Prior to the adoption of the ARD in 1977, European Member States’ laws on transfers of insolvent undertakings was divided, as were the protections offered to affected employees in EU Member States.9 There were different approaches taken by EU Member States regarding the determination of the ‘fate’ of employees when the business employing them became insolvent and was transferred to a third party purchaser on a going concern basis. The treatment of employees’ concerns varied according to the jurisdiction where the business or undertaking transferred was located.10 This was because each Member State had its own unique way of protecting the rights of employees in transfer situations.
The EU is made up of both civil and common law (essentially the UK and Ireland) countries. These countries have very different legal traditions on employment matters. In relation to transfer of undertakings, whilst some member countries already had laws similar in effects to those canvassed by the ARD, others did not.
For example, in a civil law country such as France, from as far back as 1928, there
8 H Collins, ‘Dismissals on Transfer of a Business’ (1986) 15 ILJ, 244, 255.
9 Marlene Frank, `The Rights of Employees in the Event of the Employer’s Insolvency: A Comparative Approach to the Rights of Employees during Restructuring in the United States and Europe’ (2005) 1 New Zealand Postgraduate Law E-Journal 7.
10 ibid.
158 have been laws requiring the mandatory transfer of employment contracts from the seller to the buyer whenever there was a transfer of an undertaking on a going concern basis.11 The justifications for having this type of law are that continuity of employment facilitates the transfer of skills that will be deployed to the usage of the assets of the undertaking transferred12 and that the transfer of employees’
contracts of employment ensures that workers are retained in employment, as against dismissing and putting them back on the job market. From this perspective, continuity of employment achieves both social as well as economic objectives.
In common law countries, employment relationships are mostly contract based.13 In Britain, for example, before the advent of legislation on the protection of the rights of workers during transfer of undertakings, the traditional view was that the employment relationship was a personal one based on personal agreement between the employer and the employee. The personal nature of the relationship is attributed to the provision of personal service by the employee to his employer.14 The notion of personal service, as an essential element of a contract of employment, significantly influenced the views of common law countries’
judges on change in employer when there was a business transfer. The transfer of a business from one employer to another was determinative of the employment relationship between the employee and the employer. 15 The practice of terminating all employment contracts upon the occurrence of a business transfer
11 See Code du Travail Article L122-12 of 1928 (currently codified in Articles 1224-1 and 1224-2 of the French Labour Code of June 28, 1983. It is important to note however that in France, the law does not expressly use the words ‘business transfer’. It refers to the modification of the ‘legal situation’ of the employer. French case-law has, however, identified this type of modification by reference to the business transfer. See further Lovells, ‘Business Transfer Across Europe’ (2010)
<http://www.hoganlovells.com/files/Publication/fd44d5e5-bc19-42b2-a40d-
7f33e91db78f/Presentation/PublicationAttachment/639d7e9c-4959-4d0f-8505-808388a6bf00/CN_Business_Transfers_Across_Europe_June_2010.pdf > accessed 20 March 2012.
12 Robert Upex and Michael Ryley, TUPE: Law and Practice (Jordan Publishing Limited, 2006) 4.
13 S Deakin & W Njoya, ‘The Legal Framework of Employment Relations’ (2007) Centre for Business Research, University of Cambridge Working Paper No. 349
<http://www.cbr.cam.ac.uk/pdf/WP349.pdf> accessed 29 April 2012. Professor Janet Dine has described contract as an instrument of capitalism. J Dine, ‘Post-Concession Company Models in Potential European Company Law’ (2010) paper presented at the ‘Directors' Duties and Shareholder Litigation in the Wake of the Financial Crisis’ conference (University of Leeds Centre for Business Law and Practice, September 20, 2010)
<http://www.law.leeds.ac.uk/assets/files/research/events/directors-duties/dine-post-concession-company-models.pdf> accessed 12 March 2012.
14 Ready Mixed Concrete (South East) v Minister of Pensions and National Insurance, [1968] 2 QB 497;
Express & Echo Publications v Tanton [1999] ICR 409.
15 Nokes v Doncaster Amalgamated Collieries Ltd [1940] AC 1014. See further discussion on this in chapter 5
159 rather than having them transfer automatically to the transferee was justified on the principle that contracts of employment are personal contracts and so cannot be transferred without the consent of the employee.16
What is evident in the above analysis is that in a situation where there was a going concern transfer of an insolvent business in two EU Member States, employees in country ‘A’ (France in our example) would have the advantage of continuity of employment by virtue of the existing French law which made it possible for contracts of employment to transfer automatically upon a transfer from the transferor to the transferee. On the other hand, employees in country ‘B’ (Britain in our example) would be dismissed in a similar situation, due to the operation of a different legal (common law) rule on transfer which did not support automatic transfer of employment contracts following a business transfer. However, since 1977 the dichotomy between continuity and termination of the employees’
contracts of employment when there is a change in the ownership of a business that employs them following a business transfer has been eliminated. EU workers currently enjoy automatic transfers of employment contracts alongside other
‘parallel’ protections in business transfers in the Member States. This is due mainly to the harmonisation of the discrete employment laws of the Member States on transfer of undertakings made possible by the adoption of the first generation ARD in that year.
The ARD may have enhanced the rights of the employees in transfers, but it also had some effects on businesses in the Member States as discussed at section 4.7 below. Also, its adoption is said to have signaled the gradual but continuous involvement of the EU in the social affairs of the Member States.17 The ARD is, arguably, the genesis of the existing tension between employee protection and business rescue in UK corporate insolvency setting. In tipping the balance in favour of the employees in transfers, and given that the automatic transfer
16 A classic example of the application of rule is found in the House of Lords’ decision in Nokes v Doncaster Amalgamated Collieries Ltd [1940] AC 1014, where Lord Atkins stated:
My Lords, I confess it appears to be astonishing that apart from overriding questions of public welfare, power should be given to a court or to anyone else to transfer a man without his knowledge and possibly against his will from the service of one person to the service of another.
17 Andrew L DaSilver, ‘Directive 77/187: The EEC’s Attempt to Protect Employees upon the Sale or Transfer of Businesses’ (1998) 11 B. C. Int’l & Comp. L. Rev. 147. See also Dubois, ‘European Social Law’, in M Ellis & P Storm (eds) Business Law In Europe: Legal, Tax and Labour Aspects of Business Operations in the Ten European Community Countries and Switzerland (Kluwer Law & Taxation Publishers, The Netherlands, 1982) 59.
160 principle applies to both solvent and insolvent transfers, there is inevitably a tension between employment protection (championed by the ARD) and the rescue culture (championed by UK insolvency law) in the UK. This is basically a conflict between the employment rights of the employees and the rescue of insolvent but viable businesses in the UK.18
In relation to insolvent businesses, the regime is perceived as having adverse effects on the going concern rescues of those businesses. This is because with the intervention of the ARD, not only do workers who are employed in a UK business (immediately before the transfer19) transfer or move across to the transferee, they do so on the same terms and conditions of employment they enjoyed with the previous employer. Viewed from a social lens, the ARD can easily be justified on grounds of offering a measure of social protection of the type canvassed by Traditionalists 20 for workers during transfers of insolvent businesses or undertakings when their jobs are most likely to be at risk.21 However, from a purely business standpoint, and especially from the perspective of the rescue and continuity of insolvent businesses, this European law engendered practice could cause more harm than good, even for the employees themselves.22 There is the view that legislation such as the ARD which aims to provide a measure of job security increases costs to transferees.23 A law such as the ARD operates as a disincentive to prospective buyers of insolvent undertakings. It restricts their entry into the market potentially resulting ultimately in job losses for the
18 Richard Parr & Nicola Bennett, ‘The Rescue Culture Versus Collective Employment Rights’ (2005) 18 (10) Insolvency Intelligence 156-157.
19 The meaning given to this phrase by the courts is discussed in chapter 6.
20 See generally Elizabeth Warren, ‘Bankruptcy Policy’ (1987) 54 Uni. Chi. L. Rev. 775; Donald G Korobkin, ‘Employee Interests in Bankruptcy’ (1996) 4 Am. Bankr. Inst. L. Rev. 5; Karen Gross, Failure and Forgiveness: Rebalancing the Bankruptcy System (YUP, New Haven 1997); Gross, ‘Taking Community Interests Into Account in Bankruptcy An Essay’ (1994) 72 Wash. U.L.Q. 1031; L M LoPucki,
‘A Team Production Theory of Bankruptcy Reorganization’ (2004) 57 Vanderbilt Law Review (3) 741, 769.
21 M A Rothstein et al, Employment Law (West, St. Paul, 1994) 589; Janis Sarra, ‘Widening the Insolvency Lens: The Treatment of Employee Claims’ in Paul J Omar (ed.) International Insolvency Law:
Themes and Perspectives (Ashgate Publishing Ltd, Hampshire 2008); M Gronow, ‘Insolvent corporate groups and their employees: The case for further reform’ (2004) Legal Studies Research Paper No.130, Melbourne Law School <http://ssrn.com/abstract=81424> accessed 27 January 2011.
22 Sandra Frisby, ‘TUPE or not TUPE? Employee Protection, Corporate Insolvency and One “Unholy Mess”’ (2000) 3 CFILR 249-271; John Armour & Simon Deakin, ‘Insolvency, Employment Protection and Corporate Restructuring: The Effects of TUPE’ (2001) ESRC Centre for Business Research, University of Cambridge Working Paper No 204 <http://www.cbr.cam.ac.uk/pdf/wp204.pdf>
accessed 09 January 2011.
23 Adrian Walters, ‘The Impact of Employee Liabilities on the Administrator’s Decision to Continue Trading’ (2005) 26 (11) Company Lawyer 321.
161 employees if the cost of the transfer deters the purchase.24 It follows that it is absolutely important to balance the statutory protection of the employees of an insolvent business against the ‘statutory pursuit of the rescue culture’.25 In the next section, the introduction of the ARD will be considered.