Appeal No. UKEAT/0395/08/DM

EMPLOYMENT APPEAL TRIBUNAL
58 VICTORIA EMBANKMENT, LONDON EC4Y 0DS

	At the Tribunal
	On 5 November 2008

Before
HIS HONOUR JUDGE PETER CLARK
(SITTING ALONE)

MR R OAKLAND	APPELLANT

WELLSWOOD (YORKSHIRE) LTD	RESPONDENT

Transcript of Proceedings

JUDGMENT

	APPEARANCES

For the Appellant	MS C TOMAN
(of Counsel)
Instructed by:
Messrs Runhams LLP Solicitors
Salts chambers
Salts Mill
Victoria Road
Saltaire
Shipley BD18 3LF	
For the Respondent	MR S HARDY
(of Counsel)
Instructed by:
Messrs Shulmans Solicitors
120 Wellington Street
Leeds LS1 4LT	

SUMMARY
TRANSFER OF UNDERTAKINGS:  Insolvency
Application of Reg 8(7) TUPE where company is in administration.  Whether with a view to liquidation.

Held:  Answer on facts found – Yes.  Appeal dismissed.

HIS HONOUR JUDGE PETER CLARK
1.	The parties to these proceedings before the Leeds Employment Tribunal were Mr Oakland, Claimant, and Wellswood (Yorkshire) Ltd (“Newco”), Respondent.  The claim brought by the Claimant was one of unfair dismissal.  The Respondent took a preliminary point; it was that the Claimant was not an employee of Wellswood Ltd (“Oldco”), a company in administration, immediately before any relevant transfer from Oldco to Newco on about 6 December 2006.  Consequently, he had not completed 1 year’s continuous service with Newco so as to qualify for ordinary unfair dismissal protection at the date of his dismissal by Newco, 23 November 2007.

2.	A preliminary hearing review (PHR) was listed before Regional Employment Judge Sneath on 9 July 2008.  At that hearing counsel for the Respondent, Mrs Morrison, raised a further issue; namely whether, even if he was employed by Oldco prior to any relevant transfer to Newco, he was nevertheless precluded from relying on the transfer provisions of the Transfer of Undertakings Protection of Employment Regulations 2006 (“TUPE”) by virtue of Regulation 8(7), so that he could not in any event rely upon previous service with Oldco to provide the necessary continuity.  Ms Toman, who appeared on behalf of the Claimant below as she does before me, was granted a short adjournment and the point was then argued.

3.	By a reserved judgment with reasons dated 16 July Judge Sneath upheld the Respondent’s submission, holding that the effect of Regulation 4 was, on the facts of this case, disapplied by Regulation 8(7) so that, regardless of employee status with Oldco, the Claimant did not have sufficient service to bring his claim of unfair dismissal against the Respondent, Newco.  It is against that judgment that this appeal is brought by the Claimant.

The Facts
4.	Oldco traded as a wholesaler in fruit and vegetables supplying catering businesses and hotels with fresh produce.  A major supplier to Oldco was Gilbert Thompson (Leeds) Ltd (GTL).

5.	Oldco commenced trading on 1 March 2003.  From that date the Claimant was a director and 50 per cent shareholder in Oldco.  Mr Andrew Walker was a co-director, owning the other 50 per cent of the shares.  The Claimant also describes himself as a salaried General Manager of Oldco.  I am not concerned with the question of his employment status with Oldco.

6.	By mid-2006 Oldco had run into financial difficulties.  In September the Claimant approach Mr Richard Thompson, a director of GTL, which company was then a major creditor of Oldco.  The Claimant also consulted an insolvency practitioner for advice.  They discussed the options of liquidation or administration.

7.	The Judge found (reasons para. 8) 
“The insolvency practitioner, the claimant and Mr Thompson together agreed that the administration was the better course of action.  Mr Thompson was not willing on behalf of his company to buy Oldco as a going concern.  That would mean taking on the book debts.  Instead, he decided to incorporate Newco as a wholly owned subsidiary of [GTL] and use it as a vehicle for acquiring the assets of Oldco, which included the industrial unit from which it traded, fridges, vans and five of the seven employees of Oldco, including the claimant.”

8.	The Judge records (reasons para 10) that on 6 December the sale of assets to the Respondent (Newco) was completed.  By way of further amplification, on 6 December 2006 Stephen Hull and Geoffrey Martin were appointed, I am told out of Court, Joint Administrators of Oldco.  Thereafter, certain assets were purchased by Newco, which also acquired the lease of the business premises formerly occupied by Oldco.  As to the employees of Oldco, Newco did not take on Mr Walker and one other employee.  The remaining five, including the Claimant were taken on, it being agreed that the Claimant would take a cut in salary from £39,000 pa to £20,000, later rising to £24,000.  The other four employees taken on by Newco received redundancy payments from the fund administered by the Secretary of State.  The Claimant did not seek a redundancy payment.

9.	In a report prepared by Mr Hull on behalf of the Joint Administrators dated 29 January 2007 he recounted the statutory objectives of administration contained in the Insolvency Act 1986 (I.A.), namely (a) rescuing the company as a going concern, or (b)achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first being in administration) or (c) realising any property in order to make a distribution to one or more secured or preferential creditors (I.A. Schedule B1, para 3(1)).

10.	Mr Hull stated, at para 4.2 of his report, that following a review of (Oldco’s) affairs he believed that the first objective (rescuing the company as a going concern) was not achievable as a result of the scale of the company’s insolvent position.  He therefore concentrated his efforts on achieving the secondary purpose of administration, namely a better result for creditors than would be likely if the company were wound up.  At paragraph 54 he observed that, with the probability of ongoing losses, any further period of trading to allow the business and assets to be marketed for sale may have further reduced funds available for creditors and resulted in the loss of customers.  Further passages from the report, and their context, are recorded in the Judge’s findings of fact at paragraph  9 of his reasons.  Further, at paragraph 7.3, Mr Hull anticipated that in due course the company would move from Administration into Creditors Voluntary Liquidation (CVL).

TUPE and Insolvency
11.	I do not find it necessary or helpful to rehearse the debate, ventilated in the European Court of Justice (ECJ) in cases including Abels [1985] ECR 469, D’Urso [1992] IRLR 136 and Jules Dethier v Dassy [1978] IRLR 266, as to the extent to which transfers following various kinds of transferor insolvency attracted TUPE protection; a point considered by the Scottish EAT in Perth and Kinross Council v Donaldson [2004] ICR 6670.  Article 5(1) of the Acquired Rights Directive 2001/23 (ARD), designed to consolidate European law as it was revealed by the ECJ in those cases provides:

“… Articles 3 [transfer of the employment relationship] and 4 [prohibition of dismissals on ground of transfer] shall not apply to any transfer of an undertaking, business or part of an undertaking or business where the transferor is the subject of bankruptcy proceedings or any analogous insolvency proceedings which have been instituted with a view to the liquidation of the assets of the transferor and are under the supervision of a competent public authority (which may be an insolvency practitioner authorised by a competent public authority).”

12.	Article 5(1) has been directly transposed into domestic law by Article 8(7) TUPE 2006, which provides 
“Regulations 4 [transfer of employment contracts and liabilities] and 7 [control of dismissals of employees because of relevant transfer] do not apply to any relevant transfer where the transferor is the subject of bankruptcy proceedings or any analogous insolvency proceedings which have been instituted with a view to the liquidation of the assets of the transferor and are under the supervision of an insolvency practitioner.”

13.	That provision may be contrasted with Regulation 8 (2)–(6), which provides that Regulation 4 does not operate to transfer liability for sums payable to relevant employees under relevant statutory schemes, as defined in Regulation 8(4), where relevant insolvency proceedings, have been opened not with a view to the liquidation of the assets of the transferor.

14.	Regulation 8 was considered by Elias P in Secretary of State for Trade and Industry v Slater [2008] ICR 54.  At paras 15-16 he observed:
“15.	Regulation 8 therefore aims to relieve transferees of the burdens which would otherwise apply in certain defined circumstances. 
 16.	Essentially this is done in two quite distinct ways. The most extensive exception from the effect of the Regulations is created by regulation 8(7) (which is intended to reflect the provisions of Article 5.1 of Directive 2001/23). This provides that where insolvency proceedings are analogous to bankruptcy proceedings and have been instituted with a view to liquidation of the assets, then neither regulations 4 nor 7 apply at all. There is no transfer of staff to the transferee and no claim for unfair dismissal against him …” 

The Employment Tribunal decision
15.	It seems to me that the Regulation 8(7) question raised four questions for the Employment Tribunal:

(1)	Was there, subject to Regulation 8(7), a relevant transfer within the meaning of Regulation 3?  That question was answered by the Respondent’s concession; there was a relevant transfer on 6 December 2006 (Reasons para. 12).

(2)	Was the transferor (Oldco) the subject of insolvency proceedings?  Ms Toman accepts that insolvency proceedings were in train as at 6 December 2006.  I note that that concession is in line with the definition of insolvency contained in s183(3)(aa) Employment Rights Act 1996.

(3)	Were those proceedings under the supervision of an insolvency practitioner as at the relevant date?  Yes, the joint administrators were appointed on that date.

(4)	Were the insolvency proceedings instituted with a view to the liquidation of the assets of the transferor?  This is the critical issue before me.  Judge Sneath rejected the submission on behalf of the Claimant that the insolvency proceedings had not been with a view to the liquidation of Oldco’s assets.  At paragraph 26 of the Reasons he found:

“26.	Having regard to paragraph 25 of the judgment in Dassy, I find that the purpose of the procedure was the liquidation of the assets of Oldco.  The deal behind it gave the administrators the chance of making the most advantageous realizations.  It so happened in this case that the liquidation of assets involved the sale to Newco in circumstances that would otherwise have engaged Regulations 4 and 7.”

The Appeal
16.	Ms Toman submits that as a matter of domestic insolvency law the appointment of Joint Administrators, either in court or by the directors of the company out of court (as in the present case), or by the holder of a floating charge, cannot, by definition constitute the institution of insolvency proceedings with a view to the liquidation of the company’s assets.  That state of affairs, analogous to bankruptcy, will arise in the case of a creditor’s voluntary winding-up (CVL) or compulsory winding-up by the court.  

17.	In this case, she submits, the business continued to trade in the same way as before, without interruption under the auspices of Newco.  The exception in Regulation 8(7) was not designed to apply to the facts of the present case.  Further, under 1.A., the first duty of the Administrators was to rescue the company as a going concern.  This was not considered achievable and so the Administrators focussed on the second statutory objective, achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first being in administration).  That, she submits, shows a different purpose from a bankruptcy or liquidation situation.

18.	She also draws on the old European jurisprudence, relying particularly on Jules Dethier, para 31:

“… where … the undertaking continues to trade while it is being wound up by the court.  In such circumstances continuity of the business is assured when the undertaking is transferred.  There is accordingly no justification for depriving employees of the rights which the Directive guarantees them on the conditions it lays down.

19.	The issue arises in this case because Parliament has declined to specify which particular insolvency proceedings are to be characterized as having been instituted with a view to the liquidation of the transferor company’s assets.  Nor do I derive any assistance from the BERR Guidance to the 2006 TUPE Regulations (issued March 2007) to which I have been referred.  In these circumstances I reject Ms Toman’s submission that the answer to the question now posed is purely one of domestic insolvency law; rather, it is in my view a question of fact for the Employment Tribunal.  I accept that where joint administrators continue to trade the business with a view to its sale as a going concern any relevant transfer in those circumstances will attract TUPE protection for employees under Regulation 4.  However, that is not what happened in the present case on the facts found by Judge Sneath.  Having first been consulted by the Claimant on behalf of Oldco on 23 November 2006 it is clear from Mr Hull’s report that it soon became apparent that due to its weak financial position it was not possible for the administrators to continue trading the business.  Instead, immediately following their appointment on 6 December 2007 they took immediate steps to sell the assets to Newco, who took on the lease of Oldco’s premises whilst retaining the book debts in Oldco.  This was seen as the best course for realizing the optimum return for creditors in the final liquidation of Oldco.   In my judgment the Judge was entitled to conclude that the appointment of Joint Administrators was with a view to the eventual liquidation of the assets of Oldco, by way of a CVL.

20.	Further, it seems to me that this construction accords with the policy behind Article 5(1) and in turn Regulation 8(7); namely the ‘rescue culture’, whereby a purchaser, here Newco, is not put off by the effects of TUPE protection.  The outcome, as demonstrated in this case, was that some jobs were preserved and the creditors benefited from the best available option.  I note that that social policy is articulated at paragraph 22 of the Advocate-General’s opinion in Jules Dethier.

Conclusion
21.	For these reasons I shall dismiss this appeal.