Who is in the sight?

Data processors are those who process personal data on behalf of a data controller, for example, a third party provider of:

- outsourced payroll services;
- a CRM database;
- a call centre;
- hosting provider; or
- a managed IT service or cloud provider.

So what’s new?

Under the current 1995 Data Protection Directive (Directive) (implemented in the UK in the form of the Data Protection Act 1998), data processors are not primarily liable for failure to comply with the Directive. Consequently, they do not face the same sanctions as data controllers for non-compliance. Instead, data processors currently have obligations passed to them through compulsory data processing agreements with data controllers. In this way, data controllers may set off some of their liability for breach of the Data Protection Directive in their corresponding supply agreement(s) with the relevant data processor(s). Experience has shown that some, if not most, of the high profile data breaches or losses of personal data have been caused by the default of an appointed third party supplier (or data processor). The new Regulation seeks to address this.

Set out below are some of the key changes in the draft Regulation that are aimed at imposing greater compliance responsibility upon data processors.

Technical measures

Article 30 requires data processors themselves to implement and maintain technical and organisational measures to keep the data they hold secure and to prevent unlawful destruction or accidental loss as well as unlawful forms of processing such as unauthorised dissemination and access. The obligation is subject to the nature of the data held, and is to be proportionate to the cost of such measures. Nevertheless, the requirement is directly enforceable against data processors themselves.

Joint controller

Under Article 26, where a data processor processes personal data other than as instructed by the data controller, the data processor shall be considered a joint data controller and, under Article 24, will be subject to potentially onerous provisions relating to data subject access.

Record keeping

Data processors will also be subject to the obligation to maintain documentation on all processing operations under its responsibility and the detail of all the information to be retained is set out in Article 28(2). The Information Commissioner’s Office (ICO) has suggested that, rather than prescribe in detail the extensive range of documentation data processors are required to maintain, the Regulation should instead focus on providing a desired outcome so as to prevent processors and controllers keeping the same documentation. Otherwise, the cost to data processors’ business in keeping such records may be disproportionate and is likely to be impractical in any circumstance given the current level of detail required.

DPOs

Under Article 35, all organisations processing data with 250 employees or more, and all public authorities, must designate a Data Protection Officer (DPO) who shall be responsible for compliance. The data processor and data controller may appoint a joint DPO. The DPO will be required to notify a personal data breach to the relevant supervisory authority, where feasible, within 24 hours of becoming aware of the breach. There is a similar obligation to notify the data subject ‘without undue delay’ where the data breach is likely to adversely affect the protection of personal data and privacy. The prescribed timescale within which notification must be made differs from the guidance based approach which is currently applied in the UK.

As a result, data processors will face an as yet unknown administrative burden in order to ensure they comply with all the new obligations in the Regulation.

In the firing line: fines

Most significantly, data processors may now also be directly liable for any sanctions that are imposed by the competent regulating authority (in the UK, the ICO) for intentional or negligent failure to comply with the Regulation. The fines work on a sliding scale but the maximum fine that may be levied for breaches as specified in Article 79 of the Draft Regulation is 1,000,000 EUR or up to 2% of annual worldwide turnover.

However the relevant supervisory authority may also impose a ban on processing, or order the destruction of data. This could severely disrupt companies which have data processing at the heart of their commercial enterprise. Even where such a ban is imposed, the fact that data processors are now also firmly in the limelight and crosshairs of the regulators (and any subsequent enforcement action) means that a data processor’s brand and reputation is now at significantly greater risk. Under the current regime, any liability may be dealt with behind closed doors under the auspices of private contract.  Individuals will also have the right to sue the data processor for compensation in lieu of any damage suffered as a result of unlawful processing of data.

Further, data processors will be just as susceptible to the challenges posed by hacking and cyber risk. The last year has seen numerous ‘hacktivists’ target companies which hold or process data and all have been seen to suffer reputational damage where customer data has been accessed.

How welcome is the new Regulation?

The extension of obligations to data processors is likely to be well received by data controllers by forcing data processors to take greater direct regulatory responsibility for data protection compliance. Indeed some data processors may also be unsurprised by this paradigm shift and in some respects may be better equipped and experienced to achieve compliance. Leading data processors may therefore also welcome the changes which may reflect some of their existing current business practice.

However, the proposed changes are likely to affect the costs and pricing models of outsourced and cloud based services significantly in light of the increased compliance risk. There is also therefore likely to be substantial resistance to some of the proposed changes, either because of the added cost implications or impracticality.

Other implications

The change in onus to data processors may well also impact the terms of standard processor service contracts, as data processors may be reluctant to provide data controllers with indemnities for their own failure to comply with data processing obligations. However, Article 26 identifies more measures to be included in data processing agreements and it appears that these documents will become more important and complex as both the data processors and data controllers seek protection from their liability under the new draft Regulation. In addition, there appears to be some duplication of responsibilities under the Regulations; accordingly data processors and data controllers should take this opportunity to respond to the draft Regulation to avoid confusion and inappropriate duplicated responsibilities (e.g. the requirement to maintain documentation).

Regulation versus Directive

Data processors should also be aware of the legal status of an EU Regulation. Whereas directives require the EU member states to transpose the EU law into national law by enacting their own legislation, Regulations are binding law as soon as they are brought in to force. Peter Hustinx, the European Data Protection Supervisor, has stated that the draft Regulation is not intended to substitute or replace the existing Privacy and Electronic Communications Directive (Privacy Directive). Under the Privacy Directive, ‘Service Providers’ such as telcos and ISPs are bounded to notify serious breaches not only to their relevant supervisory authority, but also, in some cases, to their customers. The EU does not propose to revise or update the Privacy Directive for several years when it is due for review. Accordingly, there is likely to be some overlap, conflict and inconsistency between the proposed Regulation and existing Privacy Directive (e.g. the fines for a Service Provider’s failure to notify under the Privacy Directive is only £1,000).

Timetable

Data processors will need to be alive to the changing legislative framework. It is anticipated that it will be a further two years before the proposals come in to force when adopted. The ICO, however, in responding to the draft Regulation, has recommended that it be brought in earlier than the customary two years following official publication. Data processors are advised to respond to the draft Regulation with any concerns. In addition, data processors should also start preparing now to ensure that they maintain their edge against competitors in this space so as to demonstrate best practice and assess and take steps to mitigate the potential impact of the draft Regulation.

For further information please contact Philip James or a member of Pitmans’ Data Privacy & Information Law team.

Philip James
Partner, Pitmans SK Sport & Entertainment
T: 0207 634 4
E: pjames@pitmans.com

Background

BESTrustees was the trustee of the Kaupthing Singer & Friedlander Limited Pension & Assurance Scheme. The Icelandic bank Kaupthing Singer & Friedlander was the sponsoring employer and in 2008 entered administration. The result of which triggered an employer debt under section 75 of the Pensions Act 1995 (the Act). Under section 75(4)(a) of the Act, when a section 75 debt arises, an assessment of the value of the scheme’s assets compared with its liabilities is undertaken.  The statutory debt is based on the buy-out liability, i.e. the cost of securing the pension scheme benefits in full with an insurance company.

A point of disagreement arose between the trustee and the employer regarding the date at which the cost of buying out the pension scheme liabilities should be calculated for the purposes of section 75. The trustee argued for the date when the scheme actuary carries out the calculation and certifies the amount. The sponsoring employer argued that under the Occupational Pension Schemes (Employer Debt) Regulations 2005 (SI 2005/678) (the Regulations), the scheme’s liabilities should be valued on the date the employer entered administration, that being 8 October 2008. The trustee applied to Court to decide on the proper construction of Regulation 5 of the Regulations, as at 8 October 2008.

Due to a significant shift in market costs of annuities over a short period of time, the valuation of the scheme’s liabilities by each party were very different. There was no dispute about the date the scheme assets should be valued, namely at the date of administration. On this date the scheme’s assets were valued at £105 million. If the Judge decided in favour of the trustee, the scheme’s liabilities would be £245 million, resulting in a section 75 debt of £140 million. If the employer was successful, the scheme’s liabilities would be £178.9 million, resulting in a £73.9 million employer debt.

Decision

The Judge found that on the true construction of Regulation 5, the time at which both the value of Pension Scheme assets and the notional cost of annuities in the market should be assessed was the “applicable time”, i.e. the date on which the Section 75 event occurred, 8 October 2008.

Comment

The Judge decided on the only sensible interpretation and to do so provided certainty in an area which causes much disagreement about the valuation methodology. The Judge commented that where assets and liabilities are both valued at the date of administration, there is at least the possibility of forming an early view on the likely outcome, not only for the pension scheme, but for creditors. Regulation 5 has further been amended since 2008 and reinforces the Judge’s decision.

Employers and trustees need to ensure that the correct date and valuation methodology is used to assess the employer debt to avoid disputes in an already uncertain area of pensions and insolvency.

For further information, please contact Pitmans Pensions Team.

Parminder Latimer
Director
T: 0118 957 0324
E: platimer@pitmans.com

From October 2012 and phased in over a number of years, all employers will be obliged by law to pay contributions into qualifying pension schemes for most, if not all, of their employees. Employees will also be obliged to contribute to these schemes, unless they choose to opt out of the scheme provided by their employer.

I have an existing pension scheme?

It is still necessary for you to review your existing scheme to ensure that it satisfies the minimum criteria required by legislation; you may be required to amend scheme rules or amend the terms of the policy so that you will be able to continue using the same scheme.

I do not have an existing pension scheme?

Employers who do not have an existing pension scheme should consider the benefits they wish to offer their eligible workers and the costs that this will involve. There are a range of qualify schemes that are available to employers each of which have their own particular features. Employers should seek advice on what pension scheme will be suitable for them.

What is a Qualifying Scheme?

Whatever pension scheme an employer chooses it must ensure that it meets the minimum qualifying criteria. These minimum requirements vary according to pension scheme type (i.e. Defined Benefit, Defined Contribution or Hybrid Scheme) and employers should seek guidance for their specific scheme. However, as a general guide if the pension scheme requires, as a minimum, a total contribution of 8% of a jobholder’s qualifying earnings of which the employer’s contribution is at least 3% it is likely that the minimum requirements are satisfied.

For more information please contact David Loosemore, or any member of Pitmans’ Pensions Department.

David Loosemore
Solicitor, Pensions
T: 0118 957 0240
E: dloosemore@pitmans.com

Tristar, formed in 1978, pioneered the airline door-to-door chauffeur service and forged strong alliances with leading airlines including Virgin. Due to high demand, the business extended its reach across the Atlantic, opening its first US branch, based in Boston, in 2005. This was followed in 2009 with an extension to their international affiliate network with the opening of a new office in Hong Kong, catering for the surge in demand from the Asian market. The firm now boasts an impressive network with a presence in over 40 countries.

Stephanie Perry and her Pitmans colleagues were again involved in this, another successful deal, helping Tristar to further cement and grow their global platform. Pitmans and Tristar have developed a strong relationship over the years since supporting Tristar’s management team through a major Management Buy Out (MBO) in 2008. The MBO earned Pitmans the award of ‘Deal of the Year’ by the Thames Valley Business Magazine in recognition of the size and scale of the project. To see the Business Magazine’s article click here.

Tristar were also supported by Santander to re-finance their business (from Barclays) which enabled the acquisition, via their US subsidiary, of the business and assets of M7.

Andy Hohne, CFO at Tristar commented: “I was delighted to once again work with Stephanie Perry and her colleagues at Pitmans towards our multi-jurisdictional acquisition and re-financing transaction. We were again impressed with their clear and concise advice and support throughout the entire process and look forward to working with them again on future Tristar developments.”

Of the deal, Tristar US CEO, Mike Fogarty said: “We are thrilled to announce the acquisition of M7, as Tristar continues to gain market share and expand its presence in North America. M7 brings a commitment to excellence with service delivered by highly trained professionals that mirrors our own. We are honored to welcome the M7 team to the Tristar family, which now numbers more than 110 in the United States.”

Dean De Beer, Tristar’s Chief Executive commented: “This acquisition affords us excellent opportunities for growth. In addition to the expanded presence in the U.S., it also provides us with a more balanced global business. We are delighted to welcome in M7 Transportation as another important step in building the Tristar brand worldwide.”

Stephanie Perry, Partner at Pitmans LLP stated that: “Our team have an excellent understanding of Tristar’s successful business model thanks to our long-standing relationship. We were delighted with the incredible growth, drive and ambition of the business, made all the more valuable against a challenging economic backdrop, and believe they will continue to prosper globally.”

Stephanie Perry
Partner
T: 0118 957 0432
E: sperry@pitmans.com

Who should attend?
This briefing is aimed predominatley at entrepreneurs, owner-managers and senior directors looking to grow their business in an upturn.

Book your place today

—————————————————————————————-
Programme:

08:30 – 09:00
Registration and buffet breakfast

09:00 – 10:45
Introduction: focus on the basics
by Andrew Jupp, Partner, Smith & Williamson

• Managing cash-flow, debt and costs
• Positioning your business for growth
• Valuing external advice

Funding options & access to finance
Martyn Fraser, Director, Smith & Williamson Corporate Finance

• Sources of funding available
• Government assisted schemes
• Pitching for finance

Preparations for business growth: company law issues
Andrew Peddie & Philip Weaver, Partners, Pitmans

• Corporate governance and compliance procedures
• Preparing for M&A activity

Human capital matters
Richard Devall, Partner & Jamie Lynch, Solicitor, Pitmans

• Employee protection strategies
• Acquiring employees – restrictive covenant issues
• Recruiting from the global talent pool

10:45 – 11:00
Break

11:00 – 12.15
The importance of intellectual property
Jeremy Summers & Philip James, Partners, Pitmans

• IP protection and exploitation
• The Patent Box

Maximising tax relief and allowances
Andrew Jupp & Dave Mouncey, Partners, Smith & Williamson

• Tax efficient business structures
• R & D tax credits
• Capital allowances
• Share options

Planning for the future
Martyn Fraser, Director, Smith & Williamson Corporate Finance

• Business valuations
• Exit strategy options
• Who has an appetite to acquire?

12.15 – 13:00
Questions followed by buffet lunch
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Venue: Pitmans, The Anchorage, 34 Bridge Street, Reading RG1 2LU
Car parking is available at The Oracle, RG1 2AG

Book your place today

To book, please contact Rebecca Walford.
T: 0117 376 2067
E: rebecca.walford@smith.williamson.co.uk

The objective of the Agency Workers Regulations 2010 is to give agency workers the entitlement to the same basic employment and working conditions as a company’s permanent employees.

Who do the regulations apply to?

The Regulations apply to agency workers who are assigned to do temporary work for a company through temporary work agencies, they do not apply to recruitment consultancies that place individuals into permanent roles.

What rights apply from day one of an assignment?

1. Access to collective facilities

From 1 October 2011, all agency workers have had the right to be treated no less favourably than comparable permanent employees or workers in relation to ‘collective facilities and amenities’, unless the less favourable treatment can be objectively justified.

Collective facilities could include:

• Canteen or other similar facilities
• Childcare facilities
• Transport services
• Toilet or shower facilities
• Staff common room
• Food and drinks machines
• Car parking

The concept of collective facilities does not extend to any off site facilities or benefits in kind which are not provided by the company, such as subsidised access to an off site gym.

The right is to equal, not better, treatment. Agency workers should not therefore be given enhanced access rights when compared with permanent employees. For example, if there is a waiting list for access to childcare facilities an agency worker will be entitled to join the list but not to jump the queue.

2. Access to employment vacancies

From the start of their assignment, agency workers have the right to be told of any permanent vacancies of the company in order to be given the same opportunity as a comparable permanent employee to apply.

The company can inform the agency worker ‘by a general announcement in a suitable place in the hirer’s establishment’. A suitable place may be a notice board or on the company’s intranet. They must be informed as to where to find the information, which could be explained during a worker’s induction.

This provision does not curtail an employer’s freedom as to how to treat applications for jobs. Agency workers do not need to be given preferential treatment when compared with other internal candidates or external candidates when deciding who is the best person for the role.

Which rights apply after a qualifying period?

1. The right to equal treatment regarding terms and conditions

The right to equal treatment with regard to basic working and employment conditions does not apply until the agency worker has completed a qualifying period of 12 weeks.

Provided that an agency worker has worked in the same role, whether on one or more assignments, with the same company for 12 continuous weeks, they will be entitled to receive the same basic working and employment conditions as are ordinarily offered to permanent employees in relation to:

1. pay;
2. duration of working time;
3. night work;
4. rest periods;
5. rest breaks; and
6. annual leave.

If there is a break of over 6 weeks between assignments, continuity will be broken and the agency worker will have to start counting the 12 weeks again before they are entitled to the right to equal treatment regarding terms and conditions.

Specific provision is also made in the regulations in relation to pregnant and nursing mothers who must be provided with paid time off for antenatal appointments, to be paid by the temporary work agency.

Anti-avoidance provisions

The Regulations contain specific anti-avoidance provisions to prevent temporary work agencies and hirers from structuring assignments to prevent the worker from acquiring equal rights.

A prohibited structure of assignments can occur when an agency worker has:

• completed two or more assignments with the hirer; or
• completed at least one assignment with the hirer and one or more earlier assignments with hirers connected to their current hirer; or
• worked in more than two roles during an assignment with the same hirer and on at least two occasions has worked in a role that was not the ‘same role’ as the previous role.

The anti avoidance provisions will then kick in if the most likely explanation for the above scenario is that the hirer or temporary work agency intended to prevent the agency worker from being entitled to the right to equal treatment.

To decide whether there has been such a structure of assignments, the following factors will be taken into account by the Tribunal:

• Length of the assignments;
• Number of assignments with the hirer or any connected hirer;
• Number of times the agency worker has worked in a new role with the hirer; and
• The period of any break between assignments with the hirer or any connected hirer.

Tribunals can make an additional award of compensation of up to £5,000 where a hirer and/or agency are found to have breached the anti avoidance provisions.

Derogations from the equal treatment principle
(Swedish derogation agreement)

In limited circumstances a contract may be entered into between an agency and an agency worker where it is agreed that the right to equal treatment with regards to pay (only) will not apply.

However, this regulation only applies where:

• the agency worker has a permanent contract of employment with the agency; and
• the contract was entered into before the first assignment started; and
• in periods between assignments the agency pays the worker a minimum of 50% of their basic pay while on assignment, and this must not be less than the national minimum wage.

It is unusual for an agency worker to be permanently employed by an agency and to receive pay between assignments, and this is therefore likely to be rarely used.

Compensation

The compensation payable by an agency or hirer for breach of the Agency Workers Regulations 2010 is that which is ‘just and equitable’ having regard to the extent of their responsibility. The legislation states that the minimum amount awarded must be two weeks’ pay but there is no statutory cap on the maximum amount that can be awarded.

Complying with the regulations

Now that the Agency Workers Regulations are in force it will be important to consider, as soon as possible, the measures you will take to comply with, or avoid the Regulations.

You may wish to put in place a record keeping system to ensure that agency workers do not work beyond the 12 week qualifying period, for example.

It will also be important to keep in regular contact with any agencies that you use for the provision of temporary workers and ensure they are kept aware of your current standard terms and conditions.

For further information on this article, please contact Pitmans Employment Team.

The cases of Key2Law (Surrey) LLP – v – De’Antiquis and Spaceright Europe Limited – v – Baillavoine have provided further clarification as to the protection afforded to employees under TUPE in the case of a transfer of an employer’s business and assets in an Administration.  The position had been unclear following the decision of the Employment Appeal Tribunal in Oakland –v- Wellswood (Yorkshore) Limited in 2009.

The Transfer of Undertakings (Protection of Employment) Regulations 1981 and 2006  (TUPE) confers on employees certain rights in the event of a transfer of an employer’s business.  TUPE provides that employees will automatically transfer to the transferee on their existing terms of employment and the transferee will then inherit employment liabilities and obligations in relation to them.   Further, a dismissal which was connected to the transfer will be automatically unfair, unless the reason is economic, technical or organisational (referred to as an “ETO” reason), entailing changes in the workforce.

Clearly, the potential adoption of liability under employment contracts would discourage purchasers of insolvent businesses and so the government introduced provisions in order to assist by adding some flexibility.

TUPE provides that, where the employer is subject to “bankruptcy proceedings or any analogous insolvency proceedings which were instituted with a view to the liquidation of the assets of the transferor”, employees would not automatically transfer to the transferee and a dismissal for reasons connected with the transfer would not be automatically unfair.

TUPE also provides that, where there are “relevant insolvency proceedings” (being “insolvency proceedings which have been opened in relation to the transferor not with a view to the liquidation of the assets of the transferor and which are under the supervision of an insolvency practitioner”) there would be greater scope to vary the terms of employment, where the variation is designed to safeguard employment by ensuring the survival of the business or part of it.

There have been a number of decisions in the Employment Tribunal and above that have demonstrated the shortcomings in TUPE, and more particularly the definitions of “relevant insolvency proceedings” and “bankruptcy proceedings or any analogous insolvency proceedings”  when it comes to be applied to an administration.

It is important to understand the difference between an administration and a liquidation.

The statutory purpose of an administration is to achieve one of the following objectives:

• The rescue of the company as a going concern; and only if that cannot be achieved
• The achievement of a better result for the company’s creditors as a whole than would be likely if the company were wound up; and if that cannot be achieved
• The realisation of some or all of the company’s property to make a distribution to one or more secured or preferential creditor.

Often, the administrator, once appointed, will trade the company either with a view to rescuing it and returning it to its directors (albeit this is rare) or in order to preserve goodwill and avoid termination or breach of contracts whilst the business is marketed for sale.

Conversely, the purpose of a liquidation is to sell assets and distribute them to creditors.  A company can only trade in liquidation in so far as it is necessary for the beneficial winding up of the company and even then the permission of the Court may be required.  A liquidation procedure therefore fits squarely into the definition of a process “with a view to the liquidation of the assets” whereas an administration process does not.

Administrator objectives

It is not always clear, at the outset of an administration, what the objective of the administrator may be and it may change as the possibility of achieving the primary and/or secondary objective disappears.  There is no obligation upon the administrator to state his objectives until he makes his proposal to the company’s creditor’s which may be up to 8 weeks after the administration.  His only obligation is to consider each of the objectives and either perform the administration so as to achieve the primary objective or dismiss it and move onto the secondary and possibly the tertiary objective. To that extent an administration should always be commenced with a view to rescuing the company as a going concern.  Does that mean that an administration can never be considered to have been carried out with a view to liquidation of assets, regardless of the actual outcome, such that it would never be possible to avoid the consequences of TUPE and that a dismissal connected to a transfer of the business would be automatically unfair?

In practice, very often the second or third objective is achieved by selling the assets of the business in one go so that the business is sold as a going concern.  Effectively the insolvent company’s assets will have been liquidated albeit the business will have been preserved through the sale.   Sometimes this will happen after a period of trading whilst in administration. Sometimes the buyer is found before the company goes into administration and the sale effected upon administration in order to preserve the goodwill and trade of the business (a “pre-pack” sale).  Often, once the business has been sold the company quickly moves into a liquidation.  Does that mean that such administrations were commenced with a view to liquidation of assets or does it depend upon whether there was a post-administration period of trading?

In Oakland the insolvent company had been sold back to its director and shareholder on the day that it went into administration. The Employment Appeal Tribunal decided that, in circumstances where the company would not trade in administration and would shortly enter into liquidation, this was “bankruptcy proceedings or any analogous insolvency proceedings… instituted with a view to the liquidation of the assets of the transferor” such that the employees did not automatically transfer to the transferee.  The Employment Appeal Tribunal did not say that this would always be the case but considered that it would be a question of fact to be determined by the Court.  This would mean that a Court would have to reconstitute the circumstances existing at the time of the commencement of the process and the objective of the administration in the mind of the administrators at that time.

Not only would this decision mean a great degree of uncertainty as to the rights of employees against transferees and the risk of a transferee adopting employee liabilities but the decision would encourage the use of  pre-pack administration where the purchaser would, on this view, be able to take the business free of employee liabilities.

Seeing clearly

A contrary view was adopted by the Employment Appeal Tribunal in OTG – v – Barke.  However, the Court of Appeal has recently considered the issue in two cases which now provide much needed guidance on the position.

In 2011, in Key2Law, the Court of Appeal considered the effect of an administration on employees.  In this case a company went into administration in the hope that a buyer could be found but it wasn’t. Instead firms of solicitors were engaged by the administrators to carry out the work of the company as its agent.

The Employment Appeal Tribunal had considered that the aim of an administration was not a question of fact but was absolute, depending upon the procedure adopted and that, since the primary aim of an administration is to rescue a company as a going concern, it would not be a process analogous to bankruptcy.  The Court of Appeal agreed, accordingly employees of companies in administration would automatically transfer to a transferee and be protected from dismissals by reason of the transfer of the business.

In Spaceright, the business and assets of the company were sold one month after the company went into administration.  At the time of the administration a buyer of the business had not been identified.  The Court of Appeal had to decide whether the dismissal of the managing director of the company was connected with the transfer of the business.  It decided that it was, notwithstanding that the actual buyer was not in contemplation at the time of the dismissal.  This is an important clarification.  Further, the Court considered that the dismissal did not relate to the ongoing business, for example, a general reduction in the number of employees to assist trading as a going concern, accordingly the dismissal was not for an ETO reason and was unfair.

Purchasers of the business of companies in administration, and other transferees, need to be aware that they are likely to adopt liabilities in relation to employees.  Purchasers should be advised that employment liabilities cannot be avoided by reaching an agreement with the administrators of the seller that they will procure the dismissal of employees before the sale of a business and assets. This is an important consideration for purchasers in any purchase but where there is a sale by an administrator, a purchaser cannot expect an indemnity from the seller or the administrator in relation to any liabilities that the purchaser may find that they have adopted.  Indeed, administrators will often insist on the purchaser providing an indemnity in favour of the seller and invariably in respect of himself, in respect of any claims subsequently made by employees against them.

All too often purchasers are unaware of this risk and the question of employment liabilities becomes a “deal breaker”.  Either the sale will fall away, potentially damaging the value of the business, or the purchaser will negotiate a reduction in the purchase price, reducing the return to creditors, or the purchaser will have to take the risk that it may have to take on employees that it does not need and/or risk employment claims from employees that are or have been involved in the business.  The claims that may be made against a purchaser may be substantial, including claims for failure to consult employees in relation to a transfer.  Liability for such failure may amount to up to 13 weeks pay per employee.

Policy decisions

Pre-pack sales of businesses out of an administration have received a great deal of bad publicity in the press fuelled by unpaid creditors left high and dry.  However, it is well established that the advantage of a “pre-pack” sale in an administration is that jobs are usually saved.  The government has considered whether pre-pack sales should be outlawed or further regulated.  Whilst more stringent reporting requirements and duties have been imposed upon administrators, in an attempt to avoid sales back to directors of an insolvent business, for the purpose of avoiding having to pay creditors, proposals that creditors should receive notice of an intended sale have been dropped.

Ultimately the government has a policy decision to make as to whether legislation protects creditors or employees.  Particularly in the current economic environment, the interests of employees must be considered to be paramount. That said, in general a sale of a business as a going concern is likely to result in a higher return to creditors (albeit it is usually secured creditors that benefit) than a break-up sale of assets, in a liquidation, would achieve.  Further, where employee liabilities transfer to a buyer of the business, the level of liabilities in the insolvent company is reduced thereby potentially increasing the level of any distribution of funds in the administration to unsecured creditors.

At its best, Oakland created a period of uncertainty when many purchasers may have been comforted by the decision and held the view that employment liabilities for dismissed employees would rest with the insolvent company.

At its worst, the decision potentially meant that the transfer of employment rights could be avoided when a business was sold out of an administration process.  This is entirely contrary to the understanding of insolvency professionals and the basis upon which policy upon administrations has been formed.  The decisions in Key2Law and Spaceright must therefore be welcomed.

Denise Fawcett
Partner
T: 0207 634 0642
E: dfawcett@pitmans.com

There are a number of ways in which a business may look to ring fence its existing unsecured debt. If the underlying business is sound, a company struggling to pay its creditors may propose a composition of its debts via a Company Voluntary Arrangement (“CVA”). A CVA is a legally binding agreement between a company and all of its unsecured creditors to pay off historic debt over a period of time, usually 3 to 5 years. Any CVA must offer a greater potential dividend return to creditors than would be achieved if the company were to enter into insolvent liquidation.

Once the CVA is approved by the requisite majority of creditors it becomes a contract between the company and its creditors and binds all unsecured creditors. However, the rights of secured or preferential creditors cannot be adversely affected without their express consent.

One of the fundamental issues with CVAs is that, for the majority of companies, there is no statutory moratorium to prevent creditor/s taking action to recover sums owed to them whilst the CVA is put to creditors. However, “small companies” can obtain the benefit of a statutory moratorium designed to prevent creditors taking action against the company whilst the CVA proposal is put to the creditors. A “small company” is defined as one whose turnover does not exceed £5.6 million; its balance sheet total does not exceed £2.8 million and has no more than 50 employees.

For companies that do not fall within the “small company” criteria it is possible to enter into a formal insolvency process, known as administration, with the intention of exiting it via a CVA once the CVA has been approved. The primary purpose of any administration is to try and rescue the company as a going concern. Administration allows time for a company’s affairs to be re-organised under the protective umbrella of a statutory moratorium.

If it is not possible to rescue the company as a going concern then the business/assets of the company may be sold to a third party via a “pre-pack.” A pre-pack involves the company entering into administration and immediately selling its business and/or assets to a third party under a sale the terms of which were negotiated before the administrators were appointed. It allows the business to continue trading via a new company and secures the employment (employees will transfer to the buyer) whilst leaving behind the burden of historic debt with the company in administration.

Pre-packs are frequently used where the core business is still viable, but the company carries significant historic debt that it can no longer service. Invariably there is no funding available for the business to continue to be traded by the administrators and, for whatever reason, any CVA proposals are not appropriate or have been rejected by a majority of the creditors.

If you have concerns or queries about any of the issues dealt with in this article or wish to explore confidentially the various methods of restructuring and/or refinancing your business please contact us and we will be happy to provide you with advice and assistance.

Adrian Wilmot
Director
T: 0118 957 0595
E: awilmot@pitmans.com

Suzanne Brooker
Partner
T: 0118 957 0516
E: sbrooker@pitmans.com

This case has been appealed and the appeal hearing is due to take place between 3 September and 2 November 2012.

For further information, please contact:

Symon Rowley
Director
T: 0118 957 0301
E: srowley@pitmans.com

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