As practitioners will know, when dealing with a sale of an insolvent business they will have to consider whether the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) applies. 

TUPE applies to transfers of businesses or undertakings (or parts of them).  If there has been a relevant transfer under regulation 3 of TUPE, then in most cases, all contracts of employment transfer to the transferee of the business under regulation 4, and employees have various dismissal rights against the transferee under regulation 7.

However, regulation 8(7) of TUPE excludes the automatic transfer of employment contracts where the transferor is subject to insolvency proceedings instituted with a view to liquidating its assets.   If regulation 8(7) applies employees that have been made redundant can make a claim from the National Insurance Fund (NIF) in respect of certain payments such as arrears, redundancy and holiday pay.

A question considered by the Employment Appeal Tribunal recently in Secretary of State for Business and Trade v Sahonta and others ([2025] EAT 166) was whether regulation 8(7) applied where a provisional liquidator had been appointed.  In this case the provisional liquidator had made employees redundant, but they were later re-employed by a new company.   Former employees of the insolvent business sought payments from the NIF but the Secretary of State refused, arguing that a TUPE transfer had occurred before the winding-up order was made. The employees challenged this decision.

The employment tribunal found that regulation 8(7) did apply when the provisional liquidator was appointed, such that the employees could claim from the NIF.  The Secretary of State appealed, but the Employment Appeal Tribunal upheld the findings of the lower tribunal.

Although the decision concerned the appointment of a liquidator in Scotland, the findings are likely to be of relevance and applicable to English processes given the TUPE regulations also apply here.   However as noted below, it may not always be the case that the appointment of a provisional liquidator engages regulation 8(7), the specific factual circumstances will need to be considered.

Background

Morton Roll Ltd (Morton), a bakery business. Phoenix Volt Ltd (Phoenix) was formed with a view to taking over Morton’s business. To be kept going, the business would have to be streamlined, with only some staff and business contracts being taken on.

On 3 March Morton signed a conditional business transfer agreement (the Agreement) with Phoenix. In the Agreement, offers of employment were intended to be made to some but not all employees.

Morton ceased its business on 3 March 2023, by stopping production, and its three large supermarket customers going elsewhere.

A provisional liquidator was appointed on 7 March 2023, and subsequently the same person was appointed interim liquidator on 31 March 2023.

All 230 employees of Morton were dismissed by reason of redundancy on 7 March 2023.

The provisional liquidator was actively involved in dealing with Morton’s affairs from the time of appointment, including revaluation of plant and equipment

On 15 March 2023 the provisional liquidator indicated that there was no intention to challenge the Agreement if the consideration was revised in areas he specified, although he indicated that he could not reach final agreement about revisions to its terms until appointed interim liquidator.

When Phoenix started up the bakery business, it recruited employees predominantly from Morton. Phoenix had not taken on Morton’s contracts to sell bakery items but had built up a new customer base.

There was no dispute between the parties that the type of insolvency proceeding to which Morton was subject was a compulsory liquidation.  The winding up petition had been brought by HMRC due to unpaid debts.  Morton was ultimately wound up on 31 March 2023.

The former employees of Morton sought payments from the NIF. The Secretary of State refused payment arguing that their contracts of employment had transferred to Phoenix prior to the winding up order being made against Morton, with the result that Phoenix was responsible for employees of Morton, and payments were not due from the NIF.

Tribunal Decision

At a preliminary hearing, the tribunal decided that there was a relevant transfer to Phoenix on 21 March 2023. The tribunal also decided 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 the supervision of an insolvency practitioner. 

Basis of Appeal

The Secretary of State appealed on the basis that the tribunal misdirected itself in law when it reached the conclusion that the date of that transfer was 21 March 2023 (when Phoenix started production), as opposed to 3 March 2023 (the date of the Agreement) (First Ground of Appeal). Secondly, even if the First Ground of Appeal was not successful, the tribunal erred in finding that regulation 8(7) of TUPE applied (Second Ground of Appeal). 

The second ground of appeal turned on the Secretary of State’s position that the date on which an insolvency situation within regulation 8(7) could exist was the date of the winding up order in respect of Morton (31 March 2023), not the date a provisional liquidator was appointed (7 March 2023).  The employees and Phoenix, on the other hand, argued that the conditions of regulation 8(7) were met from the time the provisional liquidator was appointed on 7 March 2023.  That pre-dated 21 March 2023, when the relevant transfer occurred and therefore because regulation 8(7) applied from 7 March, contracts of employment and liabilities for dismissal rights had not transferred to Phoenix.  The employees should therefore be entitled to claim payments from the NIF.

It is the Second Ground of Appeal that is of most interest to practitioners.

EAT Decision

The EAT dismissed the Secretary of State’s appeal on both grounds upholding the tribunal’s findings.

The EAT confirmed that insolvency proceedings under regulation 8(7) can begin when a provisional liquidator is appointed, as this marks the start of proceedings aimed at liquidation.

There are four conditions for the application of regulation 8(7) of TUPE, and in this case there was no dispute about the first and fourth conditions being met – Morton was the subject of “bankruptcy or analogous insolvency proceedings”.  HMRC as creditor had petitioned for Morton to be wound up by the court and the insolvency proceedings were under the supervision of a person within the definition of insolvency practitioner in regulation 2(1) of TUPE.  The dispute revolved around whether the insolvency proceedings had been instituted with a view to the liquidation of Morton’s assets.

It is possible that in some cases that the appointment of a provisional liquidator may not lead to liquidation, for example if bringing a petition results in payment of a debt, and the petition is then abandoned.  The EAT noted in this type of situation the conditions in regulation 8(7) may not be met.  However, on the facts here, there was no finding that the petition was brought merely to put pressure on Morton to pay a debt with no intention of proceeding to a liquidation or brought as part of a plan to manufacture an insolvency situation to try to evade protections in TUPE. 

The tribunal found that the presentation of the petition to the court on 7 March 2023 was the start of an insolvency proceeding at the behest of an unpaid creditor, which led to liquidation of Morton’s assets. 

The provisional liquidator was appointed by a court order which specifically authorised him to exercise certain powers under the Insolvency Act 1986 and he was subject to statutory and regulatory provisions.  Having been actively involvement in discussions, with the aim of protecting and safeguarding the assets for the benefit of the company’s creditors the EAT found that the tribunal was entitled to find that insolvency proceedings were instituted when the proceedings were brought in court and a provisional liquidator was appointed on 7 March 2023.

Concluding Comments

Although the EAT upheld the tribunal’s findings and in most cases the appointment of a provisional liquidator is likely to lead to the appointment of a liquidator and liquidation of the company there is, as noted, the possibility that regulation 8(7) might not apply in different circumstances – such as where a petition does not proceed – therefore there will always need to be careful consideration of the factual position from a buyer’s perspective. 

That said, there are unlikely to be many examples where a provisional liquidator is appointed, a transfer of all of part of the business occurs and the transferor does not then enter liquidation.