Insolvent Companies' Directors and TUPE - a small loophole with a big cost.

Here is a bizarre scenario for you. A company exists and it is run, as all companies are, by directors. They are the mind and decision makers of the business with ultimate responsibility for the success or failure of that business.

The business fails and falls into an insolvency process. On a sale of that business the directors will automatically transfer over to the owners of the new business with the same terms and conditions unless the new owner can agree a compromise with the directors.

This is all thanks to a wonderful piece of European legislation lovingly referred to as TUPE. This legislation has a very honourable purpose - it ensures that employees of a business are protected against losing their jobs or having their terms of employment unfavourably altered just because a business changes ownership. It is widely drafted to prevent clever lawyers finding loopholes for their clients and, rightly, applies even to the sale of parts of an insolvent business to a new owner.

However, what does not appear to have been considered is that this legislation results in every employee passing across. Directors are employees (often the highest paid ones). Where a sale is one sought out by the company and it is agree that the directors will leave this is not an issue (although it does potentially create a conflict of interest for the directors concerned).

But where a company is insolvent the directors are ultimately responsible for that failure. By TUPE applying to directors even in such circumstances it has inadvertently placed directors at the front of the queue to extract payouts from any potential suitor where the money involved could have been invested in the new business providing a better chance for the future success of the phoenix entity.

So, as with the bankers and their bonuses, those with most of the responsibility for the failure of a business are given the opportunity to be compensated for their failings whilst the less responsible employee faces an uncertain financial future. An easy loophole to close if someone would just pull the right strings.