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Buying a business out of insolvency - employee liabilities and TUPE

Q: I want to buy a business that’s about to go bust. Do I have to pay the claims of its employees?

A: It depends on:

  • what you buy (assets alone or a business);
  • the type of insolvency procedure (was it “instituted with a view to the liquidation of the assets of the transferor”?).

The Transfer of Undertakings (Protection of Employees) Regulations 2006 (TUPE) generally mean that:

  • employment obligations move to the purchaser when a business is transferred; and
  • rights and obligations relating to employees who were dismissed in connection with the transfer are also transferred to the purchaser (unless the dismissal was for an economic, technical or organisational reason).

However, in an insolvency “instituted with a view to the liquidation of the assets of the transferor” these obligations do not automatically transfer to the purchaser.

A challenge is that most businesses are transferred using administration and the obligations probably do then transfer to the purchaser.

Other pitfalls are that even if you purport to buy assets alone and there are elements of business continuation (intellectual property transfer, some employees rehired, same product/customers etc), the Employment Tribunal may find that it was a business transfer.

Liquidation may not help business continuity, but it can help avoid employment liabilities for a purchaser.

Two conclusions:

  • be prepared to factor the cost of employment liabilities into your price calculation; and
  • make sure there’s an experienced insolvency adviser on your team early.

 

 

 

Date: 12th September, 2008
Author: Chris Laughton

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