Does TUPE apply when a company is facing liquidation?

Case review: Secretary of State for Business and Trade v Sahonta and Ors [2025] EAT 166

When a company faces a winding-up petition and a provisional liquidator is appointed, it could mean that employment contracts don’t automatically transfer, and employees may lose some of their usual rights under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”).

What are the facts of the case?

• Mortons Rolls Limited (“Morton”) was a bakery business which came into severe financial difficulties in early 2023
• On 3 March 2023, Morton ceased to trade, and a conditional business transfer agreement was entered into between Morton and Phoenix Volt Limited (“Phoenix”) (“the Agreement”) with an aim to rescue part of the failing business
• On the same date, Morton told its employees that they were laid off with immediate effect, with Morton ceasing to trade from the close of business. As a result, HMRC filed a winding-up petition, and a provisional liquidator was appointed (7 March)
• The provisional liquidator wrote to the employees advising that they may have transferred to Phoenix, along with the transfer of part of the business under TUPE. If they did not transfer under TUPE, they were told that they should consider that they were made redundant on 7 March 2023
• A few weeks later, Phoenix recommended that the bakery start to produce goods once again and recruited employees who were predominantly employed by Morton
• On 31 March, the winding-up order was granted, and Morton entered into compulsory liquidation.

What happened to the former employees in this instance?

As a result of the insolvency, former employees of Morton sought payment from the Secretary of State for Business and Trade for payment out of the National Insurance Fund to cover arrears such as pay and a basic award of compensation for unfair dismissal.

The Secretary of State declined the employees’ request stating that there had been a TUPE transfer prior to the making of the winding-up order, and therefore Phoenix should be responsible for payment of the claim. As a result, the employees brought a claim against the Secretary of State in the Employment Tribunal.

What does the law determine in this instance?

Employment Rights Act 1996: According to the Employment Rights Act 1996, in some cases where an employer is subject to insolvency proceedings, employees are eligible to claim from the National Insurance Fund on behalf of the insolvent employer by applying to the Secretary of State. Chapter VI of Part XI and Part XII of the Act has provisions that entitle payments out of the National Insurance Fund.

Section 182 in Part XII of the Act includes instances where:

• (a)  the employer has become insolvent
• (b)  the employees employment has been terminated, and
• (c)  on the appropriate date the employee was entitled to be paid the whole or part of any debt under ERA.

TUPE

Where there has been a “relevant transfer” under Regulation 3 of TUPE, such as in this case where Phoenix acquired part of Morton’s business, the following rights transfer from the transferor to the transferee in respect of employees:

• (a)  contracts of employment under Regulation 4 of TUPE, and
• (b)  dismissal rights under Regulation 7 of TUPE.

Regulation 8(7) of TUPE has the effect of moderating the application of TUPE in an insolvency situation. It states that Regulations 4 and 7 of TUPE do not apply where the transferor is the subject of any insolvency proceedings which have been instituted with a view to liquidation and is under the supervision of an insolvency practitioner.

The practical implications of this mean that an employee’s contract of employment and dismissal rights do not transfer, where the transferor (Morton) is subject to instituted insolvency proceedings.

The Employment Tribunal

The Employment Tribunal ruled that the date of the relevant transfer pursuant to Regulation 3 of TUPE was 21 March 2023. This was because employment recommenced on this date when Phoenix began trading again at Morton.

It was also ordered that the transfer was subject to Regulation 8(7) of TUPE because on 21 March 2023 insolvency proceedings had been instituted. Consequently, contracts of employment and dismissal rights had not transferred to Phoenix and remained as a liability of Morton.

The Secretary of State appealed the decision.

The Employment Appeal Tribunal (EAT)

The Secretary of State appealed to the EAT on two grounds.

Ground 1: the Employment Tribunal had erred in respect of the date for the relevant transfer

The Secretary of State argued that the date of the relevant transfer was 3 March 2023, when the agreement had been signed and concluded.

The EAT dismissed the Secretary of State’s argument. Morton’s business was no longer a going concern as of 3 March 2023, and it was not until 21 March 2023, when Phoenix recommenced work and secured occupancy rights to Morton’s premises, that part of the business started trading again.

Ground 2: The Employment Tribunal had erred in applying Regulation 8(7) of TUPE

The Secretary of State argued that the conditions of Regulation 8(7) did not apply in the circumstances because insolvency was instituted on 31 March 2023, when the winding-up order was made, as opposed to 7 March 2023, when a provisional liquidator was appointed.

• The EAT dismissed the Secretary of State’s argument. The relevant date was 7 March 2023, when HMRC has presented a winding-up petition against Morton and a provisional liquidator was appointed
• The EAT outlined the term “instituted”, which did not mean that a compulsory winding-up order had to be made, it was sufficient that proceedings had commenced
• In essence, this meant that the transfer was subject to Regulation 8(7) of TUPE because, at the time of the transfer, Morton was the subject of insolvency proceedings instituted with a view to the liquidation of Morton’s assets and under supervision
• From 7 March 2023 onwards, Regulation 8(7) of TUPE applies, meaning the employees contracts of employment and dismissal rights would not transfer to the Phoenix but instead remained the responsibility of Morton.

As Morton was insolvent, it is the responsibility of the Secretary of State to fund the claims from the National Insurance Fund.

What are the practical implications?

There are practical implications that can be drawn from the EAT’s decision and in relation to how TUPE is applied in an insolvency situation.

TUPE still applies during insolvency proceedings

Whilst a business is going through insolvency proceedings, employers and insolvency practitioners must be mindful that TUPE can still apply. It is important that legal advice is sought to ensure clarity on whether TUPE is applicable and, if so, if any limitations or exceptions may apply. All parties to the transfer must check Regulation 8(7), as it changes what liabilities transfer from the transferor to the transferee and, in particular, can trigger the disapplication of the transfer of contracts of employment and dismissal rights.

Timing is important

The date of the transfer will determine whether TUPE applies normally, or whether it is moderated as a result of insolvency. Whilst the date of transfer of the business is determined on a case-by-case basis on the evidence, if the transfer happens before insolvency proceedings are instituted, the transferee may inherit all employee liabilities. If the relevant transfer occurs after the insolvency proceedings are instituted, Regulation 8(7) will apply, which limits the transferee’s liabilities for the employees. It is important for employers and businesses to record transfer dates accurately to avoid any disputes.

Limited liability for the buyers of the business

For the transferee, there are some limitations regarding liability. The aim is to make buying distressed businesses more attractive and reduce the risk for the transferee. Employment obligations such as contracts and continuity of services will still be inherited by the transferee, and they must comply with duties under TUPE post-transfer, but there are some limitations. If the transfer of the business occurs during insolvency proceedings aimed at rescuing the business, the transferee may not inherit all of the historic debts.

A previous EAT matter, Graysons Restaurants Limited v Jones and others UKEAT/0277/16 is similar to this case. In Graysons, Regulation 8 of TUPE was modified so that historic debts were covered by the National Insurance Fund, rather than transferring to the transferee, thereby reducing the liability. TUPE rules were ultimately relaxed and are clearly assessed on a case-by-case basis, in order to attract the rescue of the business.

Good communication

Employers and insolvency practitioners must inform and keep employees up to date under TUPE. A failure to follow TUPE regulations, such as improper consultation, can result in penalties from an Employment Tribunal of up to 13 weeks gross pay for each affected employee. This must be factored into timelines and budgets.

Government protection

It is important to note that employees are not left without protection if a situation similar to the facts of this case arises. Certain debts, such as wages, overtime, holiday pay, statutory notice pay, unpaid pension contributions, redundancy and a basic award for unfair dismissal can potentially be claimed from the National Insurance Fund. It is prudent for HR teams to advise employees on how to make these claims promptly. Whilst we recognise that insolvency proceedings can be a particularly challenging and stressful time for any business, it is still in their best interests to keep communications with the employees to avoid confusion or legal proceedings.

Government scrutiny

Both employers and insolvency practitioners should note that the government and the Secretary of State will scrutinise transfers to avoid paying out unnecessarily. Businesses should expect challenges if the timing of the transfer is unclear. This again highlights the importance of ensuring each stage is documented to avoid disputes and clearly highlight who should pay employee debts.