The law states that, in certain circumstance, the Secretary of State for Business, Innovation and Skills (BIS) may be liable for the debts of an employer who is insolvent. In Secretary of State for BIS v Dobrucki, however, the Employment Appeal Tribunal (EAT) held that in the event of a transfer in an insolvency situation, he was only liable for debts up until the date of the transfer.
Response FM carried out emergency maintenance cover work for businesses around the M25 until it ran into financial difficulty in 2011. The principal shareholder, William Sibley, tried to find a buyer for the business but after the bank reduced funding facilities, it went into administration on 14 June 2011. Two hours later it was sold to Mr Sibley but ceased trading on 17 June. It was not clear whether he was insolvent or bankrupt at that point.
Five employees made a number of claims against BIS, the administrators and Mr Sibley for arrears of pay owing to them; notice pay; outstanding holiday pay; and redundancy pay. The question arose as to whether the Secretary of State was liable to make the payments that were due until 14 June 2011 (when the company transferred under TUPE to Mr Sibley) or until 17 June when Mr Sibley’s business ceased trading.
Part XII of the Employment Rights Act 1996 (ERA) states that if an employer is insolvent, the employee’s employment has been terminated, and “on the appropriate date” the employee is owed money, the Secretary of State is liable to pay the employee certain sums under the National Insurance Fund. However, the situation becomes more complicated when a relevant TUPE transfer takes place.
Where the transferor is subject to relevant insolvency proceedings, Regulation 8(3) of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) applies even if the employee’s employment has not been terminated. This states that their employment will be deemed to have terminated for Part XII of the ERA at the time of the relevant TUPE transfer. It also provides that the transferor is treated as the employer.
The tribunal held that a relevant TUPE transfer took place after Response FM became insolvent with the individuals becoming employed by Mr Sibley. The tribunal decided that Mr Sibley was liable to pay the sums due, but went on to note that if Mr Sibley was insolvent, then the Secretary of State was liable under the National Insurance Fund not just for the arrears of pay outstanding at the date of transfer, but also for the sums which accrued between 14 and 17 June 2011 as a result of the wording in Regulation 8(3) TUPE.
The Secretary of State appealed on the basis that he was not liable to pay any debts which had accrued after 14 June.
Relying on the decision in the case of Pressure Coolers v Malloy and other relevant authorities, the EAT held that when a TUPE transfer happens in an insolvency situation, the sums to be paid by the National Insurance Fund are only those that applied at, or before, the date of the relevant transfer. The public policy behind freezing debts at that point was to minimise the burden on acquiring employers, thereby reducing the burden on them and encouraging a “rescue culture”.
As Regulation 8(3) TUPE does not have the effect of bringing forward in time the appropriate date in respect of liabilities that only arise when the employment has in fact been terminated, it followed that the Secretary of State could only be liable for the arrears of pay up and until 14 June 2011. BIS was ordered to provide calculations of the amounts due to each individual and the awards for notice pay and redundancy pay were set aside. If any sums were payable for those claims, the EAT decided that Mr Sibley was liable to make them, not BIS.
This case highlights that employees continue to lose out in certain circumstances where employers become insolvent and seek to pass on their obligations for outstanding sums owed to the National Insurance Fund.