Printers don’t like pre-packs, but that hasn’t stopped them from occurring. Indeed, over the past few years, hardly a week has passed without at least one of these deals being reported in this magazine. The aspect of pre-packs that arouses particular ire is that they allow a failed company to continue to trade, effectively unchanged except for the important fact that a large chunk of its debt has been wiped off the slate.

Up until quite recently, when one business bought another in a pre-pack administration, one of the costs it was able to avoid paying was any liability associated with employees, such as redundancy terms, as the Transfer of Undertakings (Protection of Employment) regulations 2006 (TUPE) were not applied to pre-pack buyout deals. This was the result of an Employment Appeal Tribunal (EAT) decision in 2009.

However, a ruling last month appears to have overturned this decision and looks likely to scare off potential pre-pack buyers, or at the very least make pre-pack deals less attractive.

The ruling, on 16 February, affirms what many previously thought ought to be the case – that TUPE applies to all companies that have gone into administration. This gives staff a right to transfer over to the acquiring company and not to be dismissed, or, if they are dismissed, to be paid their full redundancy entitlement. Although companies that go into liquidation are still exempt, from now on, pre-pack administration deals will be caught in the TUPE net.

While many will feel that anything that makes the pre-pack option less attractive can only be a good thing, there is another point of view. Kevin Lucas, an administrator at insolvency practitioner BCR, says: "This ruling could pose an obstacle in selling a business as any purchaser will now be more nervous about their position. When potential buyers factor the cost and impact of dealing with potential TUPE liabilities into their offer, sales prices are likely to be depressed and some deals may not take place at all.

"I don’t think this ruling on its own will reduce the numbers of pre-packs taking place, but for both secured and unsecured creditors, the inevitable reduction in sales price will reduce  the dividends they receive."

Due diligence
Many printers would argue that a ruling like this is long overdue. KCS Trade Print proprietor Terrye Teverson says: "It will stop those companies that are seeking an easy, low-cost acquisition. Purchasing a company from the administrator will in future require careful consideration to the staff position. Good news all round."

Meanwhile, Leeds-based printer Technoprint is currently defending TUPE claims brought by former Sessions of York employees who were made redundant by the administrator. Managing director Mark Snee hopes that the EAT decision will lead to the claims being dismissed.

He says: "It is not clear whether it will prevent pre-packs because the decision appears to confirm that an administrator can make redundancies prior to any transfer and those staff will not have a claim under TUPE. That is sensible because otherwise it would be almost impossible to ever transfer an insolvent business without the buyer facing potentially huge liabilities under TUPE."

How this development will affect businesses will differ from industry to industry. But print, swamped by overcapacity, will most likely benefit from a general thinning out. So this ruling, which will ultimately make buying an insolvent company less attractive, has to be viewed as a positive. Of course, it may not be long before the insolvency practitioners find their way around this ruling and everything will go back to normal.

TUPE OR NOT TUPE? REGULATION TIMELINE
2006
Regulations revised giving an exemption where the seller was the subject of bankruptcy proceedings. It stated: "Any analogous insolvency proceedings which had been instituted with a view to liquidation of the assets of the seller" would not fall under TUPE.

2009
Oakland versus Wellswood (Yorkshire) Ltd The EAT decided that a business bought out of a pre-pack administration was subject to "analogous insolvency proceedings instituted with a view to the liquidation of the assets of the transferor", therefore TUPE did not apply to the transaction.

2011
OTG Ltd versus Barke and others The 2009 case was disagreed with and the EAT claimed that businesses bought as a going concern out of any business in administration, whether as part of a pre-pack arrangement or not, will be subject to TUPE.

Future
It is anticipated that the most recent case will now be cited, so TUPE is likely to count for the foreseeable future. But, there is nothing to stop another case arising, citing Oakland versus Wellswood and reversing the situation once again.