TUPE scuppers good deals for insolvent firms

For the uninitiated, TUPE protects employees’ rights, such as salaries, notice pay and redundancy entitlements, when a whole or part of a business changes ownership. It is not possible for the purchaser to avoid responsibility for these staff entitlements, no matter what the sale contract might say.

The potential liability for purchasers buying an insolvent business has grown steadily more onerous over the years, as legal precedents and changes in legislation have added to the burden. For example, new owners now risk having to pick up claims for unfair dismissal (up to the revised maximum of some £53,000) because this falls within the scope of TUPE.

In this instance, the unfair dismissal claims are those resulting from the insolvency practitioner laying off an employee in preparation for the sale of the business.

We face an individual challenge reassuring purchasers about the risk of buying an insolvent business, while at the time informing them that they may have to pay £53,000 to each former employee because of the way we dismissed them.

On top of this, the Department of Work and Pensions confirmed last June that pensions rights would also fall under TUPE. This means that new employers are now required to provide employees of the businesses they take over with the equivalent of a stakeholder-style pension scheme, with mandatory employer contribution levels of up to 6% of earnings.

As a result of these additions to the TUPE regulations, the overall effect is the scuppering of deal after deal of insolvent business sales, as the initial enthusiasm of interested parties is overwhelmed by the understandable caution of their legal advisers.

The operation of the TUPE regulations goes against the whole principle of insolvency sales, where practitioners are supposed to be able to rescue businesses, and by doing so, preserve at least some of the jobs and enhance dividends and future trading prospects for unsecured creditors.

To do this, insolvency practitioners have to be able to divorce the business assets from the liabilities and deliver them clean to the new owners.

However, TUPE regulations make this impossible.

Earlier this year the DTI, headed by Patricia Hewitt, said it was considering legislating to reform TUPE. Since then, we have been campaigning to warn the government that something must be done to lessen the impact of the regulations where a business is sold out of insolvency.

There is a way this could be done. At present, the DTI underwrites an element of the employee liabilities where staff of insolvent companies do not find new jobs. Within a few weeks of an insolvency, it will pay claims up to certain limits for arrears of pay and other entitlements out of its redundancy fund.

This prevents employees losing out altogether or having to wait for years while assets are realised and claims are agreed. It would be relatively simple for this guarantee to be extended to staff who transfer to employers through an insolvency process, if for any reason they left that new employer within a specified time period. This would take the worst of the sting out of the potential TUPE liabilities.

The alternative, however, is that every year tens of thousands of people, who might otherwise remain in employment and continue to pay taxes, become a burden on the state purse through the benefits they claim.

For the government, this is an expensive way of pursuing a point of principle, never mind the social and psychological damage it causes by perpetuating a set of rules that forces employees out of work.

Having trialled the possibility of reforming TUPE regulations, the DTI promised to initiate a consultation process this September, with a view to starting the long legislative process in the new year. Sadly, now in late October there is still no sign of even the consultation on TUPE starting.

Most worrying of all, there are rumours that the DTI’s intention is not to relax TUPE legislation for insolvent businesses, but to tighten regulations further. The sooner we have a proper public debate the better, not least because with every week that passes the death knell sounds for more businesses that could have been saved and more people are thrown out of work unnecessarily.

Let’s hope the consultation starts soon and that the government recognises the need to help insolvency practitioners to be able to do more for employees who find themselves working for an insolvent company.

Related reading