Appeal No. UKEAT/0119/07/DM

EMPLOYMENT APPEAL TRIBUNAL
58 VICTORIA EMBANKMENT, LONDON EC4Y 0DS

	At the Tribunal
	On 18 June 2007
Judgment handed down on 27 June 2007

Before
THE HONOURABLE MR JUSTICE ELIAS (PRESIDENT)
(SITTING ALONE)

SECRETARY OF STATE FOR TRADE & INDUSTRY	APPELLANT

MR M A SLATER & OTHERS	FIRST RESPONDENTS

CFG NATIONWIDE SITE SERVICES LTD	SECOND RESPONDENT

Transcript of Proceedings

JUDGMENT

	APPEARANCES

For the Appellant	Ms SARAH MOORE
(of Counsel)
Instructed by:
The Treasury Solicitor,
Litigation & Employment Group – 4A,
One Kemble Street,
LONDON,
WC2B 4TS.	
The First Respondents

For the Second Respondent

	Neither present nor represented

Mr PAUL CADNEY
(of Counsel)
Instructed by:
Messrs Langley Wellington,
Solicitors,
Royal House,
60 Bruton Way,
GLOUCESTER,
GL1 1EP.

SUMMARY
Insolvency
Transfer of Undertakings - Transfer

Transfer of a business under TUPE 2006.  Did regulation 8 apply so as to make the Secretary of State liable for certain debts to employees?  The EAT held not, upholding the appeal.  Certain observations as to the construction of regulation 8.

  

THE HONOURABLE MR JUSTICE ELIAS (PRESIDENT)

1.	This appeal raises a question concerning the application of the new regulation 8 of the TUPE Regulations 2006 which came into force with respect to transfers taking place on or after 6 April 2006.  

2.	The background can be briefly summarised.   There are 20 claimants who were formerly employees of a company known as CFG Site Services Limited. In July 2006 the directors appreciated that the company was insolvent. On 25 July the directors decided that it should be put into voluntary liquidation. Since the company was insolvent, this had to be a creditors’ voluntary winding up. This is achieved by first calling a meeting of the members who must resolve to wind up the company because it is insolvent, followed by a meeting of the creditors.  The creditors’ meeting must be called within 14 days of the meeting of members (s98 of the Insolvency Act 1986).   The liquidator is then appointed.  

3.	Pending those meetings being summoned, a firm of accountants, Deloittes, were appointed by the directors at their meeting on the 25 July to assist the company in preparing for the winding up.

4.	On the following day, 26 July, Mr Ramsbottom of Deloittes attended the premises and gave notice of redundancy to all the staff. Valuers were appointed to value the stock.  The second respondents, CFG Nationwide Site Services Ltd – a company formed by a number of the directors of CFG Site Services – shortly thereafter purchased the business for a total of £60,000. Apparently they thought they were only purchasing the assets and did not understand that they were purchasing the goodwill.  However, the Tribunal rejected that analysis.   The Tribunal’s conclusion was that “the business was sold by the liquidator on behalf of CFG (the transferor) as a going concern.  The transaction occurred on 27 July 2006.” 

5.	The company was not formally put into voluntary liquidation until the statutory meeting of the members took place. This was on the 16 August.  As I have said it was followed by a meeting of the creditors on the same day at which Mr Ramsbottom and Mr Wong were appointed as liquidators.

6.	The claimants sought various payments from CFG Nationwide, the transferee, on the basis that they had acquired certain liabilities following the transfer.  I am told that the only outstanding claims from these claimants were for back pay and holiday pay.  They had been given employment by the transferees and considered that their contracts had continued without dismissal so that they were not entitled to redundancy pay or pay in lieu of notice. 

7.	 The transferees, CFG Nationwide, contended that they were not liable to make those payments by virtue of regulation 8.   It is common ground in the circumstances of this case that if they are right then since the transferors were insolvent, liability rested with the Secretary of State to make payments out of the insolvency fund.

8.	 The Tribunal accepted that regulation 8 relieved the transferees of liability and the Secretary of State now appeals that ruling.

The relevant law.
Regulation 8
9.	Regulation 8 provides:
“(1)	  If at the time of a relevant transfer the transferor is subject to relevant insolvency proceedings paragraphs (2) to (6) will apply.
(2)	In the regulation “relevant employee means an employee of the transferor –
(a)	whose contract of employment transfers to the transferee by virtue of the operation of these Regulations; or
(b)	whose employment with the transferor is terminated before the time of the relevant transfer in the circumstances described in regulation 7(1).
(3)	The relevant statutory scheme specified in paragraph (4)(b) (including that sub-paragraph as applied by paragraph 5 of Schedule 1) shall apply in the case of a relevant employee irrespective of the fact that the qualifying requirement that the employee’s employment has been terminated is not met and for those purposes the date of the transfer shall be treated as the date of the termination and the transferor shall be treated as the employer.
(4)	In this regulation the “relevant statutory schemes” are –
(a)	Chapter VI of the Part XI of the 1996 Act;
(b)	Part XII of the 1996 Act.
(5)	Regulation 4 shall not operate to transfer liability for the sums payable to the relevant employee under the relevant statutory schemes.
(6)	In this regulation “relevant insolvency proceedings” means insolvency proceedings which have been opened in relation to the transferor not with a view to the liquidation of the assets of the transferor and which are under the supervision of an insolvency practitioner.
(7)	Regulations 4 and 7 do not apply to any relevant transfer where the transferor is the subject to 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.”

10.	Regulation 9 allows the transferor and transferee in certain defined circumstances to effect variations of contracts of employment which would, absent the insolvency, fall foul of TUPE.  TUPE 2006 implements Council Directive 2001/23/EC, and regulations 8 and 9 are designed to give effect to Article 5 of that Directive.
 
11.	It will be noted that regulation 8 envisages the operation of two different sets of rules, depending upon whether regulation 8(6) or 8(7) is the applicable insolvency procedure.  Which set of rules applies is determined by focusing on the purpose of the insolvency proceedings, and whether it is made with a view to liquidating the assets or not with a view to liquidating the assets.  However, in both cases the provisions only apply where the proceedings have been commenced and are under the supervision of an insolvency practitioner.  The definition of insolvency practitioner is contained in s. 388 of the Insolvency Act and is as follows: 
“Meaning of “act as insolvency practitioner”
388 – (1) A person acts as an insolvency practitioner in relation to a company by acting –
(a) as its liquidator, provisional liquidator, administrator or administrative receiver….

12.	The relevant statutory scheme directly material to this case is Part XII of the 1996 Act which, so far as is relevant is as follows: 
“182 Employee’s rights on insolvency of employer

If, on an application made to him in writing by an employee, the Secretary of State is satisfied that –
(a) 		the employee’s employer has become insolvent.
(b)		the employee’s employment has been terminated, and
(c)		on the appropriate date the employee was entitled to be paid the whole or part of any debt to which this Part applies,
the Secretary of State shall, subject to section 186, pay the employee out of the National Insurance Fund the amount to which, in the opinion of the Secretary of State, the employee is entitled in respect of the debt.

183 Insolvency
(1) An employer has become insolvent for the purposes of this Part –
(a)		where the employer is a company, if (but only if) subsection (3) is satisfied, ….
(3) This subsection is satisfied in the case of an employer which is a company –
(a) if a winding up order … has been made, or a resolution for voluntary winding up has been passed, with respect to the company,”

Section 184 then defines the categories of payment which shall be made.  They include the holiday and back pay claimed here.  Although there are limits to the amounts that may be recovered under this scheme, they are not exceeded here.

The rationale behind Regulation 8
13.	The scheme of the TUPE Regulation broadly is this.  Typically where there is a transfer of an undertaking, regulation 4 provides that the employees are automatically transferred to the transferee with the latter taking over all the liabilities of the transferor.  

14.	Regulation 7 provides that any dismissal will be automatically unfair unless it is for an economic, technical or organisational reason connected with the transfer.  However, it is recognised that to apply these principles to insolvent businesses would discourage potential purchasers of the business from acquiring the business.  That would be to the detriment of the employees.

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 TUPE is created by regulation 8(7) (which is intended to reflect the provisions of Article 5.1 of the Directive). This provides that where the 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 (although other provisions of TUPE, such as the information and consultation regulations, continue to operate).

17.	A narrower exception is carved out where regulation 8(6) applies. This applies to  insolvency proceedings where the purpose is not with a view to liquidation of assets. This does not altogether exclude, but it does modify, the effects of regulations 4 and 7.   It means that the transferee does not pick up all of the liabilities which would otherwise transfer to him.

18.	Regulation 8(3) has the effect of making the Secretary of State liable for the obligations still outstanding at the date of transfer which are caught by part XII of the 1996 Act.  There is a deemed dismissal at that stage for purposes of fixing those liabilities even although there has been no actual dismissal.  However, to the extent that the liabilities exceed the statutory limits, liability transfers to the transferee.  

19.	Regulation 8(5) has the effect of making the insolvency fund rather than the transferee liable to meet any redundancy liabilities. (These will typically arise where there are dismissals for redundancy which are not for economic, technical or organisational reasons.  The issue does not arise here.)

20.	In this case the Tribunal had to determine two issues.  First, it was contended by the transferee that the nature of the insolvency proceedings in play here fell under regulation 8(6). That was disputed by the Secretary of State.  He did not, however, before the Employment Tribunal accept that if it was not applicable then regulation 8(7) was, although that is conceded before me.   

21.	The second issue was whether the proceedings had been instituted before the transfer took effect. The Secretary of State submitted that the insolvency proceedings did not commence until the formal resolution was passed in August whereas the claimants contended that it was when the directors took preparatory steps to wind up the company on 25 July.

22.	 The Tribunal concluded that regulation 8(6) was applicable and that these proceedings had been opened on the 25 July when the director’s had resolved to call the shareholders’ meeting.  The Secretary of State seeks to challenge both conclusions.

Regulation 8(6) or 8(7)?
23.	In the skeleton arguments before me there was much debate as to whether the particular insolvency in this case in principle fell within regulation 8(6) or regulation 8(7).  Bizarrely, the transferees were contending that it fell within 8(6) and the Secretary of State was asserting that, subject to the point of timing, which I consider below, it was within 8(7). The transferee contended that the purpose of the creditors’ voluntary winding may in some circumstances, and was in this case, to effect a transfer of the business, whereas the Secretary of State submitted that the purpose of that procedure is always to liquidate the assets, even if in fact that may in any particular case be achieved by a sale of the business. In fact, transferees are more fully protected if the situation falls under regulation 8(7) than if it falls under 8(6).
 
24.	Accordingly, once the Secretary of State had conceded that in any event regulation 8(7) applied, Mr Cadney, counsel for the transferee, accepted that there was no live issue as to whether regulations 8(6) or 8(7) was the appropriate provision.  I was asked by the Secretary of State to decide this question in any event.   Although I see considerable force in the Secretary of State’s arguments, I decline to do so.   I have not heard argument on both sides, and in any event I suspect that the European authorities may need to be more fully explored than they were before me.

When did the insolvency proceedings commence?
25.	The question which was considered to be live before me was when the insolvency proceedings commenced.  As we have seen, whether it be regulation 8(6) or 8(7) which applies, the transfer must take place after that date.   Under regulation 8(6) the insolvency proceedings must have been “opened” in relation to the transferor prior to the transfer.   The same result is achieved by a different route with respect to regulation 8(7). The bankruptcy proceedings or any analogous insolvency proceedings must have been “instituted” prior to the transfer.

26.	In this case the transferee contends that the proceedings were instituted or opened at the time the transfer took place even if that did in fact take place, as the Tribunal found, on 27 July. The argument is that the proceedings must be deemed to be instituted when the first step is taken to give effect to them. In this case it is said to be when the directors appointed Deloittes pending the formal meetings of the shareholders and creditors. It is submitted that it would  frustrate the purposes of these provisions if the transfer had to occur after the formal institution of proceedings took place.

27.	The Secretary of State contends that in order to determine whether the relevant insolvency proceedings have been commenced, one has to identify the particular proceeding and then determine, in accordance with the statutory provisions relating to that particular proceeding, whether it has commenced or not. The contention is that the concept of when the proceedings begin has to be the same under TUPE as it is in the legislation defining the relevant statutory proceedings. There is no basis in law for fixing a different starting point for TUPE purposes than for any other purposes.

28.	In my judgment that must be right. There would be considerable uncertainty otherwise as to when the proceedings began. Is it when the directors’ meeting to consider the position of the company is called? Or when, as in this case, the directors decide to call a shareholders’ meeting? If some different time were intended then I would have expected the regulations to spell that out.  Moreover, I suspect that the practical problems identified by Mr Cadney will rarely arise; any sale pending the appointment of a liquidator can be provisional and conditional upon that appointment and the subsequent agreement of the liquidator.  

29.	In this case the liquidation of the company occurred as a consequence of the creditors’ voluntary liquidation.  Ms Moore, counsel for the Secretary of State submits that the proceedings did not commence until the resolution of the members.  That may be right, or arguably it is not until the creditors’ meeting. I have not heard particular argument about that, but nothing turns on it in this case since on any view, it was after the transfer.
 
Were the proceedings under the supervision of an insolvency practitioner?
30.	During the course of the hearing the court raised the question whether at the time of the sale, the proceedings were under the supervision of the insolvency practitioner, a requirement for both regulations 8(6) and 8(7) to apply.  It appears to have been assumed before the Employment Tribunal that Mr Ramsbottom of Deloittes was, from the moment when he was initially asked to assist the company, an insolvency practitioner within the meaning of the Regulations.

31.	I heard written submissions on that point and both parties accepted that this assumption was wrong. The definition of insolvency practitioner, set out above, makes it plain that it was not until he was appointed liquidator that he could be so described.  He was of course qualified to act as an insolvency practitioner, but he was not acting in that capacity with respect to the transferor.

32.	Accordingly, the transferee accepts that on this ground alone, his principal contention must fail.  Assuming that the transfer was effected on the 27 July, as the Tribunal found, this was on any view before the proceedings were under the supervision of the insolvency practitioner.

Reopening the issue of the date of transfer.
33.	However, Mr Cadney had a final submission which was not, however, raised in the respondent’s answer or by way of cross appeal. He contends that there is some evidence to suggest that the agreement in this case was always conditional on the creditor’s agreement.  He identified a reference in the report to the creditors that the “funds were being held…to the liquidator’s order pending approval by the creditors”. Mr Cadney frankly admitted that this was not a point argued before the Tribunal.
  
34.	There are exceptionally circumstances where a party on appeal can run an argument before this Tribunal not argued below: see the valuable analysis by HH Judge McMullen in Secretary of State for Health v Rance and others UKEAT/0060/06, para 50.    I am satisfied that this is not one of them.  It would involve a reconsideration by the Employment Tribunal of the facts.  The document on which Mr Cadney relies is far from decisive; it merely shows that funds are being held, not that any contract was provisional.    

Conclusion.
35.	It follows that this appeal succeeds.  There were no insolvency proceedings in place when the business was transferred, and even if there were, they were not under the supervision of an insolvency practitioner. Accordingly, liability for the debts of these claimants does not lie with the Secretary of State.