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[Buy ICLR report:  ICR 881]
|Neutral Citation Number:  EWCA Civ 1567
|Case No: A2/2011/0614
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE EMPLOYMENT APPEAL TRIBUNAL
Mr Justice Underhill, Mr I. Ezekiel and Mr P. Smith
Appeal No: UKEAT/0444/09/RN
|Royal Courts of Justice
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE LONGMORE
LORD JUSTICE RIMER
MR JUSTICE WARREN
| KEY2LAW (SURREY) LLP
|- and -
|- and -
|SECRETARY OF STATE FOR BUSINESS, INNOVATION AND SKILLS
Mr Kolarele Sonaike (instructed by Key2Law (Surrey) LLP) for the Appellant
Mr Keith Bryant (instructed by pdt solicitors) for the Respondent
Written submissions from Mr Ashley Serr on behalf of the Secretary of State for Business, Innovation and Skills
Hearing date: 17 October 2011
HTML VERSION OF JUDGMENT
Crown Copyright ©
Lord Justice Rimer :
- The appellant is Key2Law (Surrey) LLP ('Key2'), a firm of solicitors. The respondent is Gaynor De'Antiquis, a solicitor. She was formerly employed as an assistant solicitor by Drummonds Kirkwood LLP ('DK'), solicitors, and worked at its Epsom office, one of its five offices. On 21 July 2008 DK dismissed her and several other employees on the grounds of redundancy. On 25 July 2008, on the application of the Commissioners for Her Majesty's Revenue and Customs ('HMRC'), Blackburne J made an order in the Chancery Division appointing Richard Hooper and Nimish Patel as joint administrators of DK.
- On 28 July 2008, DK, acting by its joint administrators, entered into a management contract with Key2 in relation to DK's Epsom and Ewell offices. On 17 October 2008 Ms De'Antiquis brought a claim in the London South Employment Tribunal against various respondents, including Key2. Her claims were under various heads, including for pay in lieu of notice and in respect of untaken holiday; and for compensation for unfair dismissal and sex discrimination. She claimed that, as a transferee of that part of DK's undertaking comprising the Epsom office, Key2 was liable to her under regulations 4 and 7 of the Transfer of Undertakings (Protection of Employment) Regulations 2006 ('TUPE').
- By a reserved judgment dated 20 August 2009 and sent, with written reasons, to the parties on 24 August, Employment Judge Freer (sitting alone) held that, for the purposes of TUPE, there was both a transfer to Key2 of part of DK's undertaking and a service provision change. Crucially, and contrary to Key2's submissions, he also held that regulations 4 and 7 of TUPE were not disapplied by regulation 8(7). Regulation 8(7), central to this appeal, provides:
'Regulations 4 and 7 do not apply to any relevant transfer where the transferor is the subject of bankruptcy proceedings or any analogous insolvency proceedings which have been instituted with a view to the liquidation of the assets of the transferor and are under the supervision of an insolvency practitioner.'
- Key2's unsuccessful argument was that as DK was in administration, it was subject to 'analogous insolvency proceedings … instituted with a view to the liquidation of [its] assets …' within the meaning of regulation 8(7). Judge Freer, applying the guidance of the Employment Appeal Tribunal ('EAT') in Oakland v. Wellswood (Yorkshire) Ltd  IRLR 250, held that the determination of whether DK was or was not so subject required a fact-based inquiry. The outcome of his inquiry was that he found that DK was not so subject. Key2 thus had to meet Ms De'Antiquis's case on the merits; and Judge Freer directed that it should be listed for a merits hearing.
- Key2 appealed to the EAT. The appeal came before a panel comprising Underhill J (the President), Mr I. Ezekiel and Mr P. Smith. It was heard together with four other appeals raising a like issue, which Underhill J, in his judgment for the EAT delivered on 16 February 2011, described as being whether administration proceedings under Schedule B1 of the Insolvency Act 1986 constitute, or may constitute, 'insolvency proceedings which have been instituted with a view to the liquidation of the assets of the transferor' within the meaning of regulation 8(7). The EAT held that administration proceedings cannot constitute such proceedings. It rejected as inappropriate the ET's 'fact-based' approach and applied what it called an 'absolute' approach. The EAT thus did not need to consider Key2's challenge to the ET's findings of fact, which was in the nature of a perversity challenge. It dismissed Key2's appeal.
- Mummery LJ gave permission for an appeal by Key2 to this court on the basis that it would raise an important point under Council Directive 2001/23/EC, to which TUPE gave domestic effect. Key2 submitted to us (i) that the EAT was wrong to hold that administration proceedings cannot be 'analogous insolvency proceedings' within the meaning of regulation 8(7); (ii) that the ET had been right that the relevant question required a fact-based inquiry; but (iii) that it had been perversely wrong to make the factual finding that it did.
- We had able arguments from Mr Sonaike, for Key2, and Mr Bryant, for Ms De'Antiquis. We also had representations on behalf of the Secretary of State for Business, Innovation and Skills, whom Jackson LJ had permitted to intervene by way of written submissions. They were prepared by Ashley Serr, who had appeared for the Secretary of State before the EAT.
- The primary issue raised by the appeal turns therefore upon the application to administration of that provision of the 2001 Council Directive that was implemented domestically by regulation 8(7) of TUPE. We were not referred to any relevant decisions of the Court of Justice post-dating that Directive. We were, however, referred to several of its decisions preceding it, which Mr Bryant said illuminated the pathway to a conclusion that the EAT's 'absolute' approach was in line with the thinking of the Court of Justice.
- In what follows I shall: (i) summarise the relevant Directives; (ii) set out the relevant provisions of TUPE; (iii) summarise, so far as relevant, the law relating to administration under Schedule B1 to the Insolvency Act 1986; (iv) summarise the facts relating to the administration order made in relation to DK; (v) refer to the decisions of the Court of Justice; (vi) refer to the domestic authorities; (vii) consider the reasons of the ET; (viii) consider the judgment of the EAT; and (ix) explain my conclusions.
(i) The Directives
- Council Directive 77/187/EEC ('the 1977 Directive') was the original 'Acquired Rights Directive'. It was introduced with a view to approximating the laws of Member States relating to the safeguarding of employees' rights in the event of transfers of undertakings, businesses or parts of businesses. It was implemented domestically by the Transfer of Undertakings (Protection of Employment) Regulations 1981 (SI 1981/1794). There is no need to refer in detail to either the 1977 Directive or the 1981 Regulations. I note merely that neither included any provision to the effect that the full impact of their respective provisions did not apply equally to relevant transfers made by transferors which or who were in insolvent liquidation or bankruptcy (in the latter case, I use that for shorthand to cover, in the domestic context, a transfer by a trustee in bankruptcy).
- Council Directive 98/50/EC of 29 June 1998 amended the 1977 Directive so as to modify its application to relevant transfers made by a transferor who or which was the subject of bankruptcy proceedings or 'analogous insolvency proceedings' of a nature that, domestically, are now referred to in regulation 8(7) of TUPE. I must refer to the 1998 Directive more fully.
- Recital (1) recited provisions of the Social Charter to the effect that the completion of the internal market:
'… must lead to an improvement in the living and working conditions of workers in the European Community. The improvement must cover, where necessary, the development of certain aspects of employment regulations such as procedures for collective redundancies and those regarding bankruptcies. ….'
- Recital (3) recited that:
'Whereas the purpose of this Directive is to amend Directive 77/187/EEC in the light of the impact of the internal market, the legislative tendencies of the Member States with regard to the rescue of undertakings in economic difficulties, the case-law of the Court of Justice …, Council Directive 75/129/EEC … on the approximation of the laws of the Member States relating to collective redundancies and the legislation already in force in most Member States;'
- Recital (7) recited that:
'Whereas, with a view to ensuring the survival of insolvent undertakings, Member States should be expressly allowed not to apply Articles 3 and 4 of Directive 77/187/EEC to transfers effected in the framework of liquidation proceedings, and certain derogations from that Directive's general provisions should be permitted in the case of transfers effected in the context of insolvency proceedings.'
- Article 1.2 replaced articles 1 to 7 of the 1977 Directive with the provisions set out in Sections I to IV of Article 1. They were later incorporated in the codifying Council Directive 2001/23/EC, the Directive now in force ('the 2001 Directive'), and so there is no need to refer to the terms of the 1998 Directive itself. I need say only that the provisions of the 1998 Directive presently relevant were contained in the new article 4a that was part of the replacement provisions of the 1977 Directive; and that article 4a then became article 5 in the 2001 Directive.
- I come to the 2001 Directive, the current Directive on the approximation of laws relating to the safeguarding of employees' rights in the event of relevant transfers of undertakings, businesses or parts of them. Recital (1) recited that the 1977 Directive had been substantially amended and that the interests of clarity and rationality required its codification. Recital (3) recited the need for the protection of employees, in the event of a change of employer, to ensure the safeguarding of their rights. Recital (5) was to the like effect as recital (1) of the 1998 Directive.
- Article 1.1(a) provides that the Directive applies 'to any transfer of an undertaking, business or part of an undertaking or business to another employer as a result of a legal transfer or merger'. Article 1.1(b) defines a 'transfer' more precisely. Article 2 defines a 'transferor' as meaning any legal or natural person who, by reason of a transfer within the meaning of Article 1, ceases to be the employer in respect of the undertaking, business or part; and a 'transferee' as any natural or legal person who, by reason of the transfer, becomes the employer in respect of the undertaking, business or part. Chapter II is headed 'Safeguarding of employees' rights' and articles 3.1 and 4.1 provide respectively:
'The transferor's rights and obligations arising from a contract of employment or from an employment relationship existing on the date of a transfer shall, by reason of such transfer, be transferred to the transferee. …
The transfer of the undertaking, business or part of the undertaking or business shall not in itself constitute grounds for dismissal by the transferor or the transferee. This provision shall not stand in the way of dismissals that may take place for economic, technical or organisational reasons entailing changes to the workforce. …
- The material parts of Article 5 provide:
'1. Unless Member States provide otherwise, Articles 3 and 4 shall not apply to any transfer of an undertaking, business or part of an undertaking or business where the transferor is the subject of bankruptcy proceedings or any analogous insolvency proceedings which have been instituted with a view to the liquidation of the assets of the transferor and are under the supervision of a competent public authority (which may be an insolvency practitioner authorised by a competent public authority).
2. Where Articles 3 and 4 apply to a transfer during insolvency proceedings which have been opened in relation to a transferor (whether or not those proceedings have been instituted with a view to the liquidation of the assets of the transferor) and provided that such proceedings are under the supervision of a competent public authority (which may be an insolvency practitioner determined by national law) a Member State may provide that:
(a) notwithstanding Article 3(1), the transferor's debts arising from any contracts of employment or employment relationships and payable before the transfer or before the opening of the insolvency proceedings shall not be transferred to the transferee, provided that such proceedings give rise, under the law of that Member State, to protection at least equivalent to that provided for in situations covered by Council Directive 80/987/EEC of 20 October 1980 on the approximation of the laws of the Member States relating to the protection of employees in the event of the insolvency of their employer, and, or alternatively, that,
(b) the transferee, transferor or person or persons exercising the transferor's functions, on the one hand, and the representatives of the employees on the other hand may agree alterations, in so far as current law or practice permits, to the employees' terms and conditions of employment designed to safeguard employment, opportunities by ensuring the survival of the undertaking, business or part of the undertaking or business. …'
- The 2001 Directive was implemented domestically by TUPE. Regulation 8(7) implemented article 5.1; and both options in article 5.2 were implemented by regulations 8(1) to (6) and 9 respectively. I must refer to the material provisions of TUPE more fully.
- Regulation 3, headed 'relevant transfer', provides that TUPE applies both to 'a transfer of an undertaking, business or part of an undertaking or business situated immediately before the transfer in the United Kingdom to another person where there is a transfer of an economic entity which retains its identity' and to a 'service provision change' as defined in regulation 3(1)(b). The interpretation provisions in regulation 1 provide that 'transferor' and 'transferee' shall be construed accordingly.
- Regulation 4, headed 'Effect of relevant transfer on contracts of employment', provides, so far as material:
'(1) Except where objection is made under paragraph (7), a relevant transfer shall not operate so as to terminate the contract of employment of any person employed by the transferor and assigned to the organised grouping of resources or employees that is subject to the relevant transfer, which would otherwise be terminated by the transfer, but any such contract shall have effect after the transfer as if originally made between the person so employed and the transferee.
(2) Without prejudice to paragraph (1), but subject to paragraph (6), and regulations 8 and 15(9), on the completion of a relevant transfer –
(a) all the transferor's rights, powers, duties and liabilities under or in connection with any such contract shall be transferred by virtue of this regulation to the transferee; and
(b) any act or omission before the transfer is completed, of or in relation to the transferor in respect of that contract or a person assigned to that organised grouping of resources or employees shall be deemed to have been an act or omission of or in relation to the transferee.
(3) Any reference in paragraph (1) to a person employed by the transferor and assigned to the organised grouping of resources or employees that is subject to a relevant transfer, is a reference to a person so employed immediately before the transfer, or who would have been so employed if he had not been dismissed in the circumstances described in regulation 7(1), including, where the transfer is effected by a series of two or more transactions, a person so employed and assigned or who would have been so employed and assigned immediately before any of those transactions. …'
- Regulation 7, headed 'Dismissal of employee because of relevant transfer', provides, so far as material:
'(1) Where either before or after a relevant transfer, any employee of the transferor or transferee is dismissed, that employee shall be treated for the purposes of Part X of the 1996 Act (unfair dismissal) as unfairly dismissed if the sole or principal reason for his dismissal is –
(a) the transfer itself; or
(b) a reason connected with the transfer that is not an economic, technical or organisational reason entailing changes in the workforce …'.
- Regulation 8, headed 'Insolvency', is of direct relevance, in particular regulation 8(7):
'(1) If at the time of a relevant transfer the transferor is subject to relevant insolvency proceedings paragraphs (2) to (6) apply.
(2) In this regulation "relevant employee" means an employee of the transferor –
(a) whose contract of employment transfers to the transferee by virtue of the operation of these Regulations; or
(b) whose employment with the transferor is terminated before the time of the relevant transfer in the circumstances described in regulation 7(1).
(3) The relevant statutory scheme specified in paragraph 4(b) (including that sub-paragraph as applied by paragraph 5 of Schedule 1) shall apply in the case of a relevant employee irrespective of the fact that the qualifying requirement that the employee's employment has been terminated is not met and for those purposes the date of the transfer shall be treated as the date of the termination and the transferor shall be treated as the employer.
(4) In this regulation the "relevant statutory schemes" are –
(a) Chapter VI of Part XI of the 1996 Act;
(b) Part XII of the 1996 Act.
(5) Regulation 4 shall not operate to transfer liability for the sums payable to the relevant employee under the statutory schemes.
(6) In this regulation "relevant insolvency proceedings" means 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.
(7) Regulations 4 and 7 do not apply to any relevant transfer where the transferor is the subject of bankruptcy proceedings or any analogous insolvency proceedings which have been instituted with a view to the liquidation of the assets of the transferor and are under the supervision of an insolvency practitioner.' (Emphasis supplied)
The emphasised language of regulation 8(7) is, with minor immaterial omissions, drawn verbatim from article 5.1 of the 2001 Directive.
- The intended workings of regulation 8 are not immediately self-evident but they received a typically luminous explanation from Elias J (as he then was) when President of the Employment Appeal Tribunal. In Secretary of State for Trade and Industry v. Slater and others  ICR 54, Elias J explained 'the rationale behind regulation 8' as follows:
'13. The scheme of the 2006 Regulations is broadly this. Typically, where there is a transfer of an undertaking, regulation 4 provides that the employees are automatically transferred to the transferee with the latter taking over all the liabilities of the transferor.
14. Regulation 7 provides that any dismissal will be automatically unfair unless it is for an economic, technical or organisational reason connected with the transfer. However, it is recognised that to apply these principles to insolvent businesses would discourage potential purchasers of the business from acquiring the business. That would be to the detriment of the employees.
15. Regulation 8 therefore aims to relieve transferees of the burdens which would otherwise apply in certain defined circumstances.
16. Essentially this is done in two quite distinct ways. The most extensive exception from the effect of the Regulations is created by regulation 8(7) (which is intended to reflect the provisions of article 5(1) of Directive 2001/23). This provides that where the insolvency proceedings are analogous to bankruptcy proceedings and have been instituted with a view to liquidation of the assets, then neither regulation 4 nor 7 applies at all. There is no transfer of staff to the transferee and no claim for unfair dismissal against him (although other provisions of the Regulations, such as the information and consultation regulations, continue to operate).
17. A narrower exception is carved out where regulation 8(6) applies. This applies to insolvency proceedings where the purpose is not with a view to liquidation of assets. This does not altogether exclude, but it does modify, the effects of regulations 4 and 7. It means that the transferee does not pick up all of the liabilities which would otherwise transfer to him.
18. Regulation 8(3) has the effect of making the Secretary of State liable for all the obligations still outstanding at the date of the transfer which are caught by Part XII of the 1996 Act [the Employment Rights Act 1996]. There is a deemed dismissal at that stage for purposes of fixing those liabilities even though there has been no actual dismissal. However, to the extent that the liabilities exceed the statutory limits, liability transfers to the transferee.
19. Regulation 8(5) has the effect of making the insolvency fund rather than the transferee liable to meet any redundancy liabilities. (These will typically arise where there are dismissals for redundancy which are not for economic, technical or organisational reasons. The issue does not arise here.)'
- Finally, I should quote the material part of regulation 9, which implemented the option contained in paragraph 5.2(b) of the 2001 Directive:
'9. Variations of contract where transferors are subject to relevant statutory proceedings
If at the time of a relevant transfer the transferor is subject to relevant insolvency proceedings these Regulations shall not prevent the transferor or transferee (or an insolvency practitioner) and appropriate representatives of assigned employers agreeing to permitted variations…'.
(iii) Administration under Schedule B1 of the Insolvency Act 1986
- The administration procedure was introduced by the Insolvency Act 1985 and consolidated in Part II of the Insolvency Act 1986, comprising sections 8 to 27. The original regime was substantially altered by the Enterprise Act 2002, but a nostalgic historical summary of it is worthwhile. Originally, a company could only become subject to the administration procedure if the court made an administration order. The court could only make such an order if (a) it was satisfied that the company was, or was likely to become, unable to pay its debts, and (b) it considered that the making of an administration order 'would be likely to achieve one or more' of the four 'purposes' for whose achievement an administration order might be made. Those purposes were specified in section 8(3):
'The purposes for whose achievement an administration order may be made are –
(a) the survival of the company, and the whole or any part of its undertaking, as a going concern;
(b) the approval of a voluntary arrangement under Part I [of the Insolvency Act 1986];
(c) the sanctioning under section 425 of the Companies Act  of a compromise or arrangement between the company and any such persons as are mentioned in that section; and
(d) a more advantageous realisation of the company's assets than would be effected on a winding up;
and the order shall specify the purpose or purposes for which it is made.'
- Section 8(2) provided that an administration order was one directing that, during the period for which it was in force, the affairs, business and property of the company were to be managed by an administrator appointed for that purpose by the court. Sections 10 and 11 provided that the presentation of a petition for an administration order resulted in a moratorium on (in broad terms) the winding up of the company or the taking of proceedings against it; and upon an order being made, a like moratorium continued. By section 14 the administrator was empowered to do all things necessary for the management of the affairs, business and property of the company and had all the powers specified in Schedule 1. Those powers did not, however, enable the administrator to pay dividends to pre-administration unsecured creditors following a realisation of assets, as such a power was ordinarily neither necessary nor incidental to his functions (I considered this in Re The Designer Room Ltd  EWHC 720 (Ch);  1 WLR 1581; as did the Court of Appeal in Re Lune Metal Products Ltd (in administration)  EWCA Civ 1720;  2 BCLC 746).
- Under the original regime, applications (i) for administration orders, (ii) raising questions arising during an administration, and (iii) for the discharge of an administration order when the purpose or purposes of the order had been achieved, or was or were seen to be incapable of achievement, formed a large part of the diet of the judges of the Chancery Division dealing for the time being with the work of the Companies Court. My experience was that the most usual purpose sought to be achieved by an administration order, and the most usual basis of applications for such orders, was that identified in section 8(3)(d), namely 'a more advantageous realisation of the company's assets than would be effected on a winding up'. This was often justified on little more than the simple basis that a realisation of assets in an administration would not suffer the costs of a compulsory liquidation, including in particular the ad valorem fees payable to the Insolvency Service on a realisation of assets. Once the realisation of assets was complete, the exit from the administration would usually be into liquidation. The preferred choice, because it was cheaper, was into voluntary rather than compulsory liquidation, although for reasons I need not explain that had disadvantages for preferential creditors. However, routes were devised by which an exit into a voluntary liquidation could be achieved without disadvantaging them (see, for example, Re UCT (UK) Ltd (in admin)  1 WLR 436).
- The original administration procedure was substantially altered by section 248 of the Enterprise Act 2002, which substituted a new Part II of the 1986 Act, now comprising a single section, section 8, which provides that 'Schedule B1 to this Act (which makes provision about the administration of companies) shall have effect.' Schedule B1 contains 116 paragraphs as compared with the mere 20 sections of the original Part II. The new provisions came into effect on 15 September 2003 although the old regime continued to apply to continuing administrations made by orders under that regime. It also continued to apply to administrations in relation (inter alia) to limited liability partnerships (as DK was) until 1 October 2006, when the Limited Liability Partnerships (Amendment) Regulations 2005 (SI 2005 No 1989) applied the new regime, with modifications, to such partnerships as well. One material change is that, under Schedule B1, out of court appointments of an administrator can also be made and so paragraph 1(2)(a) provides that a company is in administration while the appointment has effect. Paragraph 2 provides that a person may be appointed as an administrator by an order of the court under paragraph 10, by the holder of a floating charge under paragraph 14, or by the company or its directors under paragraph 22. In the present case, the appointment was made by an order of the court. Paragraph 43 applies a like moratorium to a company in administration as applied under the old regime.
- Paragraphs 3 and 4, headed 'Purpose of administration', are central to the argument and provide:
'3. (1) The administrator of a company must perform his functions with the objective of –
(a) rescuing the company as a going concern, or
(b) achieving a better result for the company's creditors as a whole than would be likely if the company were wound up (without first being in administration), or
(c) realising property in order to make a distribution to one or more secured or preferential creditors.
(2) Subject to sub-paragraph (4), the administrator of a company must perform his functions in the interests of the company's creditors as a whole.
(3) The administrator must perform his functions with the objective specified in sub-paragraph (1)(a) unless he thinks either –
(a) that it is not reasonably practicable to achieve that objective, or
(b) that the objective specified in sub-paragraph (1)(b) would achieve a better result for the company's creditors as a whole.
(4) The administrator may perform his functions with the objective specified in sub-paragraph (1)(c) only if –
(a) he thinks that it is not reasonably practicable to achieve either of the objectives specified in sub-paragraph 1(a) and (b), and
(b) he does not unnecessarily harm the interests of the creditors of the company as a whole.
4. The administrator of a company must perform his functions as quickly and efficiently as is reasonably practicable.'
- Paragraph 11, dealing with the appointment of administrators by the court, provides that the court may make an administration order in relation to a company only if satisfied '(a) that the company is or is likely to become unable to pay its debts, and (b) that the administration order is reasonably likely to achieve the purpose of administration'.
- Whereas, therefore, under the old regime there were four purposes for whose achievement an administration order might be made, under the current regime paragraph 11 shows that there is but a single 'purpose of administration', although paragraph 3 explains that it comprises three objectives in respect of which there is an order of priority. The overriding duty of an administrator is to perform his functions 'in the interests of the company's creditors as a whole'. In doing so, he must perform them with the objective of achieving the objective in paragraph 3(1)(a) ('rescuing the company as a going concern') unless, however, he thinks that it is not reasonably practicable for him do so or that the objective of paragraph 3(1)(b) 'would achieve a better result for the company's creditors as a whole.' Paragraph 3(4) provides for the circumstances in which the administrator may perform his functions with the objective of paragraph 3(1)(c), an objective falling at the lower end of the hierarchy of priority.
- It can therefore perhaps be said that the primary objective of an administration appointment is the rescuing of the company as a going concern, an objective which has in mind the saving of the company's undertaking, or a substantial part of it, and in due course the return of the company to its management. This might in some cases require the use of a company voluntary arrangement or a scheme of arrangement. Accepting the existence of such objective, it must also be recognised that in practice a high proportion of appointments of administrators have been and will be made in cases in which it is apparent both before and after the appointment that a rescue of the company in this sense is not reasonably practicable and that the alternative objective that is foreseen as being achievable is the paragraph 3(1)(b) objective. The achievement of that objective will usually involve the sale of the company's business and undertaking, either in whole or in parts. Moreover, this objective must be pursued even if a rescue of the company is perceived as practicable but the administrator nevertheless thinks that the paragraph 3(1)(b) objective would achieve a better result for the company's creditors as a whole. Despite this hierarchical scheme, the distinction between the old regime and the new one is that appointments of an administrator (whether made in or out of court) do not specify the particular objective to be pursued and achieved. What objective the administrator sets out to achieve is a matter for his own judgment.
- Accepting this last point as well, it is also the case that the particular way in which an administrator will or may set about achieving the purpose of administration is in practice not something that remains an unknown until after the administration appointment has been made. On the contrary, as paragraph 11 prescribes, the court may only make such an appointment if it is satisfied that the administration 'is reasonably likely to achieve the purpose of administration'; and in order to make an assessment as to that, the court requires evidence as to how the purpose is foreseen as likely to be achieved. That evidence must include an opinion from the proposed administrators that it is reasonably likely that the purpose will be achieved (rule 2.3(5) of the Insolvency Rules 1986).
- Often the evidence will reject as unachievable any prospect of rescuing the company as a going concern and will instead focus on the objective of achieving a better result for the company's creditors as a whole than would be likely if the company were wound up (without first being in administration). If the court is satisfied that such objective is reasonably likely to be achieved, that will be sufficient to satisfy the paragraph 11(b) condition. Its achievement will quite commonly involve a proposed sale of the company's business or undertaking, sometimes by way of a so-called 'pre-pack' under which a sale has already been organised prior to any administration and with an expectation that, once appointed, the administrator will promptly implement the sale. Such cases were the subject of discussion by His Honour Judge Cooke in his judgment in Re Kayley Vending Ltd  EWHC 904 (Ch);  BCC 578. Another reported example of such a case, conveniently close to home, is Re DKLL Solicitors  EWHC 2067 (Ch);  1 BCLC 112, an application for an administration order in relation to the insolvent partnership of DKLL Solicitors. The decision was that of Andrew Simmonds QC, sitting as a Deputy Judge of the High Court, who explained in  that the purpose of the application was to enable the proposed administrators 'to effect an immediate sale of the partnership's business to a newly incorporated limited liability partnership, known as Drummonds Kirkwood LLP … for a total consideration of £400,000.' The proposed purchaser was DK, which history has shown was destined to fare no better than the proposing vendor. (The jurisdiction to make an administration order in relation to an insolvent partnership was likewise dependent on the satisfaction of same two conditions as are specified in paragraph 11 of Schedule B1: see the judge's explanation at ). It is worth quoting what the judge said at :
'… It is not possible to rescue the partnership as a going concern, so the objective relied on is (b), namely achieving a better result for the partnership's creditors as a whole than would be likely if the partnership were wound up without first being in administration. The applicants' case [they were the two equity partners in the firm] is that the sale of the partnership's business to the proposed purchaser for £400,000 will achieve that objective. … According to the estimated statement of affairs, total funds available for creditors on a forced sale in the event of liquidation will be only about £105,000, compared to the £400,000 proceeds of the proposed sale, and the liquidation itself would create an additional £44,000 of preferential claims by employees for arrears of pay and holiday pay'. [Emphasis supplied]
The evidence was that the sale could and would be completed immediately after the appointment of administrators and the judge made the order sought.
- Another recent reported example of an appointment of administrators in order to effect a 'pre-pack' disposal of parts of the business of a solicitors' firm is Re Halliwells LLP  EWHC 2036 (Ch);  1 BCLC 345, a decision of Kitchin J (as he then was). Again, this was a case in which the evidence for the appointment of administrators showed that, before their appointment, the proposed administrators had formed the view that Halliwells could not be rescued as a going concern, nor was it reasonably practicable to achieve the objective of a better result for Halliwells' creditors as a whole than would be likely if it were wound up without first being in administration. The only purpose of administration that was likely to be achieved, and which was the basis of the application, was that referred to in paragraph 3(1)(c) of Schedule B1. Kitchin J made the order sought. The evidence showed that the implementation of the pre-packs would achieve the best return for the unsecured creditors, who would receive the maximum statutory 'prescribed part' payment of £600,000, which would be a higher dividend than, as the judge explained, they would receive if Halliwells were allowed to proceed into a traded administration. As is implicit in this, an important new feature of the current administration regime is the power of an administrator to make distributions to creditors (see paragraph 65 of Schedule B1) although, in the case of proposed distributions to creditors who are neither secured nor preferential, only if the court gives permission.
(iv) The administration order in respect of DK
- The application for an administration order was made by HMRC as creditors of DK (see paragraph 12(1)(c) of Schedule B1). Their application notice was issued on 15 July 2008 and was supported by an affidavit of Catherine Shaw made the previous day and a statement from Richard Hooper, the proposed administrator. Mr Hooper's statement simply expressed his opinion 'that the purpose of Administration is reasonably likely to be achieved'. The evidence of Ms Shaw, a solicitor with Howes Percival LLP, HMRC's solicitors, was fuller. She described how an administration order was made in respect of DKLL Solicitors, how its business and assets were sold on a pre-packaged basis to DK and how within 18 months DK became indebted to HMRC in the sum of £554,860.56 made up of VAT and PAYE liabilities.
- Ms Shaw explained as follows HMRC's belief that 'The Purposes [sic] Of Administration Are Reasonably Likely To Be Achieved':
'22. To the best of [HMRC's] knowledge information and belief the principal assets of [DK] consist of its work in progress and its ongoing retainers with its clients and the provision of legal services.
23. It is likely that if [DK] were wound up without first being in Administration this would lead to an immediate intervention by the Law Society to manage and distribute the live client files and the client account. This is likely, amongst other things, to have a serious impact upon the ability to recover [DK's] work in progress and upon the work undertaken by [DK's] clients.
24. The proposed Administrator has indicated that he believes that there may be a potential third party purchaser for the business and certain assets of [DK]. If such a sale took place this is likely to be beneficial to creditors.
25. The proposed Administrator is not currently in a position to confirm whether or not it is likely to prove possible to rescue [DK] as a going concern, although this may be the case. The Administrator will, of course, perform his functions with the primary objective of rescuing [DK] as a going concern unless it is not reasonably practicable to achieve that objective. However, by reason of the matters set out above, it is likely that the winding up of [DK] would cause a significant reduction in the potential return to the creditors of [DK], such that Administration is likely to produce a better result for [DK's] creditors as a whole than would be likely if [DK] were wound up (without first being in Administration).
26. The moratorium which would be afforded to [DK], pursuant to paragraph 43 of Schedule B1 of the Act, upon the making of an Administration Order would enable the proposed Administrator to:
26.1 take control of [DK] and its assets;
26.2 seek to protect the value of those assets for the benefit of [DK's] creditors of which [HMRC are] one;
26.3 seek to conduct an orderly sale of the business and assets of [DK] within a short timeframe so as to avoid detriment to [DK's] clients;
26.4 seek to preserve by such a sale as many jobs of [DK's] employees as possible and therefore to reduce the level of claims from employees.
27. Accordingly, [HMRC] believe that the making of an Administration Order in relation to [DK] would be the most effective way to seek to preserve [DK's] assets for the benefit of its creditors as a whole.'
- On Friday 25 July 2008 Blackburne J made the requested order, appointing Mr Hooper and Nimish Patel as joint administrators. His order records that he also had a witness statement from Peter Rees, which we have not been shown.
- On Monday 28 July 2008 DK, acting by its joint administrators, entered into a management agreement with Key2 in relation to DK's Epsom and Ewell offices. The agreement recited that it set out the terms and conditions on which Key2 had agreed to act as a sub-contractor to DK for the purpose of collecting in its work in progress and that '[DK's] business has ceased trading with effect from 25 July 2008 and is now in run-off with a view to the liquidation of its assets'. Clause 1 was headed 'Management Agreement and Agency'. DK thereby appointed Key2 its sub-contractor 'with the intention that [it] will convert and collect the [unbilled work in progress of DK] as agent for [DK] with a view to realizing the assets of [DK]'. Unless extended by mutual agreement, the agreement was to last for one year. Key2 was to have access to DK's Epsom and Ewell offices and to its books and records. By clause 2, headed 'Collection of Assets and remuneration of the Agent', Key2 was to collect in and account to the administrators for the work in progress at a commission of 25% of the first £100,000 collections and 50% of subsequent ones. Clause 7.4 provided that the agreement should survive the termination or other discharge of the administration order; and clause 7.5 made it clear that Key2 was not responsible for any liabilities of DK accruing prior to noon on 28 July 2008. There is no need to describe the nature of the agreement further. The ET found it to be a relevant transfer of the Epsom business, being part of DK's undertaking.
- On 16 September 2008 the joint administrators presented their report to creditors. They did so pursuant to their duties under paragraph 49 of Schedule B1, which requires an administrator to 'make a statement setting out proposals for achieving the purpose of administration' and requires it to be sent to (inter alios) the company's creditors as soon as reasonably practicable after the entry into administration and in any event within eight weeks.
- Paragraph 3.1 described the genesis of DK. By the end of 2007, it had six branches and about 80 employees. Its income was generated primarily from criminal and conveyancing work. By mid-June 2008, its decline in fee income meant that, failing a substantial cash injection from its members, parts of it would have to be sold so as to avoid the inevitable negative cash flow that would result from further redundancies. The members of DK sought insolvency advice and DK's business was advertised in the Financial Times on 15 July 2008, with 18 July being the closing date for offers. There was a strong response from several potential purchasers. The expectation was that any sale would be completed immediately after the proposed appointment of administrators. The original expectation was that the objective in paragraph 3(1)(b) of Schedule B1 could be achieved but in the event a sale of the business proved impossible. Negotiations with a potential purchaser were conducted over the weekend of 26 and 27 July 2008 (immediately following the administration order) but fell through, in part because the purchaser would be (or considered it would be) answerable under TUPE for any redundancy costs incurred in reducing the number of employees to a level that would make the business profitable. The management contracts that were instead put in place (including that relating to the Epsom and Ewell offices) were, however, expected to realise sufficient value for DK's work in progress to achieve the objective in paragraph 3(1)(c).
- Under the heading 'progress of the administration', the report explained that whilst it was impossible for DK to continue trading during the administration, management contracts were put in place in respect of DK's various offices so that DK's clients could continue to be serviced and the administrators could realise the work in progress. The firms with which those contracts were entered into were permitted, at their expense, to use DK's leased premises on a temporary basis. This applied to Key2 in relation to the Epsom and Ewell offices. At the date of the report, no realisations of work in progress had been made. All DK's staff had been laid off on 28 July 2008. At the date of the report, more than 60 employee claims had been made. The administrators' assessment was that there were no continuing trading issues to be dealt with and that it was appropriate to exit the administration into voluntary liquidation.
- On 2 February 2009 Blackburne J made an order under paragraph 79 of Schedule B1 discharging the administration order and ordering DK to be wound up under the provisions of the Insolvency Act 1986.
(v) The decisions of the Court of Justice
- The starting point is H.B.M. Abels v. The Administrative Board of the Bedrijfsvereniging voor de Metaalindustrie en de Electrotechnische Industrie (Case C-135/83)  ECR 469. The relevant Directive was the 1977 Directive. Mr Abels was employed in the Netherlands by Thole. Thole ran into financial difficulty and in March 1982 a Dutch court made a final order suspending the payment of its debts, a 'surséance van betaling' ('SvB'). On 9 June 1982 the same court declared Thole insolvent and appointed a liquidator, who entered into an agreement transferring its business to TTP with effect from 10 June 1982. The report does not explain whether (i) this was a transfer made on 10 June pursuant to an arrangement equivalent to a 'pre-pack', or (ii) Thole continued to trade for a period whilst it was under the liquidator's control and the transfer to TTP that he later made was then treated as taking effect from the prior date. I infer, however, that it was the latter, which I regard as more in line with the probabilities and as perhaps also receiving support from what the Court of Justice said in paragraph 3 of its judgment:
'… It was during the liquidation proceedings that, pursuant to an agreement concluded by the liquidator, Thole's business was transferred with effect from 10 June 1982 to [TTP], which continued to operate the undertaking and took over most of its work-force, including Mr Abels.'
If the business was actually transferred on 10 June 1982, it would have been unnecessary to have added that it was with effect from that date. I note, however, that Underhill J, in paragraph 10(2) of his judgment for the EAT, took a different view on this, where having referred to Thole's entry into liquidation on 9 June 1982, he said that 'the following day the liquidator transferred the business as a going concern to a company called TTP'. The point perhaps has significance in the context of the consideration of the later decision of the Court of Justice in Dethier to which I shall come.
- The question raised in Mr Abels' litigation was who should pay his wages accrued due between 1 and 9 June 1982 and his arrears of holiday pay for the year beginning 1 July 1981. Was the effect of the 1977 Directive that those liabilities passed to TTP just as they would have done if the sale to TTP had been made at a time when Thole was not subject to any insolvency regime? The 1977 Directive itself said nothing to the effect that supervening insolvency made any difference to its intended effect.
- The questions referred to the Court of Justice required it to consider not just whether the transfer by the liquidator fell outside the scope of the 1977 Directive; but also whether the 1977 Directive applied to transfers by a debtor subject, as Thole was immediately before its liquidation, to a SvB. The court said, at paragraph 13 of its judgment, that the meaning of the 1977 Directive must be clarified 'in the light of the scheme of the directive, its place in the system of Community law in relation to the rules on insolvency, and its purpose'. In paragraph 17 it referred to the fact that 'the rules on liquidation proceedings and analogous insolvency proceedings are very different in the various Member States'. It did not explain what it meant by 'analogous insolvency proceedings' but concluded in the same paragraph that 'if the directive had been intended to apply also to transfers of undertakings in the context of such proceedings [sc. liquidation proceedings and analogous insolvency proceedings], an express provision would have been included for that purpose'.
- Having on one view there arrived at the answers to the questions before it, the court in the following paragraphs proceeded to consider the rival arguments as to whether the 1977 Directive did or did not apply to 'liquidation or similar proceedings'. The argument that it did was founded on the point that the employees of an insolvent employer were those most in need of protection. The rival argument was that an application of the 1977 Directive to a transfer of an undertaking in the event of a liquidation or a SvB 'might dissuade a potential transferee from acquiring an undertaking on conditions acceptable to the creditors thereof, who, in such a case, would prefer to sell the assets of the undertaking separately. That would entail the loss of all the jobs in the undertaking, detracting from the usefulness of the directive'. As regards transfers by companies in insolvent liquidation, that consideration carried the day with the court, which concluded as follows:
'23. It is apparent from the foregoing considerations that a serious risk of general deterioration in working and living conditions of workers, contrary to the social objectives of the Treaty, cannot be ruled out. It cannot therefore be concluded that Directive No 77/187 imposes on the Member States the obligation to extend the rules laid down therein to transfers of undertakings, businesses or parts of businesses taking place in the context of insolvency proceedings instituted with a view to the liquidation of the assets of the transferor under the supervision of the competent judicial authority.' [Emphasis supplied]
24. It must nevertheless be made clear that, even though, in view of the considerations set out above, transfers of that kind do not fall within the scope of the above-mentioned directive, the Member States are at liberty independently to apply the principles of the directive, wholly or in part, on the basis of their national law alone.
The words emphasised in paragraph 23 were the inspiration for the key language later included in article 5.1 of the 2001 Directive and regulation 8(7) of TUPE. In paragraph 23, however, the court was referring only to transfers effected by a company in insolvent liquidation.
- The court turned next to a question that did not arise on the facts that had happened, namely whether the 1977 Directive applied to a transfer of an undertaking in the course of a procedure such as a SvB, which the court summarised as being one under which there was 'judicial leave to suspend payment of debts'. One argument was that the same considerations that drove the answer to the first question applied equally to that question. The rival argument was that, if the answer was the same, 'leave to suspend payment of debts might be applied for specifically with a view to a transfer to the detriment to the rights of the workers'.
- The court concluded that the non-application of the 1977 Directive to transfers by companies in insolvent liquidation did not apply equally to transfers by a company in SvB proceedings. It explained its reasons thus:
'28. It is to be noted that proceedings such as those relating to a 'surséance van betaling' have certain features in common with liquidation proceedings, in particular inasmuch as the proceedings are, in both cases, of a judicial nature. They are, however, different from liquidation proceedings in so far as the supervision exercised by the Courts over the commencement and the course of such proceedings is more limited. Moreover, the object of such proceedings is primarily to safeguard the assets of the insolvent undertaking and, where possible, to continue the business of the undertaking by means of a collective suspension of the payment of debts with a view to reaching a settlement which will ensure that the undertaking is able to continue operating in the future. If no such settlement is reached, proceedings of this kind may, as in the present case, lead to the debtor's being put into liquidation.
29. It follows that the reasons for not applying the directive to transfers of undertakings taking place in liquidation proceedings are not applicable to proceedings of this kind taking place at an earlier stage.'
- Mr Bryant submitted to us that paragraph 28 showed that, in coming to the conclusion it did in relation to transfers by a company in SvB, the court was suggesting an absolute test, meaning that a transfer of the undertaking of a company in SvB would automatically be covered by the 1977 Directive and there would be no need for further factual inquiry. There is obvious force in that although how far it assists the resolution of the issue before us is another matter. The court was there focusing only upon the SvB procedure but did not also provide a comprehensive explanation of its nature. More light was, however, shed on it in the Opinion of Sir Gordon Slynn, the Advocate General, who wrote (at 476 of the report):
'The first question also refers to the suspension of payments by judicial order ('surséance van betaling'), though the question does not strictly arise in the present case since liquidation followed the order which was made. As I understand it this order is made by the court provisionally on the application of a debtor who considers that he cannot pay his debts. An administrator is appointed and in the meantime debts (other than preferential or secured debts including those to employees) cannot be enforced. The administrator must approve all acts of administration including transfers of parts of the enterprise and dismissal of employees. This provisional order is made without a full investigation by the court, but after a further hearing, of which creditors must be given notice, the court may make a final or definitive order. It seems that in a large number of cases, if the financial difficulties are not resolved, the final suspension order is followed by bankruptcy'.
- Sir Gordon's opinion was that, for like reasons as applied to transfers in liquidation, a transfer after a final SvB order was similarly excluded from the 1977 Directive. In this respect the Court of Justice took a different view.
- The next case is Giuseppe d'Urso, Adriana Ventadori and Others v. Ercole Marelli Elettromeccanica Generale SpA and Others (Case C-362/89)  ECR 1-4105. EMG was subjected to a 'special administration procedure' by a May 1981 Italian ministerial decree, whilst being authorised to continue trading. In September 1985 its entire undertaking was transferred to New EMG, which had been formed for the purpose. 940 employees were transferred to New EMG, whilst 518 remained with EMG, although their employment relationship was ended and responsibility for their pay was assumed by a state fund. The issue for the national court was whether the contracts of the plaintiffs (some of the 518) continued with EMG or passed to New EMG. That led to a reference to the Court of Justice for the answer to the question whether the 1977 Directive applied to transfers of businesses made by undertakings that were under 'special administration'.
- The Court of Justice referred to the distinction drawn in Abels between 'transfers effected in bankruptcy proceedings designed to liquidate the transferor's assets under the supervision of the competent judicial authority', to which the 1977 Directive did not apply, and 'a procedure like a "surséance van betaling" (suspension of payments)' to which, although it had features in common with liquidation proceedings, the 1977 Directive did apply. It referred to paragraph 28 of its judgment in Abels for its reasons for the latter conclusion. It said, at paragraph 26, that given all the considerations set out in the Abels judgment 'the decisive test is therefore the purpose of the procedure in question'.
- The court examined the nature of the relevant Italian ministerial decree and explained that it could have two kinds of effect. One was akin to a decree under the general law ordering 'compulsory administrative liquidation', which had effects in substance identical to bankruptcy proceedings. Alternatively, the decree could authorise the undertaking to continue trading under the supervision of an auditor for a specified period. The auditor's powers included the power to draw up a programme whose implementation must be authorised by the supervising authority and which must comprise, whilst taking account of creditors' interests, a restructuring plan for the company.
- The court said, in paragraph 30, that legislation like the Italian law in question had 'different characteristics depending on whether the decree ordering compulsory administrative liquidation authorizes the undertaking to continue trading'. It said, in paragraph 31, that if there is no such authorisation, or if 'the period of validity of a decision authorizing the undertaking to continue trading has expired', the case will fall on the Abels side of the line and article 1(1) of the 1977 Directive will not apply to the transfer. It explained, in paragraph 32 that:
'On the other hand, it is apparent from the provisions of Italian Law that when the decree ordering the application of the special administration procedure also authorizes the undertaking to continue trading under the supervision of an auditor, the primary purpose of that procedure is to give the undertaking some stability allowing its future activity to be safeguarded. The social and economic objectives thus pursued cannot explain nor justify the circumstance that, when all or part of the undertaking concerned is transferred, its employees lose the rights which the Directive confers on them under the conditions which it lays down'.
- Mr Bryant submitted that D'Urso showed again that the court had favoured the application of an absolute test. He said that the function of the court was, in that case, to determine the primary purpose of the ministerial decree. If it was to achieve an effect equivalent to liquidation, the 1977 Directive did not apply. If it was to authorise continued trading, the 1977 Directive did apply. Whilst I regard that way of summarising the particular decision as also a fair one, since I agree that what the court was doing was examining the purpose of the particular decree, I shall reserve until later to what extent it assists in the provision of a solution to the issue with which this court has been presented.
- The next case is Luigi Spano and Others v. Fiat Geotech SpA and Fiat Hitachi Excavators SpA (formerly Fiat Hitachi Construction Equipment SpA (Case C-472/93)  ECR 1-04321. It concerned a transfer of an undertaking which, under the procedure provided for by Italian Law No 675 of 12 August 1977 laying down measures for the co-ordination of industrial policy, restructuring, conversion and development, had been declared to be in critical difficulties. It will not, I consider, be constructive to detail its facts. The court's approach to the question before it was to re-affirm what it had said in paragraph 26 of D'Urso, namely that 'the determining factor to be taken into consideration is the purpose of the procedure in question'. As for the particular case, it noted that the purpose of a declaration that 'an undertaking is in critical difficulties' was to enable it to retrieve its economic and financial situation, but above all to preserve jobs. It said, in paragraph 28, that an undertaking found to be in critical difficulties was subject to a procedure 'which, far from being aimed at the liquidation of the undertaking, is designed on the contrary to promote the continuation of its business with a view to its subsequent recovery'. It continued:
'29. In particular, by contrast with insolvency proceedings, the procedure whereby an undertaking is declared to be in critical difficulties does not involve any judicial supervision or any measure whereby the assets of the undertaking are put under administration, and does not provide for any suspension of payments.
30. The economic and social objective pursued by that procedure cannot explain or justify the circumstance that, when all or part of the undertaking concerned is transferred, its employees lose the rights which the directive confers on them (see, by analogy, the judgment in D'Urso, paragraph 32).'
I do not derive any additional assistance from that decision in answering the particular question that arises, on different facts, before us.
- I come to the Court of Justice's decision in Jules Dethier Equipement SA v. Dassy and Another (Case C-319/94)  ICR 541. Mr Dassy had been employed by Sovam, a Belgian company, since 1974. In the 1990s Sovam suffered a substantial reduction in its turnover and its net assets fell below the amount of its share capital. The shareholders could not agree upon what course was to be followed and so Sovam applied to be wound up by the Belgian court. The court on 15 May 1991 made an order putting it into liquidation under the supervision of the court and appointed a liquidator. I understand, therefore, and this is important, that this was not an insolvent liquidation. On 5 June 1991 the liquidator terminated Mr Dassy's contract. Paragraphs 6 and 17 of the Opinion of Mr Advocate General Lenz explained that by an agreement of 27 June 1991 the liquidator entered into an agreement for the transfer to Jules Dethier Equipement SA of the business assets of Sovam, which included the goodwill, commercial name, logo, office furniture, machines, tools, vehicles, patents, franchises, licences and lease. The agreement required Dethier to take over three members of staff and to inform the liquidator of any other re-engagements.
- Mr Dassy brought a claim against Dethier on the basis that, there having been a 'contractual transfer of the undertaking', it was liable to him for sums due to him from Sovam. The Belgian court regarded the transfer agreement as covering the entire business of Sovam and agreed with Mr Dassy, holding that an undertaking was transferred for the purposes of the 1977 Directive. Dethier appealed and the appeal court referred two questions to the Court of Justice. The first was whether the 1977 Directive applied 'where the transfer was effected by a company in voluntary liquidation, a procedure whose aim, in the absence of continued trading, is liquidation by realisation of the assets? Is the answer the same where the transferor is being wound up by the court?'
- The Court of Justice observed that, as the transfer was by a company being wound up by the court, it was not required to answer the first part of the first question. It referred in paragraph 21 to Abels to the effect that the 1977 Directive did not apply to a transfer of an undertaking, business or part 'in the course of insolvency proceedings'. It observed in paragraph 22 that the 1977 Directive does apply to proceedings such as a SvB even though they have certain features in common with insolvency proceedings. It continued:
'… The court in fact considered that the reasons for not having the Directive apply in the case of insolvency proceedings were not valid when the proceedings in question involved supervision by the court which was more limited than in the case of insolvency and when they were intended primarily to safeguard the assets of the undertaking and, if possible, to keep the undertaking in business by means of a collective suspension of debt payment with a view to reaching a settlement allowing the undertaking to continue operating in the future.'
- The court summarised the effect of the D'Urso and Spano decisions and reiterated that 'in deciding whether [the 1977 Directive] applies to the transfer of an undertaking subject to an administrative or judicial procedure, the determining factor to be taken into consideration is the purpose of the procedure in question…'. It added, however, that account must also be taken of the 'form of the procedure in question, in particular in so far as it means that the undertaking continues or ceases trading, and also of the Directive's objectives'.
- In paragraphs 26 to 32 the court explained why, on the facts, the 1977 Directive applied to the transfer. Rather than attempting to summarise, I will quote the critical paragraphs:
'29. According to the reference by the national court, in the case of a liquidation the liquidator, although appointed by the court, is an organ of the company who sells the assets under the supervision of the general meeting; there is no special procedure for establishing liabilities under the supervision of the court, and a creditor may as a rule enforce his debt against the company and obtain judgment against it. By contrast, in the case of an insolvency, the administrator, inasmuch as he represents the creditors, is a third party vis-à-vis the company and realises the assets under the supervision of the court; the liabilities of the company are established in accordance with a special procedure, and individual enforcement actions are prohibited.
30. It is thus apparent that the situation of an undertaking being wound up by the court presents considerable differences from that of an undertaking subject to insolvency proceedings and that the reasons which have led the court to rule out application of [the 1977 Directive] in the latter situation may be absent in the case of an undertaking being wound up by the court.
31. That is the case where, as in the main proceedings, the undertaking continues to trade while it is being wound up by the court. In such circumstances continuity of the business is assured when the undertaking is transferred. There is accordingly no justification for depriving the employees of the rights which the Directive guarantees them on the conditions it lays down.
32. The answer to the first question … must therefore be that, on a proper construction of article 1(1) of [the 1977 Directive], the Directive applies in the event of the transfer of an undertaking which is being wound up by the court if the undertaking continues to trade.'
- The decision in Dethier therefore appears to be founded on the drawing of a distinction between (a) a transfer of an undertaking by a company that is being wound up by the court (but is not subject to insolvency proceedings) and which, immediately prior to the transfer, has continued to trade; and (b) a transfer of an undertaking by a company that is subject to insolvency proceedings. In the former case, of which Dethier is an example, the 1977 Directive applies. In the latter case, of which Abels is an example, it does not. The distinction is perhaps not a comprehensively easy one because I have above expressed my understanding that the company in Abels probably continued to trade following its entry into insolvent liquidation. If that is right, then the critical feature of the distinction that the CJEU must have applied would therefore appear to be that whereas Abels concerned a company in insolvent liquidation, Dethier did not. The court did not, however, express its reasons as shortly as that.
- The final decision of the Court of Justice to which we were referred was Europièces SA, in liquidation v. Wilfried Sanders and Automotive Industries Holding Company SA, declared insolvent (Case C-399/96);  ECR 1-6965. Europièces entered into voluntary liquidation. It does not appear that it was insolvent. The liquidator gave Mr Sanders 22 months' notice of dismissal on the grounds of redundancy. He also transferred the part of the business in which Mr Sanders had been engaged to Automotive. The nature of the issues that came before the Belgian court is somewhat obscure but the critical question that arose, which was the subject of a reference to the Court of Justice, was whether the 1977 Directive applied where 'a company in liquidation transfers all or part of its assets to another company which then issues orders to a worker which the company in liquidation states must be carried out'. The court held that it did. It regarded the case as an a fortiori example of the principle it had applied in Dethier, expressing the view in paragraph 34 that 'at least in some procedural respects, voluntary liquidation has even less in common with insolvency than winding up by the court'. In short, Europièces was not subject to insolvency proceedings, any more than was Sovam in Dethier, and so the 1977 Directive applied to the relevant transfer.
(vi) The domestic authorities
- The judgment of His Honour Judge Clark in Oakland v. Wellswood (Yorkshire) Ltd  IRLR 250 played a material part in the reasoning of Employment Judge Freer in the present case and I must explain what Judge Clark decided. Wellswood Ltd ('Oldco') traded as a wholesaler supplying catering businesses. It ran into financial difficulties. The claimant, a director and shareholder in Oldco, engaged in discussions with a major creditor and consulted an insolvency practitioner. It was agreed that administration was, as compared with liquidation, the preferred course of action. The creditor was not willing to buy Oldco as a going concern since that would involve taking on its debts. It instead proposed that it would incorporate a subsidiary ('Newco') that would buy Oldco's assets and take on five of its employees, including the claimant. Newco was formed. Joint administrators of Oldco were appointed out of court on 6 December 2006 and the sale to Newco was completed on the same day. The report that was later prepared by the joint administrators explained that they had concluded that a rescue of Oldco as a going concern was not achievable and they had concentrated their efforts on what Judge Clark called 'the secondary purpose of administration', that referred to in paragraph 3(1)(b) of Schedule B1. The administrators expected that in due course Oldco would move into creditors' voluntary liquidation.
- The issue in point for present purposes arose in the context of the claimant's claim against Newco for his subsequent unfair dismissal. It is not necessary to explain the facts beyond that there was a dispute as to whether he had a sufficient period of continuous employment for the purposes of section 108 of the Employment Rights Act 1996 in order to be able to mount his claim. It is sufficient to note that Newco's answer to his claim before Judge Sneath in the employment tribunal was that (i) as Oldco had been the subject of 'bankruptcy or … analogous insolvency proceedings … instituted with a view to the liquidation of the assets of [Oldco] and [that were] under the supervision of an insolvency practitioner', regulation 8(7) had disapplied regulations 4 and 7 of TUPE; (ii) the claimant's employment contract had therefore not transferred to Newco; and (iii) his period of service with Newco was therefore too short for the bringing of an unfair dismissal claim. Judge Sneath accepted that argument, holding in respect of point (i) (as guided by paragraph 25 of the Court of Justice's judgment in Dethier) that the purpose of the adopted procedure had been the liquidation of Oldco's assets, the deal behind it giving the administrators the chance of making the most advantageous realisations.
- Judge Clark dismissed the appeal for reasons he expressed as follows:
'19. The issue arises in this case because Parliament has declined to specify which particular insolvency proceedings are to be characterised as having been instituted with a view to the liquidation of the transferor company's assets. Nor do I derive assistance from the BERR Guidance to the 2006 TUPE Regulations (issued March 2007) to which I have been referred. In these circumstances I reject [counsel for the appellant's] submission that the answer to the question is purely one of domestic insolvency law; rather, it is in my view a question of fact for the employment tribunal. I accept that where joint administrators continue to trade the business with a view to its sale as a going concern any relevant transfer in those circumstances will attract TUPE protection for employees under reg. 4. However, that is not what happened in the present case on the facts found by Judge Sneath. Having first been consulted by the claimant on behalf of Oldco on 23 November 2006 it is clear from Mr Hull's report that it soon became apparent that due to its weak financial position it was not possible for the administrators to continue trading the business. Instead, immediately following their appointment on 6 December 2007 they took immediate steps to sell the assets to Newco, who took on the lease of Oldco's premises whilst retaining the book debts in Oldco. This was seen as the best course for realising the optimum return for creditors in the final liquidation of Oldco. In my judgment the judge was entitled to conclude that the appointment of joint administrators was with a view to the eventual liquidation of the assets of Oldco, by way of a CVL.
20. Further it seems to me that this construction accords with the policy behind Article 5(1) [of the 2001 Directive] and in turn reg. 8(7); namely the "rescue culture", whereby a purchaser, here Newco, is not put off by the effects of TUPE protection. The outcome, as demonstrated in this case, was that some jobs were preserved and the creditors benefited from the best available option. I note that social policy is articulated at paragraph 22 of the Advocate General's opinion in Jules Dethier.'
- Judge Clark's decision was handed down on 9 January 2009. Employment Judge Freer's reasons for his decision in the present case adopted and applied Judge Clark's approach that the application or otherwise of regulation 8(7) in the case of an administration required the answering of a question of fact.
- Judge Freer made no reference to, and may perhaps have been unaware of, the fact that in the meantime Judge Clark's decision in Oakland had been the subject of an appeal to the Court of Appeal; and that on 30 July 2009 the court (Rix, Smith and Moses LJJ) had allowed the claimant's appeal and held that he had a sufficient period of continuous employment to advance his unfair dismissal claim (see  ICR 902). The court did so, however, exclusively on the basis of a new point based on section 218 of the 1996 Act that had not featured in the arguments below. It entitled the claimant to make good his entitlement to bring an unfair dismissal claim even if Judge Sneath and Judge Clark were correct in their disposition of the regulation 8(7) point. In those circumstances, the Court of Appeal did not have to rule on that point and did not do so, although that did not stop the court from commenting on it.
- The only reasoned judgment was that of Moses LJ, with whom Rix and Smith LJJ agreed. He referred, at , to the fact that the court had not only had a full skeleton argument on the regulation 8(7) point from counsel for the appellant, it also had supporting written submissions on it from the Secretary of State, who was anxious to avoid the application of regulation 8(7) since otherwise he would be obliged to pay out sums from the national insurance fund. Moses LJ said that, having been supplied with that material:
' … for my part I would wish to emphasise that there are strong grounds for thinking that both the employment tribunal and the Employment Appeal Tribunal took the wrong approach to their construction both to the [sic] article 5 of the Directive and to regulation 8…'.
After explaining how section 218 saved the day for the claimant/appellant, Moses LJ returned to the quoted theme:
. In these circumstances, adopting the wisdom of Rix LJ, it would seem to me most unwise for us to give a binding pronouncement on the correctness or otherwise of the contention that administration necessarily excludes the application of regulation 8(7). I would only, for my part, wish to emphasise that that is a strongly arguable point, and the only reason I agree that it should not be resolved today is that the Secretary of State is not here and, since Wellswood (Yorkshire) Ltd (Newco) is in the process of being liquidated, almost as we speak, and therefore has no representation here today, it would be unwise to reach and pronounce upon any definitive conclusion. Expressing regret that that cannot be done today, I would allow this appeal.'
- I infer that the thrust of the written arguments of the appellant and the Secretary of State was that the appointment of an administrator in respect of a transferor cannot result in the transferor becoming subject to 'analogous insolvency proceedings' for the purposes of regulation 8(7) and that there can thus be no question of a disapplication of regulations 4 and 7 under a relevant transfer effected by the administrator. I also infer that the court had no contrary written or oral argument before it as Newco was not represented. Having said this, it is likely that even if Employment Judge Freer in the present case was aware of the Court of Appeal's judgments in Oakland, he would anyway have regarded himself as bound by Judge Clark's decision rather than by the Court of Appeal's obiter doubts as to its correctness.
(vii) The reasons of the ET
- Employment Judge Freer's reasons are very full but there is no need to summarise them at any great length. I record that the respondents to Ms De'Antiquis's claims also included DK, Mr Shepherd and Mr Patel although only Key2 defended the proceedings and at some point the proceedings against Mr Shepherd had been withdrawn. At paragraph 69 and following Judge Freer considered whether there had been a relevant transfer to Key2 of DK's undertaking carried on at its Epsom office. He held that there had. He also held that there had been a service provision change within the meaning of regulation 3(b)(i) of TUPE.
- Judge Freer turned to the question of whether regulation 8(7) applied. He directed himself that the Court of Justice in Abels had held that the 1977 Directive did not apply where insolvency proceedings had been instigated with a view to the liquidation of the assets of the transferor; and that D'Urso 'recognised that insolvency proceedings may be capable of applying in a range of circumstances and therefore it is important to consider the purposes of the procedure in question'. He set out paragraph 3 of Schedule B1 and referred to Judge Clark's judgment in Oakland as being to the effect that 'the purpose of any administration is a question of fact for the employment tribunal'. He considered that it was the application for the administration order in respect of DK that provided the best evidence of why the insolvency proceedings 'have been instituted', but added that the tribunal also had to have regard to all the relevant documents and circumstances. He referred to the evidence of Mr Hooper and Ms Shaw made for the purposes of the administration application. He referred in particular to paragraphs 24 to 26 of Ms Shaw's affidavit, which I have earlier quoted and then, in paragraph 110, expressed his view that:
'… the explanation of Ms Shaw is entirely consistent with the proceedings being instituted not with a view to the liquidation of the assets of [DK]'.
- Judge Freer continued:
'111. The Tribunal considers that this is further confirmed by the Administrators' Report at 4.1 which states "initially it was anticipated that the sale of the business was possible", which would have achieved section 3(b) of Schedule B1 of the 1986 Act. It continues: "In the event, and as explained below, a sale of the business proved impossible". The explanation provided is at paragraph 4.2. "Immediately following our appointment we contacted a practice that had submitted an offer for the purchase of the whole of the business of [DK] with a view to finalising negotiation for the sale of the business. Negotiations were conducted over the weekend of 26th and 27th July 2008". Therefore these negotiations for the sale of the business took place after the Administration Order was made. Accordingly, these circumstances are entirely consistent with the statements made to the Court on the application for the Order, that the Administrator will perform his function with the primary objective of saving [DK] and that there may be a potential third party purchaser.'
- Judge Freer then considered a letter dated 27 May 2009 that Mr Hooper, one of the joint administrators had written. It read, so far as material:
'At the time that [DK] went into administration and when I was appointed by the Court as one of the Joint Administrators, there was, in my opinion, no realistic prospect of the LLP surviving administration. It would either have been dissolved or gone into liquidation and in any event it would certainly have ceased to have existed and there was no possibility that it would exit any formal insolvency procedure other than by eventual extinction'.
Judge Freer recognised that letter as cutting across Ms Shaw's assertion in July 2008 that 'the proposed Administrator is not currently in a position to confirm whether or not it is likely to prove possible to rescue the LLP as a going concern' but said that he attached less weight to the letter as Mr Hooper had not been available to be cross-examined.
- I set out the remainder of Judge Freer's reasons verbatim (Mr Scott is a member of Key2):
'113. Mr Scott's evidence was that at the hearing for the Administration Order the Judge required persuading not to put [DK] into liquidation but decided not to because he was persuaded that there were potential buyers who may acquire the business over the weekend. This evidence was put forward by the respondent in support of its contention that when the Administration Order was made there was no hope of rescuing [DK] as a going concern. However, the Tribunal considers that it demonstrates the reverse and corroborates the above conclusions. When the Order was made there was a potential third party purchaser and therefore the proceedings were not, as a matter of fact, instituted with a view to the liquidation of the assets of [DK]'.
114. [Key2] argued that its submissions are consistent with the effective operation of the "rescue culture", but of course there is a balance to be struck with the purpose of the Directive and the safeguarding of employees' rights upon transfer.
115. Having regard to regulation 8(6), the Tribunal first considered the appropriate time at which the assessment is made. Is it at the time that the insolvency proceedings commenced, or is it an assessment of the state of the insolvency proceedings at the time of the transfer? The Tribunal concludes that it is the former. Regulation 8(1) states "If at the time of a relevant transfer the transferor is subject to relevant insolvency proceedings …" and "relevant insolvency proceedings" are defined in regulation 8(6) as "insolvency proceedings which have been opened [Judge Freer's emphasis] 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".
116. Accordingly, the Tribunal concludes that, having regard to the findings and conclusions above, the insolvency proceedings of [DK] were opened not with a view to the liquidation of the assets. Accordingly, regulation 8(6) applies and regulation 4 does not operate to transfer liability for the sums payable to the Claimant under the relevant statutory schemes set out in regulation 8(4).'
(viii) The judgment of the EAT
- In summarising the legislation, and after referring to the key language of article 5.1 and regulation 8(7), Underhill J said, at paragraph 8(5):
'We should note a point about the phrase "bankruptcy proceedings". The equivalent terms in the versions of the Directive in other languages are generally not, like "bankruptcy", specific to personal insolvency. Using "bankruptcy" as the primary term reads a little oddly to an English lawyer, given that in most situations where the Directive applies the employer will be a corporate entity; but the "analogous insolvency proceedings" would of course cover corporate insolvency. The crucial point is that the proceedings, however described, should be instituted with a view to liquidation.'
- Underhill J then provided a succinct summary of the decisions of the CJEU to which I have referred, concluding that:
'14. In our view it is clear that the distinction in art. 5 of the Directive between liquidation proceedings (defined precisely as in para. 23 of the judgment of the Court) and other forms of insolvency is intended to reflect the reasoning in Abels. There is confirmation of that in the explanatory memorandum produced by the Commission at the time of the proposals which led to Directive 98/50/EC: paras, 22 and 23 of the memorandum refer explicitly to Abels and the intention to take into account the case-law of the Court.'
- Underhill J referred then to administration proceedings under the Insolvency Act 1986. He referred to the new procedure introduced by the Enterprise Act 2002 as replacing 'an earlier procedure … which had for various reasons not been much used'. I am not clear on what that last observation was based and my experience is different. Prior to introduction of the new procedure, administration applications represented a high proportion of the Company Court's work. After quoting paragraph 3 of Schedule B1, Underhill J said that it was evident that 'the primary purpose of an administration … is to give the administrator the opportunity to manage the affairs of the company so that it can be … rescued as a going concern'. He noted, however, that the administration procedure was also used 'as a quick and convenient means of liquidating the assets of the business in the interests of the creditors by way of a so-called pre-pack' but said that the use of the procedure in this way does not appear to have been the primary object of the draftsman of Schedule B1: a pre-pack may save the business to some extent but does not rescue the company. He said that 'the issue in the appeals has its origin in the mismatch between the ostensible primary purpose of the Schedule B1 procedure and the uses to which it is commonly put'.
- The heart of the rival arguments before the EAT was, by Mr Serr (for the Secretary of State), that the default objective in the paragraph 3 hierarchy was that of 'rescuing the company as a going concern', which was inconsistent with the liquidation of the assets of the company. Administration proceedings were therefore close to the SvB procedure considered in Abels. The fact that administration might lead to liquidation if it failed did not alter its character when instituted. The rival argument advanced by Ms Tether (for Key2) was that Mr Serr's approach involved an unreal approach to the purpose of administration. She pointed out that in many cases it was clear from the outset that there was no question of the company being rescued and paragraph 3 makes it clear that an administrator is not required to perform his functions with that end in mind if he thinks it is not reasonably practicable to do so or, for example, if the paragraph 3(1)(b) objective would achieve a better result for the company's creditors as a whole. She made the like point in reliance on paragraph 3(4).
- The EAT preferred and accepted Mr Serr's submissions, namely that his 'absolute' approach was correct. That was because (i) the article 5.1 distinction is more likely to be intended 'to depend … on the object of the procedure rather than the object of the individuals operating it', which conduces to legal certainty; (ii) article 5.1 is explicitly concerned with the object of proceedings when instituted, and paragraph 3 of Schedule B1 requires 'every administrator at the point that his appointment takes effect to consider first whether the primary objective of rescuing the company as a going concern is over-ridden by either of the considerations identified at sub-para (3).' It cannot therefore be said that, at the moment of the institution of any administration proceedings, their object is to liquidate the assets; (iii) there is no requirement for an administrator at the beginning of an administration to state which of the paragraph 3 objectives he is pursuing, so that until he files his proposals there is no way in which an employee or other person affected by a transfer by an administrator can establish whether or not regulation 8(7) applies; and it is important that persons affected are enabled to know where they stand; (iv) the 'fact-based' approach will therefore inevitably increase the likelihood of disputes, whereas a bright line rule has clear advantages; and (v) the avowed purpose of the 2001 Directive is to protect employees in the event of a transfer, in particular to ensure that their rights are safeguarded; and the absolute approach is plainly the preferable construction from the point of view of achieving that purpose in any case where a transfer has actually occurred. The EAT therefore departed from Judge Clark's approach in Oakland. It held that Judge Freer had reached the right result, albeit by the wrong route and that the appeal therefore fell to be dismissed.
- Regulation 8(7) gives domestic effect to article 5.1 of the 2001 Directive. It chose to do so by an almost verbatim adoption of the language of article 5.1, language that would not, I would think, but for the particular task in which the draftsman was engaged, otherwise have been his natural choice. 'Bankruptcy' is a term of art that, under the law of England and Wales, refers only to an individual's status following a judicial adjudication made in consequence of his insolvency. It has no application to corporate insolvencies, whereas the transfers with which TUPE will most be commonly concerned will be those effected by companies. The 'analogous insolvency proceedings' to which the rest of regulation 8(7) refers could, therefore, on one view, be read as referring exclusively to insolvency proceedings of a type strictly analogous to 'bankruptcy proceedings', namely proceedings for the winding up of insolvent companies or other legal entities (limited liability partnerships, for example). Alternatively, if 'bankruptcy' is read as implicitly embracing a corporate winding up, then the 'analogous insolvency proceedings' must be language directed at casting the net wider so as to catch insolvency proceedings other than those directed exclusively at the winding up of the affairs of an insolvent individual, company or other entity. It may, on that basis, be intended to embrace an insolvency regime such as administration, although it will only do so if the proceedings instituted by an administration appointment can fairly be regarded as having been 'instituted with a view to the liquidation of the assets of the transferor …'.
- Having made such points, I recognise that their making was probably substantially pointless. If it were to be viewed and interpreted exclusively as a piece of domestic drafting, regulation 8(7) would pose questions of interpretation that would be sufficiently challenging to lead to despondency if not despair. Since, however, it is manifest that the draftsman has sought by regulation 8(7) to do no more than to give domestic effect to article 5.1 of the 2001 Directive, whatever that may mean, it is the interpretation of article 5.1 that must be the focus of inquiry. Article 5.1 performed the unusual function of codifying that which the Court of Justice, in its various decisions from Abels to Europièces, had explained as the limit of the 1977 Directive.
- It is therefore article 5.1, illuminated so far as possible by the guidance of those decisions, to which this court must direct its interpretative gaze. In doing so, it must beware of adopting too literal a semantic interpretation of the relevant language. The approach must be purposive. What is clear is that the reference to 'bankruptcy proceedings' in article 5.1 is intended to include insolvent liquidations of corporate transferors. The approach of the Court of Justice to the questions raised by Abels was to interpret the 1977 Directive as excluding from its grasp a transfer effected by a transferor in an insolvent winding up, an exception for which one will search the Directive's language in vain. The court's conclusion was, however, driven by the policy consideration that if the Directive applied to such a transferor, potential purchasers of an insolvent company's undertaking would or might be put off from acquiring it on terms acceptable to the transferor's creditors. Thus it held that, at least in the case of insolvent liquidations, the protection of employees that was the purpose of the Directive must be sacrificed to the superior commercial interests of the transferor's creditors.
- The like consequence did not, however, automatically follow in transfers effected in insolvency regimes other than liquidation. In Abels the court also held that transfers by a company subject to the Dutch SvB procedure attracted the full protection for employees of the 1977 Directive, being largely influenced by the consideration it explained in paragraph 28 of its judgment, namely that:
'… the object of such proceedings is primarily to safeguard the assets of the insolvent undertaking and, where possible, to continue the business of the undertaking by means of a collective suspension of the payment of debts with a view to reaching a settlement which will ensure that the undertaking is able to continue operating in the future. If no such settlement is reached, proceedings of this kind may, as in the present case, lead to the debtor's being put into liquidation'.
The focus was, therefore, on the 'object' of the SvB procedure. Likewise, in D'Urso, the court's focus was on 'the purpose of the procedure in question' (see paragraph 26 of the judgment). That turned on whether the decree made under the relevant Italian law did or did not authorise the continuation of trading by the insolvent company under the supervision of an auditor. If, as in D'Urso, it did, the purpose of the decree was:
'… to give the undertaking some stability allowing its future activity to be safeguarded. The social and economic objectives thus pursued cannot explain nor justify the circumstance that, when all or part of the undertaking concerned is transferred, its employees lose the rights which the  Directive confers on them under the conditions which it lays down.' (Paragraph 32 of the judgment).
- The present case concerns a transfer effected by an insolvent transferor, DK, that at the material time was in administration. The 'absolute' approach favoured by the EAT and supported before us by Mr Bryant for Ms De'Antiquis and (through Mr Serr's written submissions) by the Secretary of State requires the focus to be on the purpose of administration appointments generally, an exercise centrally focused upon the 'purpose of administration' as explained in paragraph 3 of Schedule B1; whereas the 'fact-based' approach favoured by Judge Clark in Oakland, Judge Freer (in the ET in the present case) and Mr Sonaike for Key2 is to look at the purpose of the particular administration appointment that has been made. The reason why the parties made common cause that it was necessary to identify the 'purpose' of the appointment is because article 5.1 asks whether the relevant insolvency proceedings have been 'instituted with a view to the liquidation of the assets of the transferor …', the emphasised words having their origin in paragraph 23 of the judgment of the Court of Justice in Abels.
- Mr Sonaike's submissions therefore urged that the inquiry requires an answer to the question why the particular administration was instituted. Whilst both the heading to paragraph 3, and also paragraph 11(b), of Schedule B1 indicate that there is but a single 'purpose of administration', paragraph 3 shows that it can be achieved in alternative ways. Despite the terms of the opening language of paragraph 3(3), it is, he said, unreal to regard 'rescuing the company as a going concern' as reflecting either the, or a, primary object of administration. In practice, in many cases there is no prospect of such a rescue and the sole objective of an administration will be a realisation of assets in the best interests of creditors. That will be why the administration order or appointment will be sought; that will be why it will be made; and that will be what the administrator will direct his attention towards achieving. The 'pre-pack' cases illustrate this most compellingly, being cases in which the purpose of the administration will be an almost immediate execution of a pre-planned disposal of the company's business, reflecting that before the appointment a rescue of the company as a going concern is not remotely on the cards; nor (if the pre-pack is duly effected) is such a rescue on the cards after the appointment. The company's undertaking may be preserved by being acquired by a purchaser who will continue to operate it. But the company itself will not be rescued. The 'rescuing' with which paragraph 3 is concerned is, however, that of the company, not of its undertaking.
- Applying that to this case, it is said that the administration order was not made for the purpose of rescuing DK, or of authorising it to continue to trade in the hope of a rescue. Whilst this was not a 'pre-pack' case, since no sale had been lined up by the time of the making of the order, the order was made for the purpose of – or 'with a view to' - a disposal of the undertaking to a third party for a consideration enabling an ultimate distribution to DK's creditors. It was therefore made with a view to the liquidation of DK's assets and the administration was thus for a purpose within the intendment of article 5.1.
- In this connection, as the fact-finding tribunal was the ET, it is upon the ET's findings that it is necessary to focus. They reflect some confusion of thought, which was the foundation for Mr Sonaike's argument that, if the ET was right in its 'fact-based' approach, it nevertheless arrived at a perversely wrong conclusion on the facts. I have summarised Judge Freer's reasoning in section (vii) above. A key part of his findings is in paragraph 113, where he found that what persuaded Blackburne J to make the administration order was the prospect of a sale of DK's business to one or other of the potential buyers with whom it was proposed to negotiate over the following weekend. Judge Freer said of that evidence that it was:
'… put forward by [Key2] in support of its contention that when the Administration Order was made there was no hope of rescuing [DK] as a going concern. However, the Tribunal considers that it demonstrates the reverse and corroborates the above conclusions. When the Order was made there was a potential third party purchaser and therefore the proceedings were not, as a matter of fact, instituted with a view to the liquidation of the assets of [DK].'
- The conclusion in the latter part of the last quoted sentence appears to me, with respect, to have been erroneous, as Mr Sonaike submitted. A sale of DK's undertaking to a third party purchaser would have involved a 'liquidation of the assets of [DK]'. It may have saved the undertaking, which would have been carried on by the purchaser. It would not have saved or rescued DK. Judge Freer's primary finding, although he did not apparently realise it, was therefore that the factor that persuaded Blackburne J to make the order was not a consideration that the administration would or might rescue DK as a going concern (a paragraph 3(1)(a) objective) but that the purpose of administration was reasonably likely to be achieved by a disposal of DK's undertaking in a manner that would achieve a better result for its creditors as a whole than would be likely if it were wound up without first being in administration (a paragraph 3(1)(b) objective).
- Mr Sonaike's submission was therefore that the administration order was made on the basis that a beneficial liquidation of DK's assets was the intended objective. The notion that the administrators might trade DK through to a rescue was not on the cards. Why, therefore, should the case not be regarded as one in which a fair analysis of the purpose of the procedure invoked by the order made on 25 July 2008 was that it was 'with a view to' the liquidation of DK's assets under the auspices of an insolvency practitioner?
- If the facts had been better for Mr Sonaike, his argument to that end might have been more compelling. By that I mean that events might have turned out differently, by the joint administrators effecting a prompt sale of DK's undertaking, just as had been hoped. The case would then have been close to a 'pre-pack' case and it could be said that all that was intended to be achieved, and was achieved, by the administration was the liquidation of DK's assets for the benefit of its creditors as a whole.
- That, however, did not happen. This was not a pre-pack case and although a sale was a possibility, it did not materialise. Instead, the administrators entered into an agency agreement under which, on behalf of DK, they engaged Key2 on a commission basis for a term of one year to realise DK's work in progress. This was regarded as essential so that DK's clients could continue to be serviced. Whereas the administrators' original hope, if not expectation, was to achieve the purpose of administration via the paragraph 3(1)(b) objective, they were compelled to adopt a revised strategy that would at most realise property so as to enable a distribution of the nature referred to in paragraph 3(1)(c). They were thereby on one view continuing to trade DK via Key2 as its agents although of course the ET found that the management agreement took effect as a relevant transfer of the Epsom office. The achieving of the purpose of administration via the paragraph 3(1)(c) objective was not the basis on which the applicants had invited Blackburne J to make the administration order.
- Whilst Mr Sonaike recognised the change between what on 25 July was hoped to be achieved by the administration and what, after 25 July, was actually achieved by it, he submitted that it made no material difference to the position. Whatever else was on the cards immediately before the appointment, it did not include a rescue of DK. If it had included a rescue and the administrators had attempted one, then even if the attempt had failed and the administrators had instead sold the undertaking, he accepted that the 2001 Directive would apply to the transfer so effected. But his submission was that, as the purpose of the administration order was a realisation of DK's assets, it made no difference that the intended method of realisation turned out to be different from that which had been hoped for. The purpose of the administration was the realisation of DK's assets and that was sufficient to characterise the administration as 'analgous insolvency proceedings' within the terms of article 5.1.
- These submissions were advanced very persuasively but I have, however, come to the conclusion that they are not correct. First, it appears to me unsatisfactory in principle that the determination of whether or not administration proceedings are, in any particular case, to be characterised as 'analogous insolvency proceedings' should depend on the evidence leading up to the making of the appointment of administrators. That is because an inquiry of that nature may well produce an uncertain picture as to the objective, or the predominant objective, intended to be achieved by any appointment, as is shown by the evidence in the present case. Thus Ms Shaw's evidence was (i) that the proposed administrator believed that there was the possibility of a beneficial sale of the business and assets to a third party purchaser (a paragraph 3(1)(b) objective); but (ii) that, whilst the position was uncertain, it might also be possible to rescue DK as a going concern (a paragraph 3(1)(a) objective) and that 'the Administrator will, of course, perform his functions with the primary objective of rescuing DK as a going concern unless it is not reasonably practicable to achieve that objective'. Whilst Judge Freer explained that what persuaded Blackburne J to make the administration order was the possibility of a sale of DK's undertaking over the following weekend, Ms Shaw had not withdrawn her evidence as to the possibility of DK being rescued. In the event, following the appointment of administrators, there was no sale enabling the achievement of the paragraph 3(1)(b) objective and no rescue enabling the achievement of the paragraph 3(1)(a) objective. There was, however, a realisation of assets although it did no more than achieve the paragraph 3(1)(c) objective, which was not mentioned as a possibility in the pre-appointment evidence. On the particular facts of the present case, I would therefore hesitate before concluding that the pre-appointment evidence showed convincingly that the purpose of the appointment was the liquidation of DK's assets: the possibility of a rescue had been expressly mentioned and not withdrawn.
- Secondly, however, I regard it as in principle anyway wrong to identify the purpose of an appointment of administrators by reference to pre-appointment considerations as to the particular objective or objectives that it is foreseen that an appointment is reasonably likely to achieve. The present case shows that an appointment that is made with the intention, hope or expectation of – or, perhaps, 'with a view to' - the achieving of a particular objective may not in fact achieve it. The fallacy of the 'fact-based' approach is that it proceeds on the erroneous basis that the factual considerations that induce the making of a particular administration appointment are considerations that conclusively identify the objective 'with a view' to which the appointment is made. That involves a misinterpretation of the scheme of Schedule B1.
- Paragraph 11 of Schedule B1 provides that a court may make an administration order in relation to a company only if it is satisfied (a) that the company is, or likely to become, unable to pay its debts, and (b) 'that the administration order is reasonably likely to achieve the purpose of administration'. Paragraph 3 explains what that purpose is and sets out the hierarchy of objectives that I have explained. An application to the court for the making of an administration order will of course require evidence as to how it is said the purpose is likely to be achieved and such evidence will commonly be directed at the achieving of a particular objective in the hierarchical scheme. If the court is thereby satisfied that an administration order is 'reasonably likely' to achieve such objective, the paragraph 11(b) condition of the making of an administration order will be satisfied. But it is fallacious to proceed from that to the conclusion that the purpose of the administration order that is then made is to enable the achieving of that particular objective and that alone. It is not. The order is made for the purpose of administration explained in paragraph 3, which keeps all the administrator's options open; and the present case provides a good working example of how an administrator who assumes his office with the thought that he might be able to achieve the purpose of administration in one particular way may quickly find that circumstances compel him to change tack and seek to achieve it in another way. It appears to me, therefore, odd that the application or otherwise of article 5.1 to an administration appointment should be said to depend upon the expectations that have led to its making, when the events following its making require a course to be followed that differs fundamentally from such expectations.
- Take this example. Suppose the application for the administration order had been supported by compelling evidence that the purpose of administration could only be achieved by a beneficial disposal of the company's undertaking to a third party purchaser for the achieving of which there was a reasonable prospect. Suppose that, promptly after the making of the order, and unexpectedly, the former management found itself in a position to finance the continued trading of the company and the administrator concluded that, in the changed circumstances, a rescue of the company was possible; but that, following a period of trading, it then became apparent that a rescue could not be achieved after all and that it was in the best interests of the creditors that the undertaking should be sold to a third party purchaser. The 'fact-based' approach might be said to justify a conclusion that the appointment had been made 'with a view' to the liquidation of DK's assets; yet in the meantime, and exercising the judgment conferred upon them by paragraph 3, the administrators would have been trading the company with a view to its rescue and, to that end, enjoying the protection of the moratorium conferred by paragraph 43.
- In such a case, I regard it as difficult to see how it could fairly be said that the administration order had been made 'with a view to' the liquidation of the company's assets when, under the order as made, the administrator embarked, at least initially, on a quite different strategy. A more accurate summary of the position would, I consider, be simply that the order was made 'with a view to' the administrator performing his functions as prescribed by paragraph 3, being functions under which the primary objective can be said to be the rescue of the company as a going concern. That objective may not be achieved and, in my example, was not. The example would, however, be one which, on its facts, would be close to the CJEU's decision in Abels about a transferor in a SvB procedure, as to which it held that the full impact of the 2001 Directive would apply.
- These considerations suggest to me that in assessing whether an administration order is made 'with a view to' the liquidation of the transferor's assets it is necessary to focus not on the reasons that led to the making of the particular order but, as the EAT held, rather on the purpose of the procedure that is triggered by its making. The EAT rightly pointed out that article 5.1 is concerned with the purpose of 'analogous insolvency proceedings which have been instituted …' and I agree that that means a consideration of the purpose of an administration order when actually made rather than a consideration of what the applicants for the order hoped to achieve by it if it were to be made. The purpose of an administration order is that which is explained in paragraph 3 and the administrator's duties arise only upon, and not before, the making of the order. Whatever pre-conceived ideas the administrator may have had as to how he was going to perform his functions, the overriding legal obligation to which he is subject upon his appointment is, by paragraph 3(3), to perform them 'with the objective specified in sub-paragraph (1)(a) unless he thinks' either of the two things in sub-paragraphs (3)(a) and (b). Sub-paragraph (1)(a) is the objective of rescuing the company. As the EAT pointed out, even though it may immediately be clear that a rescue of the company is not on the cards, the matter must nevertheless be formally considered.
- This analysis of article 5.1 in relation to an administration order led the EAT to the conclusion that, given the alternatives open to the administrator upon the making of an administration order, it is not possible rationally to conclude that such an appointment is made 'with a view' to the liquidation of the transferor's assets. That may be what happens in practice; and it may in many cases have been apparent from the outset that that was what was going to happen. But that will not be the position in all cases; and in all cases the formal consideration of the available options is a matter with which the administrator must formally engage.
- I therefore agree with the EAT's conclusion in favour of the 'absolute' approach. It has, as the EAT pointed out, the merit of achieving legal certainty, since it means that all involved will know where they stand upon the making of an administration appointment.
- I would dismiss the appeal.
Mr Justice Warren :
- I have alas been unable to find respite in the pages of the 2001 Directive or the case-law of the ECJ from mental anguish similar to that identified by Rimer LJ in  of his judgment. However, I agree with him as well as with Longmore LJ that this appeal should be dismissed for the reasons which they give.
- The focus of article 5(1) of the 2001 Directive is on the purpose of the procedure in question and not on the reasons for which the procedure is invoked or the result which it is anticipated will be reached. Rimer LJ has explained that Schedule B1 has a single purpose with a scheme of priority of objectives. As is clear from his explanation, rescuing the company as a going concern under paragraph 3(1)(a) is the starting point for consideration, it is the prima facie objective, although it is not necessarily the one which has to be adopted even where it is one that it is possible to achieve. This is because paragraph 3(3) tells us that the administrator can proceed under paragraph 3(1)(b) if he considers that this would achieve a better result for the company's creditors as a whole. I therefore see the objective of any administration as being to achieve the best result for the creditors as a whole (see paragraph 3(2)) although if, but only if, the administrator thinks that objectives (a) and (b) cannot be achieved, and provided that he does not unnecessarily harm the interests of the creditors as a whole, he is permitted to pursue objective (c) (see paragraph 3(4)). Focusing on that as the primary objective, administration is not a process within the meaning of "analogous insolvency proceedings which have been instituted with a view to the liquidation of the assets of the transferor".
- This result chimes, I consider, with the provisions of the Insolvency Regulation (the EEC Regulation on Insolvency Proceedings 2000). That Regulation applies to "collective insolvency proceedings which entail the partial or total divestment of a debtor and the appointment of a liquidator". Article 2(a) defines "insolvency proceedings" by reference to Annex A and includes administration. It also includes a SvB. Article 2(b) defines "winding-up proceedings". They are insolvency proceedings "involving realising the assets of the debtor, including where the proceedings have been closed by a composition or other measure terminating the insolvency, or closed by reason of the insufficiency of the assets". These proceedings are listed in Annex B. The list does not include administration; nor does it include a SvB. There is, it seems to me, a close parallel between winding-up proceedings as defined and the sort of proceedings with which article 5(1) of the 2001 Directive is concerned. Just as a SvB is excluded from both so too administration is excluded from both.
- Along with Longmore LJ and Rimer LJ, I would dismiss this appeal.
Lord Justice Longmore :
- This appeal raises the question whether a corporate entity or a limited liability partnership which is in administration is the
"subject of bankruptcy proceedings or any analogous insolvency proceedings which have been instituted with a view to the liquidation of the assets of the transferor …"
within regulation 8(7) of the 2006 TUPE regulations. If it is so subject, then regulation 4 of TUPE will not apply.
- There are, I suppose, three possibilities namely (1) all administration proceedings fall within regulation 8(7); or (2) no administration proceedings fall within the regulation; or (3) it all depends on answering a question of fact namely whether, when the administration proceedings were instituted, they were instituted with a view to the liquidation of the assets of the transferor.
- For the reasons given by Rimer LJ, I am persuaded that the framers of the EU Directive, on which regulation 8(7) is based, could not have contemplated the kind of complex and uncertain factual inquiry which would in many cases have to be conducted if it were necessary to decide what "view" the institutor of the administration had in mind when the administration began.
- In these circumstances it is necessary to focus on the nature of the judicial proceedings in question and decide whether those proceedings are in essence the sort of proceedings which have liquidation of assets as their purpose or their aim. As Underhill J says in para 1 of the judgment of the EAT nobody argues that all administration proceedings must fall within regulation 8(7). One is therefore left in the position that administration proceedings, instituted in England pursuant to schedule B1 of the Insolvency Act 1986 (as laid down by section 248 of the Enterprise Act 2002) do not fall within regulation 8(7) at all. That is the result which is, in my view, the most consistent with the purpose of the Council Directive 2001/23/EC.
- I too would dismiss this appeal.
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