Whilst the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) operate to protect the employment rights of employees when there is a relevant transfer of a business or part of a business, Regulation 8(7) provides that where the transferor is the subject of bankruptcy proceedings or any analogous insolvency proceedings that have been instituted with a view to the liquidation of the assets of the transferor and are under the supervision of an insolvency practitioner, the transfer provisions of TUPE do not apply. In such circumstances, employees do not automatically transfer to the new owner and any dismissals are not automatically unfair.

In December 2011, the Court of Appeal ruled (Key2Law (Surrey) LLP v De’Antiquis) that this exception does not apply to administration proceedings under Schedule B1 of the Insolvency Act 1986 because they cannot be said to have been ‘instituted with a view to liquidation’ of the company’s assets. The primary statutory objective of an administrator when appointed is to preserve the company as a going concern, even though this may subsequently prove to be impossible. Accordingly, the Court held that a transfer of liabilities under TUPE will take place where a company is placed into administration and the business is subsequently transferred. The employment rights of employees are therefore protected when a company is sold following a ‘pre-pack’ administration.

This decision is in line with a recent ruling of the Court of Justice of the European Union (CJEU) on questions referred to it by the Dutch District Court (FNV and Others v Smallsteps BV). The CJEU ruled that Article 5 of the Acquired Rights Directive 2001/23, which TUPE implements into UK law, must be interpreted as meaning that the protection of workers is maintained in a situation where the transfer of an undertaking takes place following a declaration of insolvency by way of a pre-pack that was prepared before the declaration and put into effect immediately after it.

Until its insolvency, Estro Groep BV was the largest childcare company in the Netherlands, with almost 380 childcare centres and approximately 3,600 workers. When it became clear that it would not be in a position to meet its obligations without further financing, it entered negotiations with various potential lenders whilst at the same time working on a plan to restructure a significant part of the business following a pre-pack. In the event, an insolvency administrator was appointed and a declaration of insolvency was granted on the same day as a pre-pack was signed between the administrator and Smallsteps, a company set up by a sister company of Estro Groep’s principal shareholder, which allowed Smallsteps to purchase approximately 250 childcare centres. All those who had worked for Estro Groep were dismissed, but Smallsteps offered new contracts of employment to almost 2,600 of them.

Four of the employees not offered new employment contracts brought an action, with the support of their trade union, seeking a declaration that a Directive aimed at protecting the employment rights of workers in the event of the transfer of an undertaking must apply to a pre-pack such as the one that had taken place so that all the workers transferred automatically to the new company.

The CJEU found that the ultimate aim of administration, including pre-packs, is not the liquidation of the assets of the undertaking but its rescue. The employment rights of employees are therefore protected when all or part of the undertaking is transferred. Furthermore, the fact the a pre-pack procedure may also be aimed at maximising satisfaction of creditors’ claims does not make it a procedure instituted with a view to the liquidation of the assets of the transferor.