251: ECJ clarifies whether a relevant transfer can occur where no significant tangible assets are transferred

In Grafe and Pohle v Sudbrandenburger Nahverkehrs GmbH, the European Court of Justice (ECJ) has followed the Advocate-General’s opinion in a case which looked at whether a change in the provider of a German public bus service was a relevant transfer under the Acquired Rights Directive (ARD), the EU legislation underlying the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) in the UK.

In this case, KD, the new provider of a German public bus service, argued that the ARD did not apply to the transfer of the service from the previous provider, SBN, because it had not taken on any buses, depots, workshops or operating facilities. This was due to new technical and environmental standards requiring more environmentally-friendly and accessible buses. SBN had ceased trading and terminated the employment of its employees. KD recruited the majority of SBN’s staff except for Mr Pohle and Mr Grafe, who argued that their employment should have automatically transferred to KD under the ARD.

The ECJ noted that SBN would have been forced to replace its buses and other operating resources in the near future anyway in order to comply with the new standards, and if KD had taken over the bus fleet, it would have had to be scrapped. It was therefore clear that KD’s decision not to take on the buses was dictated by legal, environmental and technical constraints, rather than being a matter of choice. Looking at the factual circumstances, the bus service had continued to operate on most of the same routes, for many of the same passengers, with many of the same experienced bus drivers. The ECJ ruled that even where there is a transfer of a function that is asset-focused, the fact that significant tangible assets are not transferred due to legal, technical or environmental constraints does not necessarily preclude a transfer. The ECJ held that this was sufficient for the transferred entity to have retained its identity.

In an earlier case, Oy Liikenne AB v Liskojarvi, also involving the transfer of a bus service, the ECJ ruled that there was no relevant transfer under the ARD since the key assets, the buses, did not transfer and the business had therefore lost its identity. The crucial difference in this case was that KD could not use the existing buses due to the higher technical and environmental requirements.

This decision may therefore be useful for TUPE purposes, to help argue that a business transfer has taken place where no tangible assets have transferred due to external constraints such as legal, environmental or technical concerns.