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Surprise Employment Tribunal ruling a wake-up call for administrators

Despite being one of the least common forms of insolvency, pre-pack administration has continually attracted a large wave of criticism not only in media circles, but recently also by Westminster.

The process, which many believe to be unethical, allows for businesses to enter administration (thus suspending all legal action against the company, including Employment Tribunal claims) while preserving the value of assets and debtors. The business would then be bought by a third party or a newco and effectively continue without the debts or legal action attached to the old business.

Frustration can often arise not only from creditors but also from former employees where it is clear that a company has entered into pre-pack administration, only to set up sometimes immediately after as a newco, often with the same management team and directors. 

Whilst such frustration is understandable from an ethical point of view, legally, Employment Tribunals have always followed insolvency legislation and ruled against former employees attempting to claim for redundancy or unfair dismissal against a newco clearly born from the ashes of the insolvent business that wronged him or her. That is until now.

In Rogers v Project Viva, Mr & Mrs Rogers were made redundant by their employer. As a result, both claimants brought claims for unfair dismissal against Project Viva for the manner of their dismissals. Weeks before the Tribunal preliminary hearing, Project Viva entered pre-pack administration preventing any claims being brought against the company.

Following the pre-pack administration, Project Viva was sold to an investment vehicle who in turn set up a newco, Pixel West Limited. During disclosure it became apparent that all 3 companies mentioned above had a “communality of ownership”, namely that of Conservative Health Secretary, Stephen Dorrell.

Not to be outdone, Mr & Mrs Rogers applied for the newco (Pixel West Limited) to be added to the Employment Tribunal claim, citing the familiar company Director setup of both oldco and newco and the procedures undertaken by the oldco to exit them prior to the pre-pack administration.  In a bold and rather surprising move, the Employment Tribunal Judge allowed the Rogers’ application to add Pixel West Limited to the claim, stating that there was a “commonality of ownership and directorship between the companies”.

Whilst the final hearing on the unfair dismissal element of the claim is not due until May 2017, the very fact that an Employment Tribunal has allowed the inclusion of a newco company into a claim of this sort is a significant development in employment and insolvency law.  It will need to be closely monitored moving forward.

What should you be doing now?

Whilst this article is not going to be applicable to everyone reading it at this time, it is one that should be remembered in the event that administration is considered for your business or you are advising on the employment/HR aspects of a pre-pack.

What does this mean for you or your business?

Adam Kean, an Associate Solicitor in the Corporate team at BPE commented: “This decision, if it stands, poses significant concerns for business owners who may have legitimate grounds for entering into pre-pack administrations and further builds upon the existing criticisms around their use.  Careful consideration should be given by sellers to identify if any potential employment claims could now transfer to a connected company on the basis of ‘commonality of ownership’ with the potential risk undermining their future use”.

 

These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.

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