Essential employment law considerations when buying an insolvent business

Claire Hollins, Partner

With the continued rise in registered company insolvencies (noticeably in the retail and leisure sectors), we have seen an increase in instructions from clients looking to acquire these businesses either in whole or in part. While many employment law considerations remain the same as when purchasing a solvent business, there are some differences and common misconceptions.

Here are our most frequently asked questions:

What happens to the employees of an insolvent company?

The fate of the employees depends on the insolvency procedure.

• Compulsory Liquidation: all employment contracts are terminated with immediate effect.
• Administration: employment does not automatically end. Often the administrator will look to rescue the business as a going concern so will retain some or all the employees whilst that process is ongoing. In general terms, an administrator has 14 days to make a decision about whether to adopt the employment contracts or not.
• Pre-pack or phoenix sale: the sale of the business is negotiated prior to the formal appointment of the administrator with completion taking place shorty after (if not immediately) so the employees are usually retained.

Does TUPE apply?

If the business is sold in whole or in part as a going concern, the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) will apply. TUPE does not apply where the insolvency proceedings are terminal (typically in a liquidation).

There are two important exceptions where there are ‘relevant insolvency proceedings’:

1. the buyer will only be liable for pre-existing debts to employees (typically but not exclusively arrears of pay and holiday pay) to the extent that these are not covered by the National Insurance Fund; and
2. there is greater flexibility to vary employees’ contractual terms.

It is important to take advice from the outset as if TUPE does apply, subject to the exceptions, the buyer inherits all the rights and liabilities in relation to the transferring employees and is unlikely to have any protection from the seller for those liabilities.

Does this mean I have to employ all the employees?

Yes, if they are assigned to the business being acquired and have not objected to the transfer of their employment. Where only part of the business is being acquired it will be important to assess and take advice on which employees are assigned and likely to transfer particularly where there are central/head office functions.

Do I have to inform and consult affected employees/employee representatives?

Yes. A common misconception is that the duty to inform and consult does not apply in insolvency situations or that insolvency automatically qualifies as a ‘special circumstance’ giving a defence to non-compliance. Whilst the ‘special circumstance’ defence may apply, it is construed narrowly, and the buyer should wherever possible do as much as it can to ensure compliance.

Where there has been a failure to inform and consult a protective award of up to 13 weeks’ gross uncapped pay per affected employee can be made. Although liability for the failure is joint and several, in reality by the time any claims are brought and determined the buyer will inevitably be the only remaining entity and therefore solely liable for any awards made.

What information am I entitled to?

Sellers (even insolvent ones) have an obligation under TUPE to provide employee liability information at least 28 days prior to the transfer or as soon as reasonably practicable thereafter if special circumstances mean it is not reasonably practicable to do so. There are penalties for failing to do so but in insolvency cases the buyer will usually be required to waive the right to claim and moreover, if the seller is insolvent, there will be no company to claim against.

Whilst a buyer may find it difficult in an insolvency situation to obtain clear information about the employees and their terms of employment, because it is unlikely that any warranties or indemnities will be given, it is important to gather as much information and ask as many questions as possible prior to completion. The timescales often make it impossible for a buyer to be able to carry out a full assessment of the available due diligence and therefore the focus should be on the employee numbers and roles; the key terms of employment; and whether there have been any recent dismissals or litigation.

Can I change employees’ terms of employment?

Where there are ‘relevant insolvency proceedings’ there is scope under TUPE to make permitted variations in recognition of the fact that the employees’ terms may either be an unsustainable financial burden or that greater flexibility is required for the operation to survive (for example by changing hours of work). However, the rules are relatively strict, and specific advice should be taken before attempting to make any changes.

Whilst there are some relaxations to the usual TUPE rules in an insolvency situation, the trade-off is that transactions are invariably time critical, and the buyer will take on all the employment risks. It is therefore imperative that you assess the potential liabilities and adjust your offer accordingly. If you would like further advice on the employment aspects of acquiring an insolvent business, please contact Claire Hollins.