Thinking of buying or selling a distressed business?

In most cases when you buy a business you are also required to acquire the workforce of that business.  This is due to the provisions of the EC (Protection of Employees on Transfer of Undertakings) Regulations 2003, S.I. 131 of 2003 (“TUPE”).  In essence TUPE provides that where a business or undertaking is transferred, its employees are entitled to transfer to the Buyer of that business.  However in the case of distressed business sales TUPE does not always apply.  This article will briefly set out the application of TUPE to distressed business sales.  However before doing so it is important to consider the implications of TUPE.

What Are The Implications of TUPE?

TUPE provides that employees of the Seller, as at the date of the transfer, transfer to the Buyer on the same terms and conditions of employment, save for certain pension benefits, and with their continuity of employment intact.  All liabilities relating to the transferring employees also automatically transfer to the Buyer. Furthermore TUPE prohibits dismissing employees by reason of the transfer.

The consequences of the application of TUPE are always given serious consideration by a potential buyer of a business.  However the buyer of a distressed business should give the impact of TUPE even greater consideration because such a buyer is unlikely to get the usual suite of employee indemnities and warranties that would be given to a buyer in a normal commercial transaction.  Accordingly the buyer of a distressed business could be left in a situation where TUPE applies and he inherits not alone the workforce of the distressed business but also the liabilities (including historical liabilities) of that workforce with no recourse to the seller.

When Does TUPE Not Apply to Distressed Business Sales?

TUPE provides that it shall not apply to a transfer of a business where the seller is the subject of bankruptcy proceedings or insolvency proceedings.  Insolvency proceedings for the purpose of TUPE are “proceedings where the transferor may be wound up under section 213(e) of the [Companies] Act of 1963 ”.  Section 213(e) provides that a company may be wound up by the court if the company is unable to pay its debts.

Accordingly TUPE does not apply to the sale of the business where an official liquidator has been appointed by a Court to a the seller pursuant to s.213(e) of the 1963 Act i.e. a court ordered compulsory liquidation. However TUPE goes on to provide that if the sole or main reason for the institution of bankruptcy or insolvency proceedings in respect of a transferor (seller) is the evasion of an employer’s legal obligations under TUPE, TUPE shall apply to a sale of a business by such a seller.

When Does TUPE Apply to Distressed Business Sales?

TUPE does not specifically deal with the sale of a distressed business other than in the case of a compulsory liquidation or bankruptcy.  In Blayney v Vanguard Plastics Ireland Ltd ([2002] 13 E.L.R. 193) it was determined that TUPE applied where the company selling the business went into a voluntary liquidation by means of a creditors’ voluntary liquidation. Furthermore the High Court Mythen v The Employment Appeals Tribunal ([1990] E.L.R. 1) held that TUPE applies to the sale of a business by a receiver.  Finally based on the wording of TUPE and European case law on the issue there are strong arguments to be made that TUPE would apply to the sale of a business in examinership.

Are There Any Ways To Avoid the Application of TUPE?

Potential purchasers often ask if there is a means of circumventing the application of TUPE.  The application of TUPE will always depend on the facts of the proposed business sale as in some cases it does not apply irrespective of it being a distressed business sale.  If TUPE applies to a proposed business sale it provides that the parties cannot contract out its provisions.  TUPE provides that any provision in an agreement that purports to exclude or limit its application shall be void.  In order to deal with the implications of TUPE, in the normal course, a purchaser would be given warranties and indemnities in relation to the transferring employees.

TUPE may of course act as a deterrent to a potential purchaser of a distressed business because it is unlikely that he will receive the normal warranties and indemnities relating to the transferring employees.  However, it is open to such a purchaser to consider the ETO Defence.  As previously stated TUPE prohibits dismissing employees by reason of the transfer of the business alone.  However it does permit a dismissal for economic, technical or organisational reasons, which entail changes in the workforce (the “ETO Defence”).  It has been found that redundancy falls into the ETO Defence. Accordingly, a potential purchaser in determining whether to buy a distressed business may consider relying on the ETO Defence after the acquisition of the business.  In such circumstances the cost of redundancy is usually taken into account in the purchase price.  However, it is important to note that it has been determined by the Employment Appeals Tribunal that a seller could not make use of the ETO defence where the decision to dismiss employees was in the interests of selling the business rather than in the best interests of running the business after its acquisition.

Conclusion

In summary if a liquidator has been appointed to a company by reason of Section 213(e) of the Companies Act 1963 (a compulsory court liquidation) TUPE does not apply to the sale of the business of such a company, unless the sole or main reason for such a liquidation is to circumvent the application of the Regulations.  The same principles apply to bankruptcy.

For a more detailed overview of the issues raised in this article see Eimear Branigan’s article in the Irish Employment Law Journal The Transfer of Undertakings Regulations – Do they apply to Distressed Business Sales? (2011) 8(4) IELJ 100.

For further information on any of the issues raised in this article or employment law queries please contact Laura Graham, Senior Associate at lgraham@reddycharlton.ie