Employment Appeal Tribunal clarifies law on “pre-pack” administration TUPE dismissals

15 June 2011

Important news for those buying a business out of "pre-pack" administration. The Employment Appeal Tribunal (EAT) in Pressure Coolers v. Molloy & others has clarified that where the purchaser of such a business dismisses employees that transfer under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) after the transfer then the purchaser itself, not the Government, is responsible for paying their basic unfair dismissal award and notice pay.

In this case, Mr. Molloy was employed by Maestro International Limited, which went into "pre-pack" administration so Pressure Coolers could acquire its business. He was made redundant shortly after his employment transferred to Pressure Coolers under the TUPE Regulations.

Part of the “rescue culture” that the 2006 re-enactment of TUPE was supposed to promote is to allow buyers of insolvent businesses (defined as those businesses that are subject to insolvency proceedings “with a view” to liquidating their assets) would not have to take on the employees of the troubled business via the TUPE automatic transfer mechanism, as they previously had had to.

However, in this case, the purpose of instituting the “pre-pack” administration was not with a view to liquidating Maestro’s assets. Instead, it was an administration purely designed to sell the business as a going concern. The “rescue” provisions of TUPE (i.e. Regulation 8(7), which would have excluded TUPE altogether if the purpose had actually been the liquidation of assets) did not therefore apply and the employees transferred to the buyer under TUPE – meaning Mr. Molloy could bring a claim against Pressure Coolers.

Pressure Coolers tried to argue that liability for sums payable to an employee under “relevant statutory claims” (i.e. the basic unfair dismissal award and notice pay) did not pass to it, but, instead, should have been picked up by the Secretary of State under other provisions of TUPE 2006. Pressure Coolers argued that these provisions, Regulation 8(1) – (6), meant that the Government should have picked up the tab for these departing employees because, by reference to the Employment Rights Act 1996, Regulations 8(1) –(6) provide that the Secretary of State will pay up when and if he or she is satisfied that the “employer” is insolvent. Pressure Coolers said that, because Maestro was insolvent, the Government should therefore pay these dismissal costs.

Mrs. Justice Cox disagreed. She said that, for regulations 8(1)-(6) of TUPE to apply, then the relevant liability must have arisen prior to the transfer. The employee had been dismissed by Pressure Coolers after the transfer and the company was, therefore, solely liable for the sums claimed.

This decision would appear to be a blow to the intent of the 2006 revisions to TUPE to promote a “rescue culture”. Firms are going to be less likely to want to “rescue” failing businesses if they are likely to be saddled with the liabilities incurred in dismissing the employees of that business. It remains to be seen if the Coalition’s trumpeted reforms to employment law will now be extended, EU Law permitting, to make life easier for such potential “white knights” of troubled enterprises.

In the meantime, as with all dismissals of affected employees after a TUPE transfer, take legal advice before issuing the P45!

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