When provisional becomes terminal for TUPE: why purpose, timing and control determine employee protections

Insolvency does not automatically disapply The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) – but recent case law has provided further authority about when and why employee protections can fall away in business transfers involving failing companies. 

TUPE operates to transfer the employment of in-scope employees in certain circumstances, such as to a buyer in certain business and asset transfers. Employees' historic terms and conditions, and rights and entitlements, are also largely preserved.

TUPE already introduces complexity to business sales and outsourcing arrangements. Where one party is insolvent, that complexity is often amplified, with greater uncertainty around whether – and how – TUPE applies.

A recent Employment Appeal Tribunal (EAT) decision – Secretary of State for Business and Trade v Sahonta and Ors [2025] EAT 166 – considered this point on when TUPE protections apply, and when they do not, in insolvency situations.

How does insolvency affect TUPE protections?

TUPE recognises two broad types of insolvency proceedings:

1. Rescue focused insolvency (non-terminal insolvency)

These are proceedings intended to save the business as a going concern (for example, administration or pre-pack administrations). Broadly speaking, in these cases:

• employees usually transfer automatically;
• dismissals connected to the transfer are automatically unfair;
• contractual terms remain protected (subject to limited exceptions); and
• to make the rescue more attractive to buyers, certain debts owed to employees will not transfer to the buyer but will instead be paid from the National Insurance Fund (NIF).

2. Liquidation-focused insolvency (terminal insolvency)

Where proceedings are instituted with a view to liquidating assets, then TUPE regulation 8(7) may apply. If it does:

• employment contracts do not transfer automatically;
• dismissals are not automatically unfair; and
• employees may claim certain payments from the NIF, where the transferor has 'become insolvent' as per the Employment Rights Act.

What happened in Sahonta?

Morton Rolls (Morton) was a bakery which faced financial difficulties ultimately leading to its compulsory liquidation.

Morton entered into a Conditional Business Transfer Agreement (CBT) with another company, Phoenix Volt (Phoenix), who acquired part of the bakery business, on 3 March 2023. Pursuant to the CBT Phoenix acquired some but not all of Morton's employees but did not acquire the right to trade from Morton's premises. That same day, Morton sent a letter to all employees advising that their roles were at risk, that they had been laid off with immediate effect and Morton ceased trading that same day.

Shortly after, on 7 March 2023, a provisional liquidator was appointed to Morton following a winding-up petition by HMRC and Phoenix entered into further negotiations with the provisional liquidator regarding the terms of the transfer.

Phoenix recommenced bakery operations from Morton's former premises on 21 March 2023, employing a number of former Morton staff. A compulsory winding-up order was granted on 31 March, and an interim liquidator was appointed.

Around 140 former Morton employees claimed payments from the NIF. The Secretary of State refused, arguing that a TUPE transfer had occurred before Morton entered liquidation, making Phoenix liable instead. The Employment Tribunal – and later the EAT – rejected that argument.

The EAT found that:

• The TUPE transfer date is a fact-sensitive, practical question, turning on when responsibility for operating the business passes to the transferee.
• There was no transfer on 3 March (when the agreement was signed), as there was no going concern at that time. It would not have been possible for Phoenix to take over and continue business on that date – staff were laid off, bank accounts were frozen and, at that time, Phoenix lacked access to the premises.
• Here, the transfer occurred on 21 March, when Phoenix obtained operational control and resumed trading. By that date, Morton was already subject to insolvency proceedings (a provisional liquidation) with a view to subsequently entering liquidation, supervised by an insolvency practitioner.
• As a result, TUPE regulation 8(7) applied, disapplying automatic transfer and automatic unfair dismissal protections.

Importantly, the EAT confirmed that TUPE regulation 8(7) can be triggered by the appointment of a provisional liquidator, and does not require a winding-up order to have been made.

The EAT acknowledged the argument by the Secretary of State that a temporary cessation of business does not preclude a relevant transfer, and that there can be a transfer at a time no employees are working and no activities are being carried out. This is an established principle in case law, though it is also established that a temporary cessation of activities may be relevant but is not conclusive on its own. On this 'temporary cessation of activities point, the EAT ultimately found that it was for the Tribunal to consider all the circumstances, and decide when responsibility for carrying on the business passed to Phoenix. Notably it said:

"It is possible that a different tribunal might have reached a different decision on the facts, but the conclusion reached, in light of the governing law, is one that a reasonable tribunal properly directing itself could have arrived at."

As such, care should be taken when considering how this decision may apply to individual circumstances.

The big question arising from this decision is: could this type of mechanism be used in the future to structure insolvency proceedings around TUPE? Time will tell.

Key lessons from Sahonta

TUPE is significantly fact sensitive, particularly when considering the date of transfer. In Sahonta it is interesting that a sale by a provisional liquidator, where the company is then later going into liquidation, qualified under TUPE regulation 8(7) – but that may not always be the case. As the EAT acknowledged, a different Tribunal may have reached a different decision, given the circumstances.

When considering whether TUPE regulation 8(7) applies:

• Purpose over form: ask why the insolvency proceedings were instituted (liquidation vs. a rescue-oriented process), not merely what it is called.
• Timing matters: identify the actual transfer date – when operational responsibility passes – and whether qualifying insolvency proceedings had begun by then. A temporary pause in operations will not preclude a TUPE transfer.
• Drafting & communications: conditional sale agreements and employee letters won't determine the outcome, the facts on the ground will.
• Risk management: buyers relying on regulation 8(7) should evidence the liquidation purpose, otherwise standard TUPE protections may apply.
• Litigation risk: the final decision on the application of TUPE is fact-specific and may well be subject to significant uncertainty. It is important to be alert to that risk, be clear which party is assuming that risk and for that party, that the commercial upside of the transaction is sufficient to compensate them for taking on that risk.

Sahonta is a timely reminder that insolvency does not, of itself, 'switch off' TUPE. Whether (and which) employee protections apply depends on the purpose of the insolvency proceedings, the timing of the transfer and who is in control of the business in practice. For employers, insolvency practitioners and buyers alike, careful analysis at an early stage is essential – getting it wrong can lead to significant, unexpected employment liabilities.

Government consultation on TUPE reform

In its Make Work Pay plan, the government committed to strengthening TUPE protections. As part of this, it has published a call for evidence seeking views from employers, employees and employee representatives on their experiences of current TUPE processes.

The consultation responses will help the government consider how to strengthen existing TUPE protections and develop policy proposals for reform. The call for evidence is open until 1 July and can be accessed here.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, May 2026