UK: TUPE Law: Insolvency, TUPE And Managing Employment Risks

This ThinkHouse TUPE Club Q&A deals with our Top 10 questions on:

  • the key employment issues in Administrations and Liquidations; and
  • how TUPE applies when there is an insolvency situation.

Q1. What is the effect of insolvency on contracts of employment?

There are various types of insolvency proceedings and these are designed to achieve various different end results. The different types of insolvency also have different consequences for the entity and employees.


There is no immediate effect on the employees. The Administrator is an agent of the company, so the identity of the employer has not changed and the contracts of employment just continue. They are not automatically terminated.

Where the Administrator retains the employees, after 14 days the Administrator will be deemed to have automatically "adopted" their contracts of employment on their existing terms and conditions (unless the contracts are re-negotiated and this is not a sham).

If the contracts are "adopted" by the Administrator, the contract of employment simply continues with the company but 'adoption' is important because it determines how employees' claims are ranked against other debts of the insolvent company.

Once an Administrator adopts the employment contracts, certain "qualifying liabilities" incurred after the adoption of the contract have "super priority". Super priority means that certain qualifying liabilities will be paid in priority to:

  • outstanding claims for the Administrators' fees and expenses; and
  • floating charges and unsecured creditors.

The "qualifying liabilities" are restricted to payments of debts or liabilities arising out of the employment contract and are limited to wages and salary (for the period after appointment) and include holiday pay, sick pay, pay in lieu of holiday and pension contributions. However, not all payments count as qualifying liabilities, for example, a statutory redundancy payment, payment in lieu of notice, a protective award and damages for wrongful dismissal.

Compulsory Liquidation

The employees' contracts of employment automatically terminate on the appointment of the liquidator/court receiver because the identity of the employer is deemed to have changed.

However, eligible employees are entitled to eight weeks' pay and pay in lieu of untaken holiday, a statutory redundancy payment and potentially a protective award for failure to collectively inform and consult for redundancy.

Q2. What protection do employees have?

The majority of debts owed to employees are unsecured and rank second to last in the order of priority set out in the Insolvency Act on a realisation of assets.

Employees whose unsecured claims are accepted by the insolvency practitioner will be entitled to a share of the funds available to the insolvent company's creditors that is proportionate to the amount of their claim. In practice, unsecured creditors are only likely to recover a few pence in every pound that the company owes them.

However, there are two limited protections for employees in an insolvency situation. These protections are not extensive and are more akin to a safety net rather than covering all of the losses and claims an employee may have.

The NIF guarantees a minimum base payment of specified debts (some arrears of pay, a statutory notice payment, a statutory redundancy payment, some pensions payments and some holiday payments, a basic award for unfair dismissal in some circumstances) owed to employees provided certain conditions are met (including that the employee must be entitled to the relevant debt on the appropriate date).

  1. The first protection is for "preferential debts".

    Employees are entitled to a limited amount of "remuneration" as a preferential debt. Preferential debts must be paid in full in priority to all other debts after debts owed to secured creditors and the expenses of the winding up.

    "Remuneration" is a defined term and capped at specified amounts. It can fall into two categories:
    • Remuneration owed in respect of the whole or part of the four months prior to the relevant date (capped at a maximum of £800 per employee per claim).
    • Amounts owed by way of accrued holiday pay before the relevant date (unlimited).
    Remuneration would include contractual commission, contractual overtime and contractual bonuses, but it would not include other claims such as a statutory redundancy payment or unfair dismissal awards.
  2. The second protection is the National Insurance Fund ("NIF").

    This guarantee applies regardless of the types of insolvency procedure or whether the debt is preferential or unsecured.

Q3. How do redundant employees of an insolvent business get a redundancy payment?

An employee with two years' continuous service who is made redundant will be entitled to a redundancy payment. Where an employer is insolvent and does not pay the statutory redundancy payment to the employee, the employee can claim it from the NIF.

However, the employee must have made a written claim to the employer or make a claim to the Employment Tribunal within six months of dismissal. The conditions for payment are that the employee must be eligible to claim a redundancy payment, the company must be liable to pay it and the employee must take all reasonable steps (but not necessarily legal proceedings) to obtain payment from the employer.

Q4. What about the unprotected amounts owed to employees?

Any claims in excess of the limits for the NIF must be claimed from the insolvent employer in the usual way and will be unsecured debts.

These could be claims for notice pay above the statutory minimum or the compensatory award for unfair dismissal.

All creditors, including employees, share any remaining amount, in accordance with the proportion of their claims.

If there is a transfer under the Transfer of Undertakings (Protection of Employment) Regulations 2006, where the insolvency proceedings are classed as "non terminal" (see Q8 below), liability for unpaid sums in excess of the protected amounts will transfer to the transferee.

Employees usually make claims against the Insolvency Service, the insolvent employer and any potential transferee to maximise the chance of recouping some of the debt owed to them.

Q5. Can employees bring tribunal claims against an insolvent business?


All claims are stayed as there is a moratorium on legal proceedings. No claims can continue or be brought without either the consent of the Administrator or the permission of the court.

However, the Administrator can agree to proceedings continuing and it may be in the interests of the Administration to do so, for example, to avoid the costs of a successful application for a court order by the employee.


There is also a moratorium on legal proceedings in a Liquidation. However, claims cannot be brought or continued without the leave of the court.

Q6. What about collective consultation for redundancy?

Where 20 or more redundancies are proposed at one establishment within a 90 day period, there is an obligation on the employer to inform and consult with appropriate representatives. Failure to do so may result in a protective award and the maximum award is 90 days' gross pay per employee.

There is a "special circumstances" defence for failure to inform and consult for collective redundancy purposes but it is very narrow and difficult to demonstrate, even in an insolvency situation. Insolvency is not, of itself, a special circumstance. In any case, even if there is a special circumstance defence, there is a duty on the employer to take all such steps as are reasonably practicable in the circumstances to comply with the duty.

It is a criminal offence not to submit a HR1 form notifying the Secretary of State of the proposed redundancies at the appropriate time before the dismissals. Recent high profile prosecutions for breach of this duty have highlighted the importance of this requirement. However, criminal liability does not pass under TUPE and would remain with the transferor.

Q7. What incentive is there for an insolvent business to comply with the redundancy collective consultation duties?

If an Insolvency Practitioner breaches the duty to inform and consult in a large scale redundancy situation (20 or more proposed at one establishment within 90 days), this could result in a liability for a protective award for the company.

In practice, there is often insufficient time to carry out a proper information and consultation process with appropriate representatives. If a protective award is made, then employees can claim any unpaid protective award (up to statutory limits) from the NIF.

If there is a sale of the business, there are potential risks for the Buyer as they may pick up liability for the protective award. Therefore, reducing the financial risk of a claim for a protective award may make the business more attractive to the Buyer. A Buyer may be more easily found, at the best possible purchase price, potentially ensuring a better return to creditors.

Compliance, even complying as much as possible given the timescales, could reduce the risk of claims from employees, saving time and cost.

Protective awards can also be preferential debts in certain circumstances.

Q8. Does TUPE apply to an insolvency?

TUPE applies to an insolvency situation but the extent to which it applies depends on whether the insolvency proceedings are 'terminal' or 'non terminal'.

"Terminal" proceedings

Terminal proceedings are defined as bankruptcy proceedings or any analogous insolvency proceedings instituted with a view to the liquidation of the assets under the supervision of an insolvency practitioner.

In terminal proceedings, there is no automatic transfer of employees. This means a Buyer can cherry pick staff without incurring liabilities for those who do not transfer. A Buyer can also employ transferring employees on their own terms and conditions as there is no requirement to maintain existing terms and conditions of employment.

Technically, other provisions of TUPE apply, such as the requirement on the outgoing employer to provide employee liability information and the requirement to inform and consult. In a Compulsory Liquidation, usually most employees are dismissed automatically on the appointment of the liquidator which makes consultation unrealistic in a practical sense.

"Non terminal" proceedings

Non terminal proceedings are relevant insolvency proceedings which have been opened without a view to the liquidation of the assets of the transfer.

Government guidance suggests that this will include a number of different insolvency procedures, including Administration and a 'pre pack' (where there is an immediate sale of the business on appointment of the Administrators).

In non terminal proceedings, TUPE applies, but with some limited changes.

Employees will retain most TUPE protection and there is an automatic transfer of assigned employees. There is a requirement on the transferor to provide employee liability information and the obligations on the transferor and transferee to inform and consult will still apply. There will be a transfer of most pre-existing employee liabilities to the transferee, however, there are a few, limited exceptions.

  1. Some outstanding liabilities (those amounts that the employees have a right to claim from the NIF) will not transfer to the transferee and can be claimed by the employee separately from the NIF. Those claims are taken over by the government and the debts remain with the transferor.
  2. If certain conditions are satisfied, the transferor or the transferee can agree permitted variations to terms and conditions of employment of assigned employees.

Where TUPE is relaxed to permit some flexibility in changing terms and conditions of employment, the reason for any changes must be to safeguard employment opportunities by ensuring the survival of the business, there has to be consent from appropriate representatives, not individuals, and there are extra requirements if non trade union representatives are used.

These conditions limit the value of this relaxation in practice and employers may remain uncertain as to whether any changes were valid.

Q9. What risks are there for a potential Buyer in an Administration?

A Buyer of an insolvent business will usually face increased risk. Initially, the Buyer must assess whether there is a relevant transfer under TUPE and, if so, whether the insolvency procedure is terminal or non terminal. In an Administration (non terminal procedure), it is important to consider that:

  1. the process may be very fast paced and confidentiality may be important;
  2. it is unlikely that there will be a full due diligence process;
  3. TUPE requires the outgoing employer to provide employee liability information, but there is no effective enforcement mechanism in an insolvency situation if this is breached or the information is incomplete or incorrect;
  4. if TUPE applies, all assigned employees will transfer to the Buyer (or a new provider of the services). In some cases, the question of who is assigned to the business (or the services) is relevant, yet it is more difficult to assess in light of limited information;
  5. amounts that the assigned employees can claim from the NIF will not transfer but other liabilities connected with those employees (and liabilities connected with employees who have been dismissed pre-transfer by reason of the transfer where there is no economic, technical or organisational defence) will transfer to the Buyer including:
    1. any salary arrears /unpaid holiday;
    2. ongoing claims caused by the Seller's acts or omissions pre transfer (e.g. discrimination);
    3. liability for unfair dismissal for pre-transfer dismissals made to make the business more attractive for the Buyer; and
    4. protective awards relating to any collective redundancies pre transfer of employees who would have otherwise transferred;
  6. liability for breaches of the duty to inform and consult under TUPE is joint and several and so, in practice, will be a liability for the transferee;
  7. the transferee is unlikely to have the warranties and indemnities that it would normally expect from a transferor which would mitigate the impact of the automatic transfer principle under TUPE;
  8. the Buyer is usually contractually responsible for these transferring liabilities in the sale agreement (depending on the commercial negotiation);
  9. the Seller/Administrator may require an indemnity from the Buyer for any amounts the employees claim from the NIF. As the government takes over the employees' claim and becomes a creditor of the company, the indemnity is to reduce the liability of the insolvent company. This effectively negates the protection offered by TUPE in preventing certain liabilities transferring to the Buyer; and
  10. an Administrator will typically seek an indemnity in relation to a failure to provide Employee Liability Information under TUPE in order to minimise the risk that any additional claims will be brought against the company in Administration.

Dismissal issues in Administration

A key issue is often liability for dismissals. Under TUPE, where the principal reason for a pre-transfer dismissal is the transfer then the dismissal is automatically unfair and the liability will pass to the Buyer under TUPE.

If the principal reason for the dismissal is an economic, technical or organisational reason (ETO reason) entailing changes in the workforce, then any liabilities would remain with the Seller.

When a company is in economic difficulty, redundancies may have been made in order to cut costs even before the company enters formal insolvency proceedings. After appointment, an Administrator may make at least some dismissals immediately, and more over time. The key to whether or not the Buyer inherits the liability under TUPE depends on the reason for the dismissal and whose reason it is.

If the reason for dismissal is that the Seller or Administrator aims to slim down the workforce with a view to making the business more attractive for sale then this will be by reason of the transfer itself and the dismissal will be automatically unfair. This is the case even if there is no identifiable transferee on the horizon and a potential buyer has not been identified.

Alternatively, if dismissals are made because the company cannot pay employees' wages, and wants to run the remainder of the business, this will be an ETO reason and the dismissals will not be automatically unfair. The Seller (or Administrator) would still need to follow a fair procedure to avoid unfair dismissal claims but any liability would not transfer under TUPE.

Q10. How can a Buyer mitigate the extra risks of an Administration situation?

The practical steps to mitigate risk and potentially reduce liability will depend on the commercial strength of the negotiating parties and the specifc circumstances of the proposed deal. However, the following can be considered:

  1. Do as much due diligence as circumstances permit to identify and mitigate the extra risks of an insolvency situation. Bear in mind that the information will usually be provided by an Administrator who may not have the full information about the business or complete access to records.
  2. In a pre-pack there may not be full access to staff or information but it may be possible to gather some information informally through contacts within the company, such as the number of employees, their terms and conditions, whether there have been any dismissals, likely liabilities, and whether the wages have been paid.
  3. The Buyer then assesses the potential risk and whether it outweighs the benefits of acquiring the business.
  4. Ensure that the employees claim all possible amounts from the NIF.
  5. In the absence of any indemnities, risks needs to be taken into consideration in the purchase price or other mechanisms e.g. holding back a retention amount from the purchase price, deferred consideration or an escrow account.
  6. The Buyer should resist indemnities requested from the Seller/ Administrator, if possible and limit any given e.g. to a defined list of employees.
  7. Securing cooperation from the Insolvency practitioner to inform and consult as required by TUPE may mitigate liability even if it is not possible to fully comply with the obligations. It is important to do as much as possible in the circumstances, even if that is limited to providing the information required under TUPE. The Buyer can draft appropriate letters and manage the process. The Buyer can also reduce the burden of consultation by not envisaging taking any measures after the transfer.
  8. Settlement agreements preventing claims against the Buyer may be possible in limited circumstances e.g. for the senior management team.
  9. Obtain documents and evidence that would help defend claims of automatic unfair dismissal for pre-transfer dismissals. A Buyer will have difficulty defending claims if it does not have access to the documents recording the reasons and the party who made the dismissals and can persuade them to give evidence.
  10. Plan for claims and the management time and additional costs this involves.

"Read the original article on"

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
26 Sep 2019, Seminar, London, UK

Providing GCs, Heads of Legal and senior in-house lawyers with timely, topical and practical legal advice on a variety of topics.

8 Oct 2019, Seminar, Birmingham, UK

Supporting the development of paralegals, trainees and lawyers of up to five years' PQE by providing valuable knowledge and guidance together with practical tips.

10 Oct 2019, Seminar, London, UK

Supporting the development of paralegals, trainees and lawyers of up to five years' PQE by providing valuable knowledge and guidance together with practical tips.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions