Employment Law Considerations When Purchasing an Insolvent Business
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 becomes insolvent, one option is to sell it in whole or in part as a going concern. However, purchasing an insolvent business comes with unique legal and operational challenges, particularly in the area of employment law.
TUPE and Insolvency
When buying an insolvent business, understanding obligations toward employees under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) is crucial. While insolvency can modify TUPE’s application, employee rights are still largely protected.
Failure to manage employment risks properly can lead to significant liabilities and legal disputes after the acquisition.
How TUPE Works
- Employees assigned to the business automatically transfer to the buyer on their existing terms and conditions.
- Continuity of employment is preserved, even in insolvency cases.
Exceptions Under Insolvency
- Regulation 8 provides exceptions where the company is in bankruptcy or similar proceedings aimed at liquidation; TUPE does not apply.
- For businesses in administration or a Company Voluntary Arrangement (CVA), TUPE generally applies but may have modifications.
Modified TUPE Rules in Administration
When TUPE applies during administration, the buyer inherits employees, but certain liabilities can be limited.
- Arrears of wages, holiday pay, and other debts may be covered by statutory schemes rather than the buyer.
- There is greater flexibility to modify employee terms under relevant insolvency proceedings, but only within strict legal limits.
Pre- and Post-Transfer Dismissals
Buyers must be cautious about dismissals around the time of transfer:
- Dismissals solely due to the transfer are automatically unfair.
- Valid Economic, Technical, or Organisational (ETO) reasons, such as redundancy, may justify changes.
Information and Consultation Obligations
Even during insolvency, employers must:
- Inform and sometimes consult employee representatives about the transfer.
- Failure to comply can result in protective awards up to 13 weeks’ gross pay per employee.
Liability can be joint and severable, meaning buyers could be responsible if the seller is no longer in existence.
Due Diligence and Risk Management
Thorough employment due diligence is essential when purchasing an insolvent business. 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 conditions
Conclusion
Employment law can make or break the success of purchasing an insolvent business. Early legal advice, thorough due diligence, and a clear understanding of TUPE in insolvency contexts are essential to minimise risk and ensure a smooth transaction.
If you have queries about Employment Law, please contact a member of the Employment team at Glaisyers ETL.
