So-called “pre-pack” (or back to back) administrations are controversial because they often leave behind them a trail of destruction as far as creditors, and particularly unsecured creditors, are concerned.
They typically arise in situations where a company is in serious financial (generally cash flow) difficulties and provide a way for the business to survive, albeit (or at least it should be the case) in the hands of different owners. they are often used for management buy-outs.
Although such arrangements tend to favour secured lenders such as banks, the same cannot be said for unsecured (e.g. trade) creditors, who can often be left with a measly dividend of as little as 2 or 3p in the £. They are therefore often seen as unfair but, in fact and as long as the procedure is not grossly exploited, they are consistent with the Cork Report of 1982 which did much to shape modern insolvency law and practice and which has at its heart the promotion of a “rescue culture”.
But what about the employees? Does TUPE come to the rescue? For years, there was uncertainty, as the result of a number of conflicting judgments. In 2012 the Court of Appeal, in Key2Law (Surrey) LLP v De’Antiquis (Key2) held that the exemption from TUPE that can arise in other insolvencies (such as liquidations) does not apply to administrations because their objective (even if it is in the short term) is to secure the survival of the business as a going concern. Consequently, all employees will transfer to the buyer in the usual manner (although there is some relaxation of the rules taking into account the insolvency, such as limited contract variations).
The Court of Justice of the European Union has now weighed in on the matter in its decision (on a referral from the Netherlands) in the case of Federatie Nederlandse Vakvereniging and others v Smallsteps BV.