Employment Rights – Transfer of an Undertaking

Part 6 – The position of insolvent businesses

To assist the rescue of failing businesses, the Regulations make special provision where the transferor employer is subject to insolvency proceedings.

First, the Regulations ensure that some of the transferor’s pre–existing debts to the employees do not pass to the new employer. Those debts concern any obligations to pay the employees statutory redundancy pay or sums representing various debts to them, such as arrears of pay, payment in lieu of notice, holiday pay or a basic award of compensation for unfair dismissal. effect, payment of statutory redundancy pay and the other debts will be met by the Secretary of State through the National Insurance Fund. However, any debts over and above those that can be met in this way will pass across to the new employer.

Second, the Regulations provide greater scope in insolvency situations for the new employer to vary terms and conditions after the transfer takes place. As was discussed in Part 3, the Regulations place significant restrictions on new employers when varying contracts because of the transfer or a reason connected with the transfer. These restrictions are in effect waived, allowing the transferor, the new employer or the insolvency practitioner in the exceptional situation of insolvency to reduce pay and establish other inferior terms and conditions after the transfer. However, in their place, the Regulations impose other conditions on the new employer when varying contracts:

• the transferor, new employer or insolvency practitioner must agree the "permitted variation" with representatives of the employees. Those representatives are determined in much the same way as the representatives who should be consulted in advance of relevant transfers (see Part 5 for more details);
• the representatives must be union representatives where an independent trade union is recognised for collective bargaining purposes by the employer in respect of any of the affected employees. Those union representatives and the transferor, new employer or insolvency practitioner are then free to agree variations to contracts, though the speed of their negotiations may be faster than usual in view of pressing circumstances associated with insolvency;
• in other cases, non–union representatives are empowered to agree permitted variations with the transferor, new employer or insolvency practitioner. However, where agreements are reached by non–union representatives, two other requirements must be met. First, the agreement which records the permitted variation must be in writing and signed by each of the non–union representatives (or by an authorised person on a representative’s behalf where it is not reasonably ¹² practicable for that representative to sign). Second, before the agreement is signed, the employer must provide all the affected employees with a copy of the agreement and any guidance which the employees would reasonably need in order to understand it;
• the new terms and conditions agreed in a "permitted variation" must not breach other statutory entitlements. For example, any agreed pay rates must not be set below the national minimum wage; and
• a "permitted variation" must be made with the intention of safeguarding employment opportunities by ensuring the survival of the undertaking or business or part of the undertaking or business. ¹³

Q. What types of insolvency proceedings are covered by these aspects of the Regulations?

A. These provisions are found in Regulations 8 and 9. Those two Regulations apply where the transferor is subject to "relevant insolvency proceedings" which are insolvency proceedings commenced in relation to him but not with a view to the liquidation of his assets. The Regulations do not attempt to list all these different types of procedures individually. It is the Department’s view that "relevant insolvency proceedings" mean any collective insolvency proceedings in which the whole or part of the business or undertaking is transferred to another entity as a going concern. That is to say, it covers an insolvency proceeding in which all creditors of the debtor may participate, and in relation to which the insolvency office–holder owes a duty to all creditors. The Department considers that "relevant insolvency proceedings" does not cover winding–up by either creditors or members where there is no such transfer.