the approach of Lord Browne-Wilkinson in Powdrill v. Watson [1995] BCC 319, 330; [1995] 2 AC 394, 443–4, who spoke of not impeding the rescue of viable businesses through ‘imponderable liabilities to employees’: see Lyons and Roberts, ‘Administration Expenses – Friday Afternoon Drafting and the Rescue Culture’. See also A. Walters, ‘The Impact of Employee Liabilities on the Administrator’s Decision to Continue Trading’ (2005) 26 Co. Law. 321: ‘It is plausible to suggest that the decisions in Allders and Huddersfield are entirely in tune with the spirit of the insolvency legislation’; cf. R. Parr and N. Bennett, ‘The Rescue Culture v. Collective Employment Rights’ (2005) 18 Insolvency Intelligence 156: ‘A victory for common sense? Well, yes, if you are a supporter of the rescue culture. But there will be those who support the European approach to the enhancement of collective employment rights who wouldn’t agree. They will see [the Court of Appeal Huddersfield] decision as giving administrators the green light to ride roughshod over the rights of employees of an insolvent company. (In Powdrill v. Watson the Court of Appeal had given ‘super-priority’ not only to wages payable for the period for which notice of termination of employment should have been given, but also for holiday pay for the period before the appointment of the administrator. The Insolvency Act 1994 quickly amended s. 19 (the predecessor to para. 99) to limit administrators’ liabilities to wages or salary or occupational pension payments in respect of services rendered wholly or partly after the adoption of the contract (s. 19(6)–(8)) (holiday and sick pay were deemed wages or salary for such purposes).) See also ch. 9 above.

760 the impact of corporate insolvency

Another set of laws covers the situation in which there is a sale of the company or part of the business: a sale that might be made as part of a rescue operation or the realisation of assets by the liquidator, administrator or receiver. Employees in such scenarios may be faced with new owners who wish to vary terms of employment, close down some units or downsize by dismissing a portion of the workforce. General employment laws cover workforce reductions and variations of contract and will not be discussed here.30 Mention must, however, be made of the Transfer of Undertakings (Protection of Employment) Regulations 1981 (hereafter ‘old TUPE’) which implemented the European Acquired Rights Directive 77/18731 and the Transfer of Undertakings (Protection of Employment) Regulations 2006 (hereafter ‘TUPE’) which replaced and revoked the old TUPE Regulations and came into force on 6 April 2006.32

The original Acquired Rights Directive of 1977 was designed to preserve the contractual rights of employees on a transfer of their employing business33 and, as a result, the old TUPE regulations were introduced by a ‘reluctant’ government.34 They affected transfers in insolvency and non-insolvency situations. Before the introduction of old TUPE, a

30See generally Collins et al., Labour Law.

31Transfer of Undertakings (Protection of Employment) Regulations 1981 (SI 1981/1794). On ‘old’ TUPE see, for example, R. Eldridge, ‘TUPE Operates to Damage Rescue Culture’ (2001) Recovery (September) 21; S. Frisby, ‘TUPE or not TUPE? Employee Protection, Corporate Rescue and “One Unholy Mess”’ [2000] 3 CFILR 249; J. Armour and

S.Deakin, ‘Insolvency, Employment Protection and Corporate Restructuring: The Effects of TUPE’ (ESRC Centre for Business Research, Cambridge, Working Paper No. 204, June 2001); H. Collins, ‘Transfer of Undertakings and Insolvency’ (1989) 18 Ins. LJ 144; P. L. Davies, ‘Acquired Rights, Creditors’ Rights, Freedom of Contract and Industrial Democracy’ (1989) 9 Yearbook of European Law 21.

32The new TUPE Regulations (SI 2006/246) are intended to give effect to Directive 23/ 2001, which amends the original Acquired Rights Directive (77/187/EEC). See generally

M.Sargeant, ‘TUPE – The Final Round’ [2006] JBL 549; D. Pollard, ‘TUPE and Insolvency, I and II’ (2006) 19(6) Insolvency Intelligence 81 and (2006) 19(7) Insolvency Intelligence 102; and on the history of TUPE see R. Henry, ‘Application of the Proposed TUPE Regulations to Insolvency Proceedings’ (2005) 22 Sweet & Maxwell’s Company Law Newsletter 1.

33On the definition of a ‘transfer’, the construction of ‘identity’, the effect of amending Directive 98/50/EC and contracting out, see Case C-172/99, Oy Liikenne Ab v. Pekka Liskjarvi and Pentti Juntunen [2001] IRLR 171 (ECJ) and P. L. Davies, ‘Transfers: The UK Will Have to Make Up its Own Mind’ (2001) 30 Ins. LJ 231. See also V. Shrubsall, ‘Competitive Tendering, Out-sourcing and the Acquired Rights Directive’ (1998) 61 MLR 85.

34See David Waddington MP, Under-Secretary of State for Employment, HC Debates, vol. 14, col. 680.

business transfer terminated all employment contracts under the common law35 and employees of insolvent companies that were involved in a transfer were able to rely only on their preferential claims or their access to the National Insurance Fund. The purchaser of a going concern sale of an insolvent business was, accordingly, not liable for the acquired rights of its employees. Following old TUPE, matters were different. Under Regulation 5 of old TUPE (now TUPE Regulation 4) a transfer of an undertaking passed contracts of employment over to the transferee and previously employed persons became employees of the transferee under the same terms and conditions as were set out in their initial contracts.36 Unsatisfied liabilities of the transferor also passed to the transferee.

The TUPE Regulations of 2006 keep in place the rights and obligations of old TUPE but some revised wordings are used (in efforts to clarify the law and in reflection of post-1981 case law) and some changes are effected by TUPE 2006 – notably to widen the scope of the Regulations to cover cases where services are outsourced, insourced or assigned by a client to a new contractor.37 A stated purpose of the new regulations is to provide some relief from the transfer of liabilities in a formal insolvency so that some liabilities will be met by the National Insurance Fund instead of passing to the transferee.38 New provisions thus make it easier for insolvent businesses to be transferred to new employers and new rules set down the ability of employers and employees to agree to vary contracts of employment where a relevant transfer occurs.39 A new duty is also imposed on the old transferor to supply information about the transferring employees to the new transferee employer.40 Fresh provisions also set down the circumstances in which it is unfair for

35Nokes v. Doncaster Amalgamated Collieries [1940] AC 1014.

36Under Regulation 7 of old TUPE and Regulation 10 of TUPE, an employee’s right to

participate in an occupational pension scheme does not carry over to the transferee under Regulations 5 and 6 of old TUPE or Regulations 4 and 5 of TUPE. See generally

D. Pollar d, ‘ Pensions and TUPE’ (20 05) 34 Ind ustri al Law Jo urnal 12 7 and sion below on the protections for employees offered by the Pensions Act 2004.

37See TUPE Regulation 3.

38See TUPE Regulation 8 and below. The effect is that the state subsidises transfers in potential rescue situations: see R. Dhindsa, ‘The Draft TUPE Regulations and Insolvency’ (2006) 19 Insolvency Intelligence 8; Sargeant, ‘TUPE – The Final Round’.

39See TUPE Regulation 9. A person’s contract of employment will not transfer if the individual informs the transferor or the transferee that he or she objects to being so transferred: see TUPE Regulation 4(7); Hay v. George Hanson [1996] IRLR 427; New ISG Ltd v. Vernon and Others [2007] EWHC Ch 2665; J. McMullen, ‘The “Right” to Object to Transfer of Employment under TUPE’ [2008] 37 Ins. LJ 169.

40See TUPE Regulations 11 and 12.

762 the impact of corporate insolvency

employers to dismiss employees for reasons connected with a relevant transfer.

TUPE has, however, been roundly criticised as being badly drafted and ‘bringing confusion to new heights’.41 A core difficulty concerns the definitions of different kinds of insolvency proceedings – upon which much depends. Transfers that are effected in the context of a formal insolvency are governed by two sets of provisions depending on the type of insolvency procedure involved.42 Regulation 8(1)–(6) deals with insolvency proceedings ‘opened in relation to the transferor not with a view to the liquidation of the assets of the transferor and which are under the supervision of an insolvency practitioner’.43 In these ‘relevant insolvency proceedings’ certain of the transferor’s debts to employees will not pass over to the transferee but will be satisfied out of the National Insurance Fund. Thus, regarding employees who pass over to the transferee, and notwithstanding the non-termination of their employment, the National Insurance Fund will meet payments due under the insolvency provisions of the Employment Rights Act 1996.44 In the case of employees who have been dismissed by reason of the transfer – and therefore dismissed unfairly – the debts that the National Insurance Fund will meet are those payable as statutory redundancy pay by the Secretary of State under the insolvency and redundancy provisions of the Employment Rights Act 1996.45

In the case of proceedings that (in the terms of TUPE Regulation 8(7)) have been ‘instituted with a view to the liquidation of the assets of the transferor and are under the supervision of an insolvency practitioner’ Regulations 4 and 7 do not apply and there is, accordingly, no automatic

41 Se e Lord H un t of W ir ral i n House of Lords Debates, 3 May 2 006 (8 p. ‘TUPE 2006 – A Missed Opportunity’ (2006) 3 International Corporate Rescue 228;

M. Rollins, ‘Technical Update’ (2006) Recovery (Summer) 11.

42See TUPE Regulation 8.

43The Employment Appeal Tribunal has ruled, in Secretary of State for Trade and Industry

v. Slater [2008] BCC 70 that, for Regulation 8(6) or 8(7) to apply, the transfer must take place after the date on which the insolvency proceedings have commenced (which was to be identified with reference to the statutory provisions governing the start of the particular process) and, also, when those proceedings have come under the supervision of an insolvency practitioner – which, in the case at issue, was not until he was appointed liquidator.

44That is (according to the Guidance of the Redundancy Payments Directorate): arrears of pay, holiday pay, sums due for failures to give statutory minimum periods of notice, and basic awards for unfair dismissal, subject to statutory limits under the Employment Rights Act 1996 s. 182.

45These provisions give effect to Article 5(2) of Directive 23/2001.

passing of rights and obligations under employment contracts to the transferee. Nor are dismissals made by reason of the transfer automatically deemed to be unfair.

Regulation 9 of TUPE enlarges the scope for the transferor and/or transferee varying the terms of employment contracts before or after the transfer takes place. Thus, variations can be allowed where the sole or principal reason is the transfer itself or a reason that is connected with it which is not an economic, technical or organisational reason and is designed to safeguard employment opportunities by ensuring the survival of the whole or part of the undertaking.46 Such variations must be agreed with representatives of the employees.

As for dismissals of employees because of the relevant transfer, TUPE Regulation 7 takes the place of Regulation 8(1) of old TUPE and states that employees will be deemed to have been unfairly dismissed if the sole or principal reason for dismissal is the transfer, or a reason connected with it that is not an ‘economic, technical or organisational’ (ETO) reason entailing changes in the workforce of the transferor or transferee ‘before or after the relevant transfer’.47

The insolvency implications of old TUPE depended a great deal on the courts. One central issue was whether the purchaser of an insolvent business could avoid inheriting employee liabilities if the IP, acting as agent of the transferor company, effected dismissals prior to the transfer. Matters here turned on the construction of the phrase ‘employed immediately before the transfer’ in old TUPE Regulation 5(3) (a phrase repeated in TUPE Regulation 4(3)). An opportunity to avoid employee-related obligations was provided by the Spence case48 where the Court of Appeal held that an employee dismissed three hours in advance of a transfer was not employed ‘immediately before’ that event. The House of Lords, however, took a different view in Litster49

46Regulation 9 responds to the inflexibility of the old TUPE Regulations: in Wilson v. St Helens Borough Council [1999] 2 AC 52 the House of Lords held that if employees were transferred on a relevant transfer under (old) TUPE, their terms and conditions could not be varied lawfully for a reason connected with the transfer, regardless of their consent or the period of time between the transfer and the variations of terms. See further Dhindsa, ‘Draft TUPE Regulations and Insolvency’.

47TUPE Regulation 7(2).

48Secretary of State for Employment v. Spence [1986] ICR 651. But see Bork International A/S v. Foreningen 101/87 [1988] ECR 3057, [1990] 3 CMLR 701 (ECJ rules that if a worker is dismissed before transfer at the behest of the transferee, and in breach of Article 4(1), the worker is regarded as being employed at the time of transfer).

49Litster v. Forth Dry Docks and Engineering Co. Ltd [1990] 1 AC 546. See also Re Maxwell Fleet Facilities Management Ltd (No. 2) [2000] 2 All ER 860.

764 the impact of corporate insolvency

where there was an hour’s gap between dismissal and transfer. Their Lordships focused on the purpose of the Acquired Rights Directive – which they said was to ensure the protection of the acquired rights of employees – and accordingly read old TUPE Regulation 5(3) in the light of old TUPE Regulation 8(1). The effect was to add to the words ‘employed immediately before the transfer’ the phrase ‘or would have been so employed if he had not been unfairly dismissed in circumstances described in Regulation 8(1)’.50 The new TUPE Regulation 4(3) follows Litster (only dropping the word ‘unfairly’ and renumbering the referenced regulation) by using the phrase ‘or would have been so employed if he had not been dismissed in circumstances described in Regulation 7(1)’.

A further complication flows from Regulation 7(2) of TUPE, which (like old TUPE Regulation 8(2)) offers the employer a defence. The dismissal will not be unfair if, as already noted, there was an ‘economic, technical or organisational reason’ for it (the ETO defence).51 The courts have held, regarding old TUPE Regulation 8(2), that improving the price of a sale will not constitute such a reason and have tended to look for a justification connected with the prospects of operating the business as a going concern.52 The courts have thus developed case law relevant to TUPE Regulations 4 and 753 but, from the IP’s point of view, a concern is

50See Frisby, ‘TUPE or not TUPE?’, p. 256; Lord Oliver in Litster [1990] 1 AC 546 at 563A–B. Cases subsequent to Litster, such as Re Maxwell Fleet Facilities Management Ltd (No. 2)

[2000] 2 All ER 860, also indicated that where a hive-down had taken place in an avoid the transfer of employment liabilities, the courts would treat the device unsympathe-

tically and apply the Litster approach. The courts would thus ensure that where dismissals were made prior to the eventual transfer of the hive-down vehicle, the employment liabilities would pass through to the ultimate transferee. (In a hive-down it is usual to transfer the viable parts of the business to a subsidiary of the insolvent company and to seek to sell that subsidiary as a ‘clean commercial package’: see Davies, ‘Acquired Rights’, pp. 32–3.)

51See, for example, Eldridge, ‘TUPE Operates to Damage Rescue Culture’, p. 20.

52See Pollard, ‘TUPE and Insolvency, II’; Whitehouse v. Charles A. Blatchford & Sons Ltd [2000] ICR 542 (CA); Wheeler v. Patel and J. Goulding Group of Companies [1987] ICR 631 (EAT); Gateway Hotels Ltd v. Stewart [1988] IRLR 281 (EAT). See also Dynamex Friction Ltd and Ferotec Realty Ltd v. Amicus and Others [2008] EWCA Civ 381, where the Court of Appeal held that dismissals of staff made by an administrator because of lack of funds were made for a

genuine economic reason, and not a reason connected with a transfer, notwithstanding that the business was subsequently sold to companies controlled by the former director. On the approach of the ECJ see Abels v. Administrative Board of the Bedrijfsvereniging voor de MetaalIndustrie en de Electrotechnische Industrie (Case C-135/83) [1987] 2 CMLR 406; Jules Dethier Equipment SA v. Dassy (Case C -31 9/94) [ 199 8] ICR 541.

53See, for example, Frisby, ‘TUPE or not TUPE?’; Pollard, ‘TUPE and Insolvency, I and II’; Collins et al., Labour Law.

that this is bedevilled by uncertainties on a number of points: for instance, regarding the ETO defence and the connection between a dismissal and the transfer.54 Such a practitioner would, in an ideal world, be able to calculate the reliability of any TUPE-avoiding measures and his or her exposure to potential employee claims. The DTI/BERR, moreover, has not decided to determine precisely the extent to which TUPE will apply to different insolvency procedures and this means that insolvency practitioners have to rely on uncertain developments in case law. It should also be stressed that whether TUPE will apply to a process will be an important factor in selecting which procedure to follow and will impact considerably on the practitioner’s ability to attract a purchaser of the troubled company or business. On present evidence, that practitioner is faced with a legal state of affairs that is uncertain and far from ideal.55

Turning to TUPE and the position of pension rights following a transfer, Regulation 10 stipulates that rights and obligations relating to occupational pensions schemes do not carry forward to transferees. The Pensions Act 2004 sections 257 and 258, however, introduced new pension protections with respect to transfers of employment that come within the terms of TUPE.56 Regarding transfers after 6 April 2006 to which TUPE applies, transferees are required to offer transferred employees a minimal level of pension provision if they had, immediately before the transfer, enjoyed access to an occupational pension scheme with an employer contribution element. The transferee may choose whether to offer a defined benefit scheme of a defined standard or a money purchase scheme to which the employer contributes at a specified rate.57 Immediately before the transfer the transferring employee must be either an active member of the scheme; eligible to be such a member; or potentially such a member if employed by the transferor for a longer period. The 2004 Act protections, however, only apply to future benefit accruals – they do not protect benefits that relate to service before the

54Frisby, ‘TUPE or not TUPE?’, p. 259, for instance, asserts: ‘Both insolvency practitioners and transferees will never be entirely certain whether “financial constraints” dismissals will be adjudged to be unconnected to a transfer.’

55See, for example, Pollard, ‘TUPE and Insolvency, I and II’; M. Sargeant, ‘Business Transfers and Corporate Insolvencies: The Effect of TUPE’ (1998) 14 IL&P 8; Eldridge, ‘TUPE Operates to Damage Rescue Culture’, p. 20.

56See D. Pollard, ‘Pensions and TUPE’; S. Bewick, ‘Pensions – A Roadmap for Users’ (2006) Recovery (Winter) 16.

57See Transfer of Employment (Pension Protection) Regulations 2005 (SI 2005/649) for stipulations regarding the minimal standards of schemes.

766 the impact of corporate insolvency

transfer, the rights and obligations regarding which remain with the transferor. What the 2004 Act does involve, for prospective purchasers of troubled companies, is the prospect of having to bear a minimum level of future pension obligations and the need to investigate, before purchasing, the transferor’s pension schemes, the contribution levels of employees and the relevant waiting periods. Obligations to match the contributions of the employee up to a maximum of 6 per cent of the employee’s salary will have to be factored into financial plans.58

For employees, the Pensions Act 2004 brought not merely the above TUPE-related protections but also those offered by the Pensions Regulator and the Pension Protection Fund (PPF). The latter fund became operational on 6 April 2005 and provides compensation to employees who are members of eligible defined benefit schemes if the employer becomes insolvent and the scheme is underfunded.59 To be covered by the PPF the scheme must be an eligible one and must not have commenced winding up before 6 April 2005; the employer must be insolvent, its scheme funded below the PPF level of benefits, and the IP must have issued a scheme failure notice stating that a scheme rescue is not possible. In the alternative, the trustees of the fund must have applied to the Board of the PPF to assume responsibility for the scheme because it appears that the employer is unlikely to continue as a going concern; or the Pensions Regulator must have notified the Board that the employer is unlikely to continue as a going concern.

The Pensions Regulator became operational on 6 April 2005 also and is responsible, inter alia, for protecting pension benefits, reducing the risk of claims on the PPF and promoting the good administration of pension schemes.60 The powers of the Pensions Regulator include measures designed to reduce the ‘moral hazard’ whereby employers may seek to avoid their pension obligations at the expense of the PPF. Thus, the Pensions Regulator is able to require employers to make contributions or

58See Pollard, ‘Pensions and TUPE’, p. 139.

59See Pensions Act 2004 Part 2; R3, Technical Bulletin, No. 70, May 2006. Prior to 6 April 2005 employees’ pensions were protected by the Government’s Financial Assistance Scheme. On the merits and otherwise of the PPF and discussion of other options see B. Shaw, ‘Occupational Persions Trusts’ (2008) Recovery (Autumn) 40.

60Since 30 December 2005 it has been the case that each scheme has to meet a statutory funding objective – as detailed in the relevant regulations (the Occupational Pension Schemes (Scheme Funding) Regulations 2005 (SI 2005/3377)). The Regulator also issued a code of practice, ‘Funding Defined Benefits’, in December 2005.

give financial support to a scheme61 and to issue financial support directions that are designed to prevent employers avoiding pension debts by using group structures.62

Insolvency practitioners are obliged to give various notifications in order to assist in the operations of the Pensions Regulator and the PPF. The IP must, thus, notify the Board of the PPF, the Regulator and the trustees of the relevant pension scheme of his appointment and his ceasing to act.63 Under section 120 of the Pensions Act 2004, the IP must notify the same parties when an ‘insolvency event’ occurs in relation to an employer who operates an occupational pension scheme.64 After such an event, the IP must also inform these parties about the status of the scheme – including his view on whether a rescue of the scheme is possible. For such purposes, an ‘insolvency event’ means, in essence, the commencement of any insolvency process other than a members’ voluntary liquidation.65 The IP who acts within his duties is not, however, subject to the Pensions Regulator’s power to require contributions or financial support.

Efficiency

In assessing whether the law’s treatment of employees leads to efficiency in insolvency processes, it is necessary to keep the efficiency question

61S. 38 of the Pensions Act 2004 empowers the Pensions Regulator to issue a contribution notice requiring a person to make good a shortfall under a scheme – and for such purposes a person made liable may be an employer or a person connected with, or an associate of, the employer. The circumstances allowing the use of this power include those where the Regulator is of the opinion that the person was party to an act (or deliberate failure to act) the main purpose of which was to prevent the recovery of a debt which might become due from the employer in relation to the scheme. On 15 April 2008 the Government announced that it would strengthen this power by, inter alia, removing the need for the Regulator to prove intent to avoid properly funding the scheme, taking away the employer’s ‘good faith’ defence and allowing reference to the resources of the group of companies in judging whether a financial support direction should be made (see R3 Members’ News, 17 April 2008).

62Occupational Pension Schemes (Scheme Funding) Regulations 2005, Regulation 6.

63See s. 22 of the Pensions Act 1995 (as modified by the Pensions Act 2004).

64The notice must be given within fourteen days of the event or the date when the IP becomes aware of the scheme. The notice will trigger an ‘assessment period’ during which the Board of the PPF will determine whether the PPF will cover the scheme. On

the low number of s. 120 notices and the growing problem of ‘orphan pension sehemes’ see D. Toms, ‘Pensions: Another Ticking Time Bomb for Insolvency Practitioners’ (200 8) Reco very ( Sp ring ) 36.

65See Pension Protection Fund (Entry Rules) Regulations 2005 (SI 2005/590) and Pension Protection Fund (Entry Rules) Amendment Regulations 2005 (SI 2005/2153).

Protections for employees may also help to shore up morale. It has been noted that office holders tend to fear that employees who feel that a business is doomed will have a propensity to withdraw co-operation or will be likely ‘to develop mysterious illnesses’ or simply be liable not to apply very much effort once they know that they are certain to be made redundant.67 Similarly, some protective rules, notably those on employee consultation, may encourage the successful pursuit of solutions. As Armour and Deakin have commented: ‘On the positive side, TUPE provides a basis on which a designated representative of the employee – either the recognised trade union or unions in the enterprise concerned, or the default representatives provided for by statute – has the power to enter into negotiations with the employer over the terms on which the restructuring may take place.’68

Contrary to this optimistic view, however, are ranged a number of objections. In response to the argument that TUPE encourages rescue by shielding the transferee from liabilities, it can be cautioned that the reforms under discussion are modest and that much more could have been done to encourage rescue.69 TUPE provides that basic awards for unfair dismissal are paid out of the National Insurance Fund but compensatory awards for unfair dismissal (which will often dwarf other liabilities) will still pass over to the transferee – a situation that may deter the potential purchasers of troubled companies who are likely to fear not merely the quantum of such compensatory awards but their indeterminacy.70

Uncertainties in the law may be another concern because they tend to raise transaction costs, produce solutions inefficiently and render rescues more difficult. Present TUPE regulations, as indicated above, are uncertain in so far as it is difficult for a transferor or a transferee to judge whether redundancies made preor post-transfer in order to reduce a

67Armour and Deakin, ‘Insolvency, Employment Protection and Corporate Restructuring’, p. 37.

68Ibid., p. 46. See also the arguments for employees’ participation in M. Armstrong and A. Cerfontaine, ‘The Rhetoric of Inclusion? Corporate Governance in Insolvency Law’ [2000] Ins. Law. 38.

69See Bewick, ‘TUPE 2006 – A Missed Opportunity’.

70Ibid., where it is suggested that in a typical case (of average earnings and ten years of service) the quantum of liabilities that do not transfer under TUPE is likely to be exceeded tenfold by that of transferring liabilities. Collins notes the role of Regulations 11 and 12 in seeking to control the uncertainties confronting potential purchasers through mandating the notification by the transferor to the transferee of information regarding potential liabilities to employees: Collins et al., Labour Law, para. 10.44.

770 the impact of corporate insolvency

wage bill will produce costs to transferees following the application of Regulations 4 and 7.71 Special difficulty, as indicated, attends the definitions of different kinds of insolvency proceedings – which are crucial in deciding whether transfers of rights occur. The source of the difficulty with TUPE on this point is that the definitions of procedures used are derived from the imprecise language of the Directive and it is not certain which UK procedures are referred to – or even whether reference should be made to the type of procedure involved or the outcome of the given procedure that is anticipated in a particular context.72 Not only that, but the BERR Guidance Note on TUPE does not take the same view on these points as the 2006 DTI Redundancy Payments Directorate’s Guidance.73

A second issue is whether (leaving uncertainties aside) shifting acquired rights costs onto the purchasers of insolvent companies does indeed obstruct rescues and thereby impede efficiency. Here much depends on the particular circumstances.74 In cases where there is no prospect of rescue, acquired rights have no effect. In instances where there is a clear case for a going concern sale, acquired rights are likely not to affect the rescue although purchasers will discount the price paid in reflection of their expected liabilities to employees (a solution principally raising issues of fairness rather than efficiency). In some cases, however, the transfer of acquired rights will mean that an office holder will raise more through a break-up sale than by selling as a going concern to a buyer who will make an offer that is acquired rights discounted. Armour

71 On the predecessor regulations 5 and 8 see G. Morris, ‘Transferring Liability for Employee Claims’ [2000] JBL 188; Frisby, ‘TUPE or not TUPE?’, pp. 265–6, where an interviewee is quoted as calling TUPE ‘one unholy mess’; Sargeant, ‘Business Transfers and Corporate Insolvencies’; Armour and Deakin, ‘Insolvency, Employment Protection and Corporate Restructuring’, p. 38.

72See Rollins, ‘Technical Update’; M. Sargeant, ‘More Flexibility for Insolvent Transfers: The Amended Acquired Rights Directive’ (1999) 15 IL&P 6. (For example, even administration can be embarked upon with a view to liquidation of some, or all, of the assets of the company: see ch. 9 above.)

73See R3, Technical Bulletin, No. 77, November 2006. The view of the DTI Redundancy Payments Directorate (Guidance of 8 June 2006) is that Regulations 4 and 7 will not apply to compulsory liquidations and creditors’ voluntary liquidations but (contrary to the statement contained in the BERR Guidance of March 2007) will apply to members’ voluntary liquidations (since these are not insolvency proceedings). In administrations, administrative receiverships and voluntary arrangements, the NIF will meet payments owed to transferring employees under the insolvency provisions of the Employment Rights Act.

74See Armour and Deakin, ‘Insolvency, Employment Protection and Corporate Restructuring’, pp. 25–39.

and Deakin thus quote as ‘largely representative’ the following comment from a party experienced in the conduct of administrations and administrative receiverships: ‘The Acquired Rights Directive I think is bad news for employees because it makes businesses harder to sell and therefore jobs harder to rescue … [A]t the margin I’m sure there are cases where the businesses didn’t sell because of the burdens that the purchaser would have had to take on.’75

The 2006 reforms of TUPE were designed to make transfers more attractive to purchasers but, as noted, liabilities for unfair dismissal compensatory payments continue to pass to transferees and this may mute the rescue-enhancing effects of the 2006 regulations. Whether the process of protecting acquired rights actually impedes rescue rather than merely reduces sale price may, again, depend on a number of considerations, such as the number of employees involved, the length of their service and the quality and timing of information possessed by the potential purchaser.76

A further issue alluded to above is whether the overall effect of TUPE is economically inefficient when the National Insurance Fund pays out for redundancies in circumstances where continuing employment for some of the workforce would have lowered net costs.77 On this point, the DTI consultation of 2001 argued that the benefits of rescue-enhancement were ‘expected to outweigh the relatively modest additional “deadweight” costs’ in insolvency payments from the National Insurance Fund.78 A danger, however, is that, since employees, under TUPE, will not be able to recover unfair dismissal compensation from the National Insurance Fund and will carry this forward to the transferee, this may induce IPs to engage routinely in pre-transfer dismissals.79 On this last point, however, something may turn on the information possessed by the IP. If the quality of information is high, it might be hoped that the IP would assess the need to dismiss or retain on the (acceptable) basis of the employee’s value to the

75Ibid., p. 31. The European Court of Justice considered this issue in the case of Abels v.

Administrative Board of the Bedrijfsvereniging voor de Metaal-Industrie en de Electrotechnische Industrie (Case-135/83) [1987] 2 CMLR 406.

76Frisby, ‘TUPE or not TUPE?’, p. 265.

77Ibid, p. 264.

78DTI, TUPE: Government Proposals for Reform: Public Consultation Document (DTI, 2001, URN 01/1133), para. 30. (Some costs would be offset by savings in benefit payments to employees who lost their jobs on liquidation.)

79A concern expressed by Frisby, ‘TUPE or not TUPE?’, p. 268. Cost to the state would, however, be limited in the DTI’s proposed regime as the National Insurance Fund only pays up to statutory limits.