If a business is transferred from one owner to another, the new proprietor takes on a legal obligation to employ its staff on terms that are no less favourable than before – but what if the transfer is itself invalid under insolvency rules? The Employment Appeal Tribunal (EAT) considered that issue in a novel case.
The case concerned a professional firm which, pursuant to a sale agreement, was transferred by its sole proprietor (the seller) to one of its salaried partners (the buyer). After the firm subsequently ceased trading, the firm’s employees launched proceedings against the buyer seeking redundancy payments.
In upholding their claims, an Employment Tribunal (ET) found that, by operation of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE), the buyer was fixed with the full range of legal responsibilities to the firm’s 30 or so employees.
A few months prior to the sale, a bankruptcy petition had been issued against the seller. He was declared bankrupt soon after the transaction was completed. Under Section 284 of the Insolvency Act 1986, those under threat of bankruptcy are debarred from disposing of their property without the consent of, or subsequent ratification by, a court.
The ET accepted that the sale agreement was caught by that provision and, in the absence of judicial consent or ratification, the transaction was void. However, it went on to rule that TUPE continued to bite and that the employment contracts of the firm’s staff had transferred to the buyer.
In upholding the buyer’s challenge to that ruling, the EAT noted that the firm derived its revenue from selling the services of its employees. Although people could not be regarded as ‘property’, it made no logical sense to treat the firm and its staff as distinct economic entities.
The ET had given no adequate explanation of the legal basis of its decision that the employment contracts transferred to the buyer notwithstanding the invalidity of the sale contract. Given that the seller’s trustee in bankruptcy had subsequently taken possession of the firm’s assets, the ET’s ruling had saddled the buyer with all the legal liabilities arising under TUPE but with none of the possible benefits of having acquired the firm.
The EAT noted that all the affected employees had now received payments from the government’s Redundancy Fund equal to the sums that the ET had awarded them against the buyer. Issues in the case having thus been rendered somewhat academic, the matter was unlikely to proceed any further.