The Court of Justice of the European Union (CJEU) has this week made a decision which confirms that the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”) will apply to transfer employees where a business in administration is subject to a pre pack sale. This reflects a similar decision made previously by UK courts and tends to confirm the position regarding businesses in administration (as opposed to some other form of insolvency procedure) and pre pack sales in particular.
A "pre-pack" occurs where a company is put into administration and its business and/or assets are immediately sold by the administrator under a sale that was pre-arranged before the administrator was appointed. This may involve the sale of a business as a going concern or the sale of some or all of the assets.
The case of Federatie Nederlanse Vakvereniging and others v Smallsteps BV concerned the Acquired Rights Directive which safeguards the rights of employees on a business transfer. This Directive is implemented in the UK through TUPE and, broadly, provides that employees subject to a relevant business transfer:
- should have their contracts of employment automatically transferred to the new owner on their existing terms and conditions;
- are protected from detrimental changes to their terms; and
- have protection from being dismissed because of the transfer.
The rules in the Acquired Rights Directive can be modified (as they are in TUPE) where the business which is transferring is the subject of bankruptcy or analogous insolvency proceedings. There are two types of insolvency proceedings which have different consequences:
- In cases where insolvency proceedings aim to liquidate the assets of the business (so it will no longer aim to trade), the employees do not automatically transfer and do not have the protection from automatically unfair dismissal because of the transfer or changes to their terms otherwise afforded by the Directive. This is often referred to as ‘terminal’ proceedings.
- Where insolvency proceedings are ‘non-terminal’ and seek not to liquidate the assets but to rescue the business or sell it as a going concern, employees will transfer and have protection from dismissal, but the Directive provides that there can be more scope for changes to their terms of employment and certain debts do not transfer. The UK has implemented provisions to this effect.
In a previous decision (Key2Law (Surrey) LLP v De’Antiquis [2011] EWCA Civ 1567), the English Court of Appeal found that where a business is in administration, this is a ‘non terminal’ process as it generally has the aim of rescuing the business or selling it as a going concern and TUPE will apply. This will be the case in regards to a pre-pack sale by an administrator and the employees ought to automatically transfer to the buyer under the terms of TUPE and are protected from unfair dismissal because of the transfer. This same issue is essentially what the CJEU were asked to rule upon.
The case concerned Estro Groep BV which employed around 3,600 workers in the Netherlands across 380 childcare centres. The company ran into financial difficulties and contacted a potential buyer, which then set up the new company Smallsteps BV to take over around 250 of the childcare centres.
An administrator was appointed to Estro. The court granted an application declaring Estro insolvent and on the same day, the administrator concluded an agreement to sell 250 of Estro’s childcare centres to Smallsteps. The administrator dismissed all 3,600 of Estro’s employees and Smallsteps offered new employment to almost 2,600 of them.
Four employees who were not offered such new employment, along with their trade union, sought a declaration that all employees working in the 250 centres taken over by Smallsteps were subject to the protection of the Acquired Rights Directive and their employment transferred to Smallsteps automatically on their existing terms. The Dutch Courts referred the case to the CJEU on the question of whether the rights afforded to employees to transfer automatically under the Acquired Rights Directive applied to a pre-pack sale aimed at rescuing an insolvent business as a going concern. If the situation fell within the scope of ‘terminal’ proceedings aiming to liquidate the assets of the business as above, then the employees would not automatically transfer.
The CJEU held that a pre-pack arrangement was outside the scope of the exception in the Directive. The definition will not be met where there is no declaration of insolvency, or where the procedure adopted is aimed at ensuring the continuity of a business rather than liquidating it. In this case, although there was a declaration of insolvency on the same day, the pre pack had already been prepared to enable a relaunch once insolvency had been declared. The CJEU found that a pre-pack procedure was not aimed at liquidating the undertaking and the primary purpose of the pre pack was to safeguard its value by allowing a swift relaunch after insolvency was declared and avoiding the disruption of ceasing activities for a period. Generally, the primary purpose of liquidation is to maximise the proceeds for the undertaking’s creditors. It was argued that a pre pack was partially for this purpose, but the CJEU found that this was not relevant.
Pre pack arrangements in the Netherlands and Britain are not entirely the same, but they are similar such that the decision confirms the approach previously taken by UK courts. Therefore, if a British business is put into administration, whether it is the subject of a pre pack sale or otherwise, it is possible that TUPE could apply to any sale or transfer of part or all of the business. Where the business is providing services under contract to particular clients, there is also the possibility that TUPE will apply to any service provision change where a new contractor takes over a contract from the insolvent company. The consequences of this can be significant, given where there is a breach of TUPE, employees could seek to claim unfair dismissal or a protective award for failure to inform and consult them. It is advisable to take advice in any situation where TUPE might apply.
It should also be noted that, although this is a decision of the CJEU, it is not expected that Brexit will change this position given the similar decisions of the UK courts and the stated intentions of the government with regards to ensuring existing employment rights which flow from EU Directives will remain UK law following Brexit.
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