It has been reported that Claire’s is due to call in administrators for its UK and Ireland business, putting around 2,150 jobs at risk.
When a company is insolvent, one option is that the company can be sold in whole or in part as a going concern.
However, purchasing an insolvent business presents a unique set of legal and operational challenges. One of the most complex and potentially costly areas to navigate is employment law.
TUPE and insolvency
If the business is sold, buyers must understand their obligations relating to employees, particularly under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). While insolvency can alter how TUPE applies, employee rights are far from extinguished. Failure to properly manage employment risks can lead to significant liabilities and legal disputes post-acquisition.
Under TUPE, when a business is sold, employees assigned to the business automatically transfer to the buyer on their existing terms and conditions with continuity of employment preserved. This typically applies even in the case of an insolvent sale. However, where the seller is undergoing insolvency proceedings, TUPE offers limited flexibility.
Specifically, regulation 8 of TUPE provides exceptions where the transferor is subject to bankruptcy or analogous insolvency proceedings initiated with a view to liquidation. In such cases, TUPE does not apply, and employee contracts do not transfer automatically. However, if the business is in administration or company voluntary arrangement (CVA)—insolvency processes intended to rescue the company—TUPE generally does apply, albeit with some modifications.
Modified TUPE rules in administration
Where TUPE applies during administration, the buyer inherits employees, but certain liabilities can be limited. For instance, under regulation 8(5), arrears of wages, holiday pay and certain other debts may be paid for by statutory schemes, rather than by the buyer. This can reduce the buyer’s exposure, but only if the transfer qualifies under the specific insolvency provisions.
Under TUPE, there is greater scope to make changes to employees’ terms and conditions where there are ‘relevant insolvency proceedings’. This reflects that modifications may need to be made where employees’ terms place an unsustainable financial burden on the business, in order for the business to survive. However, this is not an unfettered right to change terms and conditions – the rules are fairly strict.
Pre- and post-transfer dismissals
Buyers should be wary of dismissals around the time of transfer. If employees are dismissed either before or after the transfer and the sole or principal reason is the transfer itself (and not an economic, technical or organisational (ETO) reason), the dismissal will be automatically unfair. This can expose the buyer to unfair dismissal claims—unless a valid ETO reason exists, such as redundancy due to restructuring.
Information and consultation obligations
Even in insolvency, employers are required to inform and, in some cases, consult with employee representatives about the transfer. Failing to comply can result in protective awards of up to 13 weeks’ gross pay per affected employee. Although responsibility often starts with the seller, liability can be joint and severable. Therefore, in a situation where the buyer might be the only remaining entity once proceedings are brought, there is risk of an award for failure to inform and consult being brought against the buyer.
Due diligence and risk management
If considering purchasing an insolvent company, thorough employment due diligence is essential. Although it can be more tricky with insolvent companies, in particular due to the timescales often involved, as far as possible, buyers should identify:
- Transferring employees and their terms
- Outstanding liabilities (e.g. unpaid wages, accrued holiday)
- Pension obligations
- Ongoing disputes or tribunal claims
- Whether TUPE applies and under what terms
In conclusion, employment law can be a critical factor in the success or failure of purchasing an insolvent business. Obtaining legal advice early, conducting proper due diligence, and understanding how TUPE operates in insolvency contexts are essential to mitigating risk and ensuring a smooth transaction.
For more information on the issues raised in this article, please contact a member of the Glaisyers ETL Employment team.
