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How not to legislate09/08/2006. Source: SJ Berwin. Simon Witney 
Unfortunately, notes SJ Berwin, it isn't the first time that a European government has made a mess of introducing new rules - and it certainly won't be the last - but the process of changing the regime that applies to protect British employees when businesses are disposed of following insolvency is an object lesson in how not to legislate. After consultation, during which all the problems with the new rules were pointed out to the government, the final form of the regulations appeared late in the day - significantly later than the self-imposed deadline that officials had previously committed to - and were rushed through Parliament in a hurry to meet an artificial deadline.
The unfortunate result of this bungled process is that it is now more difficult to re-structure failing businesses than it was before (even though the new rules were intended to make it easier), and the government has admitted that the courts will have to clarify the badly drafted legislation when a case comes before them.
Ironically, the confusion has arisen from a well-intentioned desire to update and re-state the regulations - which ultimately emanate from European law - that apply on any business transfer (the so-called "TUPE Regulations"), and to facilitate essential corporate restructuring by excluding some insolvent businesses from the full rigours of the law.
Under the revised rules there are two separate regimes that apply. The first passes some employee related costs to the government (instead of the purchaser of the business) and allows some changes to employment contracts, with employee consent, where they are needed to ensure the survival of the business. The second regime goes even further, and effectively allows a business to transfer (or, at least, its assets to transfer) without its employees, and facilitates necessary dismissals by the insolvency practitioner.
The problem, though, is in the way the rules specify which regime is to apply. The language used in the new regulations mirrors that in the European legislation (apparently because of a drive to avoid "gold plating" European rules in the UK), which is, in turn, based on a European court decision relating to a Dutch insolvency.
In that case, the court drew a distinction between disposals during a terminal insolvency procedure and disposals made during a procedure aimed at a reorganisation. But, in trying to cut and paste those rules into English law, the government has left it completely unclear which set of rules apply: the language used simply does not reflect the different types of insolvency procedure that exist in the UK, and it is impossible to tell whether the test is based on the objective possible outcome of a particular process, or the subjective result in the particular case. Administration, for example, has as its primary objective rescue of the company - not transfer of its business.
However, if rescue becomes impractical or produces a worse result for creditors, disposal becomes the purpose. It is possible for an administration to be opened to rescue the company or to dispose of the business. It is even possible for it to be begun on an asset break-up basis. And, conversely, liquidation is objectively a terminal process, but a going concern sale is possible in some cases.
But the problems do not stop there. As well as creating significant uncertainty about the treatment of employees in insolvency sales, the new information and consultation procedures (which apply on any transfer of employees, including those from insolvent businesses) will be hard for an insolvency practitioner to meet. The new rules require certain information to be given to the purchaser, and if this is not done the insolvent company is liable for a minimum £500 (€730) per employee. There is also a duty to inform and consult employee representatives, and there are significant penalties for failure to do so.
The problem is that in insolvency situations the affairs of the company are often disordered, and the insolvency practitioner rarely has a full picture of them. The availability of funding, and the reaction of the customers and suppliers of the business, will often not leave time for consultation. If "special circumstances" render it impractical to carry out the obligations in full, the obligation is only to do all that is "reasonably practical". Unfortunately these issues will be judged on a case-by-case basis after the event, leaving the outcome uncertain at the point of transfer. If there is a failure to inform and consult, the purchaser of the business could have to pay compensation to the employees of up to thirteen weeks pay each.
All in all, the process of bringing in these new rules was shambolic, and lessons ought to be learned. In the meantime, any private equity deal that involves a business rescue will be significantly harder to achieve until the courts are able to step in to sort this mess out.
Simon Witney
SJ Berwin is a pan-European law firm with a particular focus on private equity. It has offices in London, Frankfurt, Munich, Berlin, Madrid, Paris and Brussels. If you would like further information on our services to the private equity industry please contact Simon Witney in our London office 020 7533 2222 or visit our website at www.sjberwin.com.
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