Buying insolvent businesses: the key employment issues

Carillion has fallen over in spectacular fashion. Some fashion brands are teetering on the edge of insolvency after poor Christmas trading, exacerbated by the march of online competitors and the impact of Amazon’s cheaper (cheap, that is, until they have extinguished the competition) offerings, funded by its low business rate, out-of-town existence. Administration is often the outcome.

Astute buyers, blessed with cash in the bank, can often jump in and cherry-pick the best parts of a business in difficulty. That might be individual, standalone assets or parts of the business. Assets and businesses sold by insolvent companies often present good value. However, acquisitions always come with risks, particularly where employees are concerned.

The appointment of an insolvency practitioner will not automatically terminate contracts of employment. However, the insolvency practitioner will often dismiss some of the workforce on or shortly after appointment, to make the business more attractive to a potential buyer or more commercially viable. An administrative receiver has a 14-day window in which to decide whether to adopt contracts of employment.

The Transfer of Undertakings (Protection of Employment) Regulations 2006 ("TUPE") are likely to apply in relation to the sale of the business of an insolvent company, or part of that business. It will not usually apply to the sale of standalone assets or to share sales. This will be important as TUPE provides, amongst other things, for:

  • contracts of employment to transfer to the buyer without variation (save in relation to pensions);
  • all existing employee liabilities to transfer to the buyer;
  • protection for employees against dismissal connected with the transfer; and
  • the seller to inform, and possibly consult with, trade unions or elected employee representatives about the transfer.

Failure by the seller to comply with its obligation to provide statutory information to, and where relevant consult with, employee representatives can be expensive. Compensation can be awarded by an employment tribunal at a level that is just and equitable, up to 13 weeks’ gross pay per employee, and awards often start at the maximum level. It makes financial sense to focus attention on that aspect, as both seller and buyer will be jointly and severally liable in the event of a claim. Save in the most extreme circumstances, it is unlikely that the statutory defence that special circumstances exist, rendering informing and consulting not reasonably practicable, will be available – the defence is construed narrowly.

The position on pensions is important. On a TUPE transfer the potential downside for a buyer is limited. Most pension liabilities are left behind with the seller. The buyer must take on any contractual obligation to pay pension contributions into a personal pension scheme, but any pension rights arising from an occupational pension scheme will not transfer, subject to one important caveat: some such rights may transfer if the employee has the right to receive a pension on redundancy or early retirement. Post-transfer the buyer need only pay at the level of pre-transfer contributions or contribute up to 6% of basic salary (the level being determined by the employee) on a matching basis: the choice is the buyer’s.

It is extremely unusual to obtain an indemnity from the insolvency practitioner with regard to any employee claims, therefore, the purchase price should reflect such risk. Generally the terms of the insolvency sale agreement will be in favour of the seller. Even the least contentious standard provisions will often not be drafted on a reciprocal basis. It is very much buyer beware and the insolvency practitioner will not give the warranties which a solvent seller would. In fact a big part of the agreement will be excluding the insolvency practitioner's personal liability!

Buyers should be prepared to carry out an extensive, but accelerated, due diligence exercise. Due to the lack of warranties which are likely to be offered by the insolvency practitioner, due diligence will be all the more important. The due diligence team (financial/tax advisers, lawyers, HR, industry specialists etc.) should be put in place as soon as possible. The onus is very much on the buyer to gather as much information as possible in order to expand on the often limited marketing information given by the insolvency practitioner. Employment due diligence is particularly important.

Whilst Carillion’s collapse understandably causes concern over the future of hundreds of major projects and thousands of jobs in the UK, both within the company itself and its multitude of sub-contractors and suppliers, it may also provide opportunities for construction and outsourcing firms to pick up valuable parts of its business.

Fashion brands that are in administration may have attractive parts to their businesses that nimble competitors may be able to pick up and integrate into their existing businesses, to the advantage of buyer, employees and creditors alike. An astute buyer will undertake comprehensive due diligence and negotiate the price with reference to the often unknown risks being taken on.

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.