It's been quite a week for important cases on TUPE and its operation in relation to administrations. The Court of Appeal has delivered two judgments which are of considerable importance for those contemplating and structuring transactions out of administration.

The key points to note are that:

  • TUPE always applies to transactions out of administration which otherwise fall within its scope; and
  • an employee who is dismissed by administrators prior to a sale but when there was no particular transaction or purchase in existence or contemplation can argue that his or her dismissal was transfer connected and therefore potentially automatically unfair as well as being a liability for which the ultimate acquirer of the business is responsible.

On 14 December 2011, in Spaceright Europe Limited v Baillavoine and others, the Court of Appeal held that the dismissal of the chief executive officer on the same day as his employer went into administration was for a transfer-connected reason and was automatically unfair, even though the business and assets were sold a month later. Liability for the dismissal fell to the transferee acquirer of the business because the dismissal was transfer-related. The dismissal was automatically unfair and was not justified as being for an "economic, technical or organisational reason entailing changes to the workforce" because the administrators' evidence was rejected that the dismissal was decided upon because the company did not need a chief executive after the appointment of the administrators — the dismissal was found to have been effected in order to facilitate sale of the business. The important point of principle affirmed by the Court of Appeal is that a dismissal can be transfer related, and that therefore the dismissal potentially can be automatically unfair and liability for that dismissal pass to the acquirer, where the identity of the acquirer is not known (or even contemplated) when the dismissal was carried out. This decision unavoidably increases the risk that acquirers will end up liable for pre-transfer dismissals effected by administrators where it cannot be established that the dismissal truly relates to the conduct of the business rather than the facilitation of its sale.

On 20 December 2011, in Key 2 Law (Surrey) LLP v D'Antiquis and others, the Court of Appeal addressed the long running debate about whether TUPE does apply to transactions out of administration. This issue was the subject of competing decisions of the Employment Appeal Tribunal ("EAT"), the most recent of which was OTG Ltd v Barke and others where it was held that administrations (including pre-packs) always fall within the scope of TUPE and cannot fall within the scope of the exemption that applies to "bankruptcy ... or ... analogous insolvency proceedings which have been instituted with a view to the liquidation of the assets of the transferor". This contrasted with the earlier EAT decision in Oakland v Wellswood (Yorkshire) Ltd, where it was considered that whether a transaction out of administration fell outside the scope of TUPE depended on the "fact based" test of whether in reality the insolvency was instituted with a view to the liquidation of the transferor's assets. The Court of Appeal has decided that administrations always fall within the scope of TUPE, thereby removing any ability to evade its application based on the precise circumstances in which administration was decided upon.

Whilst these two Court of Appeal decisions will not assist those seeking to avoid or limit the exposure to potential liabilities which TUPE creates, at least they do (subject to any further appeals) bring some certainty to the legal position in relation to the two issues they address. Those considering acquisitions out of administration will need not only to appreciate that TUPE will still apply to such transactions but also that the possibility of those dismissed by administrators prior to the acquisition having claims against them needs to be carefully assessed in their commercial considerations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.