The High Court in London has this week been considering whether employees of an insolvent company automatically transfer to the purchaser of their employer’s business by an administrator.

The Employment Appeals Tribunal (EAT) had decided in February 2011, in the case of OTG v Barke, that employment rights transfer as a result of TUPE (Transfer of Undertaking (Protection of Employment) Regulations 2006). The case has now been appealed to the High Court.

Nick Moser, Head of Restructuring and Corporate Recovery at Taylor Wessing said: “The judgment will give clarity to the way banks and administrators restructure failing businesses. Most practitioners have assumed that the EAT in February came to the correct view and so the cost of transferring employees has already been priced into restructurings.

“Although upholding the EAT may appear to be good news for employees, the higher cost of buying a business could have a detrimental effect in the long run.”

Sean Nesbitt, Head of Employment at law firm Taylor Wessing added: “The principle of OTG v Barke provided certainty with its bright-line approach and presumption that the purpose behind administration is rescue.

“If the court reverts to a more fact based approach, it may enable a better quality of justice where administration was not for the purpose of rescue, however, this will be at the expense of certainty. Certainty benefits the responsible insolvency practitioner and whilst the employment costs of transactions post OTG v Barke may have increased, this in itself is a useful tool for identifying viable acquisitions and reducing the scope for financial engineering.”

The High Court’s judgment is expected shortly.