The Employment Appeal Tribunal (EAT) has held in Noble v Box and ors that the tribunal was wrong to conclude that an agreement could be severed in such a way that the employees, but not the other assets of an economic entity, were able to transfer under the Transfer of Undertakings (Employment Protection) Regulations 2006 (TUPE).
Mr Stott, the sole owner of a firm of solicitors named Ingrams, was struck off the roll of solicitors on 28 October 2016 by the Solicitors Regulation Authority (SRA) after findings of dishonesty were proven against him.
The SRA then authorised Ms Noble, a salaried partner at the firm, to run the practice until it was sold. As a result of the negotiations dragging on, the SRA instructed Mr Stott to get rid of his interest by 4pm on 8 December 2016. At that point, Ms Noble agreed to buy the business.
She did not, however, pay for it out of her own pocket but from the practice’s bank account, from which she continued to draw a salary and which remained under Mr Stott’s control. The employees continued to work, being paid from the same bank account, although it was never transferred to Ms Noble.
Mr Stott was made bankrupt on 25 April 2017, following the presentation of a bankruptcy petition against him in July 2016. This meant that the December 2016 agreement between him and Ms Noble was subject to section 284 of the Insolvency Act which states that “any disposition of property” by a bankrupt during the time to which it applies is void unless a court has agreed to it. In this case, no court had agreed.
A number of employees argued that their contracts had transferred over to the new firm by operation of the TUPE regulations. Ms Noble argued that as the agreement with Mr Stott had not been made with the consent of the court or ratified by it, it was void. It followed that if the transfer of the economic entity was void, nothing could be said to have transferred over to her.
Noting that the transfer of the workforce as an economic entity was not dependent on a transfer of property, the tribunal rejected Ms Noble’s argument that the agreement as a whole could not be severed.
Unless she was proposing the concept of a “vanishing transfer” (which the tribunal rejected), there seemed to be no other way to account for the continued employment of the firm’s employees for four and a half months before the bankruptcy and for a further three months beyond that.
It therefore concluded that, as the employment contracts were separate from and not in any way tainted by the voidability of the property elements of the sale agreement, the employees’ contracts had transferred over under TUPE.
Upholding the appeal, the EAT held that it was impossible to understand the proper legal basis on which the tribunal could conclude that the employment contracts could be severed from the other assets of Ingrams. How, it wanted to know, could they have transferred permanently to Ms Noble, given that the funds from which the salaries were paid were the property of Mr Stott, and the work which the employees did and the revenues that they generated, also reverted to him (or his trustee in bankruptcy).
It was therefore “to stand logic on its head to argue that, as a void contract, the sale of the undertaking - the law firm - must be regarded, as a matter of law, as though it ha[d] never taken place, but that the transfer of all contracts of employment between the firm and its employees are capable of subsisting independently as an economic entity.”