Under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE), certain liabilities pass to the Secretary of State in the event of a company going bust. In Pressure Coolers Ltd v Molloy and ors, the Employment Appeal Tribunal (EAT) said that the transferee was liable for an employee's basic award and notice pay following his unfair dismissal after a "pre-pack" TUPE transfer, not the Secretary of State.

Basic facts

Mr Molloy had worked for Maestro International Ltd (MIL) since 1989 and was one of three employees who were involved in manufacturing equipment. The other two were much younger and had only worked there since 2003.

It was clear by the end of 2008 that the company was in financial difficulties, and in early January it went into “pre-pack” administration so that Pressure Coolers Ltd (PCL) could acquire the business. The managing director of PCL decided there were too many manufacturing staff and based on the advice of MIL’s directors, he decided to make Mr Molloy redundant.

The sale of the business was completed by TUPE transfer on the morning of 13 January 2009 and Mr Molloy was told of his dismissal that afternoon. He received no prior notice that he was to be dismissed and was not given pay in lieu even though he was owed wages and accrued holiday.

He made claims against both companies for unfair dismissal, age discrimination, failure to consult under TUPE, unauthorised deductions from wages and a failure to give him notice pay or payment for his accrued but untaken holiday.

MIL did not respond to the claims but PCL argued that because the transferor’s assets had been liquidated (as opposed to selling the business as a going concern), TUPE did not apply (Regulation 8(7)).

Relevant law

Regulation 8(3) of TUPE states that, on the transfer of an insolvent business, certain liabilities which were incurred before the transfer pass to the Secretary of State rather than the transferor.

Section 184 of the Employment Rights Act (ERA) states that these liabilities include up to eight weeks’ arrears of pay, pay in lieu of notice, holiday pay and the basic award for unfair dismissal.

Tribunal decision

The Tribunal rejected the company’s arguments. It found that PCL had dismissed Mr Molloy after the TUPE transfer and that Regulation 8(7) did not apply following a “pre-pack” sale agreement by an administrator who intended to transfer the business as a going concern.

It concluded that the Secretary of State was only liable for the debts due before the date of the transfer under section 184 ERA and ordered PCL to pay Mr Molloy’s basic and compensatory award for unfairly dismissing him.

EAT decision

And the EAT agreed. It said that under article 5.2a of the European Acquired Rights Directive (on which TUPE is based) and the case of OTG Ltd v Barke and ors, it was clear that the only “contractual or other debts that shall not be transferred to the transferee are those which are “payable before the transfer” ".

As Mr Molloy was dismissed by PCL after the transfer, the liability to pay his basic award for unfair dismissal and his pay in lieu of notice could not have arisen before the transfer and it therefore fell to PCL to make those payments.

Comment

The critical fact in this case was that the dismissal occurred after the transfer had taken place and so was by the new employer rather than the administrator. This factual scenario meant that the Tribunal were able to conclude that the business had been transferred as a “going concern” and so not with a view to “the liquidation of assets”.

As such Regulation 8(7) did not apply. The EAT agreed with this conclusion. Whilst the 2006 TUPE Regulations sought to address some of the difficulties arising from insolvency and business transfers, this decision shows the boundaries of the so called “rescue culture”.