Reported Test Case on TUPE and Insolvency

In the recent widely reported TUPE case of Pressure Coolers Ltd v Molloy, the Employment Appeal Tribunal held that:-

• the liability for the basic award for unfair dismissal and notice pay owed to a transferring employee of an insolvent business (in this case, Mr Molloy) did not pass to the Secretary of State because the employee had been dismissed after the transfer, and therefore the liabilities were not payable before the transfer and remained the responsibility of the transferee, in this case Pressure Cooler Ltd.

The decision follows the previous case of OTG Ltd v Barke which held that TUPE will apply within administrations, although this case is subject to an appeal.

The Facts

Mr Molloy had been employed for 20 years as a bench fitter for a company which went into administration due to financial difficulties. The company was put into administration at 11.00 a.m. and then transferred simultaneously to Pressure Coolers Ltd. At 3pm the same day the administrator dismissed Mr Molloy together with other employees on grounds of redundancy on the instructions of the new owner without any prior warning or consultation.

Mr Molloy issued tribunal proceedings for unfair dismissal, age discrimination, notice pay, unpaid holiday pay and arrears of pay which he succeeded in and the tribunal held that the Secretary of State was liable to make certain payments out of the NI Fund including the basic award for unfair dismissal.

Following a review of the decision however the Tribunal changed this view and accepted that the Secretary of State’s argument that they were only liable to meet those claims that were specifically due on or before the transfer date, which in this case only included Mr Molloy’s unpaid holiday and pay arrears.

It was highly relevant that the business in question was sold by the administrators as a going concern under a pre-pack administration agreement in which the buyer took on most of the employment liabilities and accepted that TUPE applied to the employees and also indemnified both the seller and the administrators for most of the employment liabilities and did not take legal advice at the time.

The Employment team at CWJ tried to argue on behalf of the buyer, Pressure Coolers Ltd, that the Secretary of State was responsible for the basic award for unfair dismissal and notice pay because:-

• the spirit and intention of the TUPE regulations was to encourage a rescue culture in which acquiring employers of insolvent business, such as Pressure Coolers Ltd, could do so without also inheriting certain debts which the government would be responsible; 
• the wording of the relevant TUPE legislation was slightly ambiguous and implied that certain debts might crystallise at the moment of transfer regardless of whether or not there had been a dismissal and would therefore automatically become pre-existing debts to which the Secretary of State and not the transferee were responsible for.

Unfortunately the EAT did not accept these arguments and decided in favour of the Secretary of State who argued that Pressure Coolers Ltd were responsible as theses liabilities crystallised post transfer once the employees were dismissed by Pressure Coolers Ltd.

The implications

This test case highlights again the risks involved in buying a business with employees in an insolvency situation, and administrations in particular, and the need to take specialist legal advice before buying or entering into any commercial agreement to buy or take on any contracts in these circumstances in order to be made fully aware of the risks and potential costs involved and avoid expensive tribunal awards.

If you are thinking of buying a failing company in an insolvency situation please contact William Addis of CWJ on 01689 997 834 or william.addis@cwj.co.uk or any member of the Chambers recognised employment team.