Caveat Emptor- a reminder to purchasers in administration sales
Jeffrey Green Russell acted for the successful respondent, Bruno Baillavoine in the recent Employment Appeal Tribunal ("EAT") case of Spaceright Europe Limited -v- Baillavoine and Others (UKEAT/0339/10). The case not only affirms the EAT's earlier decision in Harrison Bowden Limited -v- Bowden [1994] ICR 186 over that in Ibex Trading Co Limited (In Administration) -v- Walton and Others [1995] IRLR 499, but also serves as a reminder of the liabilities that potential purchasers in administration sales can unwittingly assume. To read the full judgment, click here [http://www.bailii.org/uk/cases/UKEAT/2011/0339_10_0102.html].
Background
On 1 February 2011, the EAT held that the dismissal of the Chief Executive of a company and its subsidiary in administration by its administrators, prior to the sale of the business and assets of the group as a going concern was automatically unfair under regulation 7 of the Transfer of Undertakings (Protection of Employment) Regulations 2006 ("TUPE"), since Mr Baillavoine was dismissed to enable the purchaser to acquire the business and assets of the group without the continued employment of its Chief Executive. The EAT confirmed that a dismissal could be related to the transfer even where the administrators may not have identified a particular purchaser (transferee) at the time of the employee's dismissal.
In reaching its conclusion, the Tribunal had followed the EAT's earlier decision in Harrison Bowden Limited -v- Bowden [1994] ICR 186 over that in Ibex Trading Co Limited (In Administration) -v- Walton and Others [1995] IRLR 499. This line of authority was confirmed as correct by the EAT in its decision on 1 February 2011, which is in line with other more recent EAT decisions on this issue.
Practical points
Employees are of course only one of a number of considerations that investors considering purchasing businesses in administration as a going concern must bear in mind, but nevertheless, they are an important one. The only way in which a buyer can commercially protect itself from liability for unfair dismissal or for statutory redundancy payments of employees is by obtaining an appropriate indemnity from the insolvent company acting by the insolvency practitioner. As this recent EAT case has shown, an agreement that the insolvency practitioner will obtain the dismissal of employees before the sale of a business and assets does not shift liability.
In practice, an insolvency practitioner will rarely agree to the insolvent company providing such an indemnity. Instead, they will usually insist on the buyer providing an indemnity in favour of the insolvent seller and himself in respect of any claims made later by employees against either the insolvent seller and/or the insolvency practitioner. In exchange, the the purchaser would expect the purchase price to reflect the likely level of liabilities to be assumed by the buyer in respect of the employees. As an alternative, it may be possible to agree with the insolvency practitioner the likely level of liability that the buyer will assume on dismissal of those employees and retain an equivalent amount of money from the purchase price pending the dismissal of the employees and the settlement of claims brought by them.
To discuss any TUPE issues you may have, please contact John O'Connell or Sarah Ingram on 0207 339 7000. If you are interested in advice on insolvency and administration, please contact Tony Bown or Justin Stephenson on 0207 339 7000.
