Last reviewed 27 May 2022

The purchase of a business as a going concern is relatively common, and the processes to follow are for the most part settled. In nearly all cases, the Transfer of Undertakings (Protection of Employees) Regulations 2006 (“TUPE”) apply to the transfer of the employees’ contracts, rights and service over to the new employer/owner, who must honour these rights as though they were the ones to give them in the first place.

But what about in the case of administration or insolvency? What happens to the employees and their contracts?

On Friday 6 May 2022, the board of the retailer McColl’s, operator of 1160 shops and employer of 16,000 people, initiated the process to enter administration following a failed attempt to arrange a “rescue deal” with its lenders, who refused to allow the restructure of the retailer’s debts. McColl’s officially entered administration on 9 May 2022. On the same day, Morrisons (the supermarket chain) announced it had agreed with the administrator to purchase the business via a pre-pack administration, taking on:

  • all employees

  • two pension schemes

  • all stores

  • repayment of all debts to secured and preferential creditors, and a distribution to unsecured creditors.

Below we explore the legalities behind what has happened and practically what it means for the employees of McColl’s.

What is administration?

Administration is a procedure that can be entered into voluntarily by businesses struggling financially and who need a period of relief from creditor pressure in order to explore what options they have for corporate rescue. It can also be started by a secured creditor, where they are concerned about the possibility of recovering their debt.

Administration has one of three purposes.

  1. Rescuing the company as a going concern.

  2. 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).

  3. Realising property in order to make a distribution to one or more secured or preferential creditors.

Upon entering administration, an appointed registered insolvency practitioner becomes an administrator of the business and takes on the overall control and management of the company.

What is a pre-pack administration?

A pre-pack administration involves the downfall of one business and the establishment of another. Strictly speaking, this is a subset of the main administration process that utilises an accelerated merger and acquisition process prior to the business entering administration. During this period the business is aggressively marketed and the terms of a sale agreed, before officially entering administration and being sold immediately or shortly thereafter.

Why use a pre-pack?

A pre-pack allows for a seamless transition from insolvent company to purchaser without undue delay. This means minimal disruption in the operation of the business, its services to customers and for its employees who are simply moved over to the new employer. It also avoids the negative stigma that can be attached to a business that continues to operate during administration, which can drive customers and lenders away for fear of the company being wound up.

Another benefit of pre-packs is seen for businesses that have skilled employees, from which much of its value is derived. By preventing a lengthy period of administration (it can last for up to 12 months), the chance of skilled employees losing confidence in the business and moving on is reduced. As a result of this they are retaining their skills, expertise and value within the business, putting it in the best position to thrive following the business sale.

What does this mean for employees?

Administration falls under “relevant insolvency proceedings” in the TUPE regulations, ie “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" (Regulation 8(6)). According to BEIS guidance, this includes all collective insolvency proceedings where the business is transferred to another entity as a going concern (as such, this does not include winding up of a business).

Therefore, many “normal” rules of TUPE apply, such as that employees transferred to the new employer (transferee) will go with their contracts, rights, benefits and service intact. They can also not be dismissed where the sole or principal reason for the dismissal is the transfer itself (unless there is an economic, technical or operational (ETO) reason).

Exemptions to the usual TUPE rules

However, some special rules do apply in the case of administration and TUPE. Ordinarily, the debts associated with employees of the transferor (old employer) transfer to the transferee. This is not the case in a “relevant insolvency proceeding” under Regulation 8(6) of the TUPE Regulations. Instead, these are taken on by the Secretary of State and payments are made from the National Insurance Fund.

These debts include:

  • a maximum of eight weeks’ arrears of pay (subject to the statutory week’s pay cap)

  • up to six weeks of holiday pay

  • pension contributions.

It is also possible, when a transfer falls within Regulation 8(6), for changes to employment terms to be agreed between the transferor, insolvency practitioners or transferee, where this is necessary to safeguard the survival of the business. However, these must be agreed with employee representatives, must not breach statutory entitlements and information must be shared with affected employees of what the changes are (in a non-unionised environment). The sole or principal reason for the change must be the transfer, not an ETO reason, and be with the aim to safeguard employment. This could be, for example, by offering a lower salary or changing benefits.

What can McColl’s employees expect now?

As the information and consultation obligations of TUPE still apply in these circumstances, they should be provided with information regarding any changes that will be taking place because of the transfer, and anything else practically they need to know as a result of the transfer.

There is no indication that dismissals will be necessary, even though they could be permitted for an ETO reason. They should also not expect to see their contracts changed unless this is deemed to be essential to the survival of the business. At this stage it has not been indicated by the parties involved that this will be necessary, but it remains to be seen if it will take place.

The transfer should have limited impact on the employees of McColl’s. There may be an element of rebranding, or there may not. By purchasing the business as it has, it would appear Morrisons intends to continue to run operations as they were, in the short term at least. What will happen longer term remains to be seen.