Hiving down by insolvency practitioners in order to avoid employees liabilities will not work

Re. Maxwell Fleet and Facilities Management Limited (No 2) - 20th January 2000

In this case, there was an application to determine an issue arising in connection with Regulation 4 of the Transfer of Undertakings (Protection of Employment) Regulations 1981 (“TUPE”). TUPE is designed to protect employees by providing that where an undertaking is transferred from A to B, the contracts of the employees who are employed “immediately before the transfer” are also automatically transferred with it. The administrators tried to circumvent the effects of TUPE using a hive-down scheme. The issue was whether a sale by administrators of the assets and business of a company, “A”, to another company, “B”, via a third company which was created purely for this purpose, transferred from A to B the liabilities under the contracts of employment of certain employees. The judge held, not surprisingly, that the scheme did not work and that the employee liabilities went across to B.

This case is further evidence that the courts will adopt a purposive approach to TUPE cases to give effect to the purpose of the regulations, namely the protection of employees. Exploiting technical loopholes in the regulations to the detriment of employees is unlikely to work.

TUPE must, before July 2001, be amended to bring it into line with a new Acquired Rights Directive. Since the New Directive proposes that debts and obligations of the transferor will not pass to the purchaser of a business in an “insolvency context” (although that term is not defined), it may be that this will alleviate the requirements to consider complex and ultimately unsuccessful schemes to deal with employee liabilities whilst at the same time saving a business.

Facts

Maxwell Fleet and Facilities Management Limited (“MM”) ran a fleet of vehicles and a parcel distribution service. Joint administrators were appointed in February 1992. The administrators dismissed all but twelve of the employees of MM, and the case concerned these remaining employees.

A provisional, management buy-out for MM was agreed. This was effected on 9th April 1992, as follows.

- The two subscriber shares in an off-the-shelf company were transferred one to each administrator.

- The administrators terminated the employment of MM’s remaining employees.

- Immediately after terminating the contracts of employment, the business and assets of MM were transferred to the shelf company.

- Following this, the business and assets were bought by Fleet Distribution and Management Limited (“FD”).

The purpose of this scheme was admitted to be to seek to avoid the transfer of the employees’ contracts to FD under TUPE. Thus, the intention was for FD to take over the business of MM as a going concern without taking on the employees.

Both MM and FD agreed that the transactions amounted to a relevant transfer under Regulation 3 of TUPE and that the employees were unfairly dismissed (under Regulation 8(1)), but FD did not agree that it thereby assumed the employment liabilities. FD tried to rely on Regulation 4 of TUPE to avoid these employee liabilities.

Regulation 4 allows the transfer by an insolvency practitioner of all or part of a company’s undertaking to a wholly-owned subsidiary in order to protect the viable parts of the company, deeming the transfer, for the purposes of TUPE, not to be effective until immediately before the subsidiary or the transferred assets themselves are sold on to a third party. Unlike the other regulations of TUPE, Regulation 4 does not have its origins in the European Directive, but was introduced by the UK government to facilitate insolvency work. FD used this fact to argue that, while other provisions of TUPE had to be interpreted in a purposive manner in accordance with the Directive, Regulation 4 was not envisaged in the Directive itself and so no such purposive approach was possible. As such, this purposive approach to the other parts of TUPE and, in particular, Regulations 3 and 5, should not be extended to Regulation 4 which should be seen instead as a separate code within the Regulations. Thus, Regulation 4 should have its literal, everyday meaning, and therefore the transfer from MM to the subsidiary should be deemed not to have been effective until immediately before the transfer from the shelf company to FD. By this stage, there were no employees in MM as they had already been dismissed by the administrators. Therefore, no rights of former employees could be transferred under Regulation 5 to the shelf company or FD, as they were not employed “immediately before the transfer”.

David Mackie QC (sitting as a deputy High Court judge) held that the transaction on 9th April 1992 was not an orthodox hive-down at all. The viable parts of MM’s business were not segregated from the remainder (ie by being placed in the shelf company vehicle) by the administrator in order to place them in a position where they might have continued to be profitable or be sold. The administrators used the shelf company intermediary solely to try to achieve the transfer of the business to FD without the employees’ liabilities - “In substance it was a single transfer and I have no hesitation in finding.....that [Regulation 4].....should be construed to defeat an ingenious device, designed to deprive employees of protection which would otherwise be available to them”. Regulation 4 fulfils the purpose of the Directive while allowing hive-downs in an insolvency situation. Where such a hive-down occurs, the “relevant transfer” is postponed (not cancelled), so that the objective of the Directive of passing responsibility for the employee liabilities to the ultimate transferee is met.

Further, the judge held that Regulation 4 should not be construed differently from the rest of TUPE just because it does not originate from the Directive - ie just because a particular regulation does not directly give effect to the Directive is not a reason for construing it in a different manner. Further, just because European Court of Justice cases have shown that judicial insolvencies of a terminal kind may be outside the Directive does not mean that Regulation 4 should be construed differently from the rest of TUPE. Therefore, Regulation 4 should be approached in the same way as the other Regulations, and the purpose of the Directive should be adhered to.

For further information, please contact Rita Lowe on Tel: 0207 367 2798 or e-mail: [email protected]