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In January 2010, Crystal Palace FC were near the bottom of the Championship league and facing financial difficulties. The company which owned Crystal Palace FC, Crystal Palace FC (2000) Limited (“the Company”), subsequently entered into administration on 26 January 2010.
The Company’s administrator entered into negotiations for the sale of the business and terms were agreed in principle in May 2010, however complications arose delaying the sale and the Company suffered severe issues with its liquidity. As a result, and in view of the potential sale of the business, the administrator undertook to save costs whilst allowing the Company to continue trading which would preserve the value of the business pending a future sale. Accordingly, the administrator dismissed a number of administrative staff and retained only those who would be necessary to the core operations of the club in order to keep the business running. The dismissed employees brought a claim in the Employment Tribunal for unfair dismissal.
Under regulation 7 of TUPE, an employee is unfairly dismissed “if the sole or principal reason for his dismissal is (a) the transfer itself; or (b) a reason connected with the transfer that is not an economic, technical or organisational (“ETO”) reason entailing changes in the workforce”.
As no agreement had been reached in relation to the transfer at the effective date of the dismissals, the principal reason for the dismissals could not be the transfer itself. However, it was argued on behalf of the former employees that their dismissals were for a reason connected with the transfer and there was no ETO reason entailing changes in the workforce. It was argued that they were simply dismissed to make the sale of the business more attractive for the purchaser.
The Court of Appeal in Crystal Palace FC Ltd v Kavanagh (2013) retreated from the approach in Spaceright (2012) in deciding that liability for employees who are dismissed by an administrator where the company is due to be sold will not necessarily pass over to the purchaser if the purpose of the dismissals was to keep the company trading.
At the ET it was held that the dismissal of the employees was connected with the transfer as the decision to reduce the workforce was taken with a view to keeping the business running, which would increase the possibility of a sale in future. However, a distinction was drawn between the reason for the dismissals (reducing salary costs) and the ultimate objective (sale of the business). If the administrator’s reason for dismissal was that a smaller workforce would make the business more attractive to prospective purchasers, that would not be an ETO reason. However, the administrator in this instance dismissed employees because the Company was at risk of entering liquidation if staff costs were not reduced. That was considered to be an economic reason entailing changes in the workforce, and therefore liability for the dismissed employees did not transfer to the purchaser of the business.
The EAT reversed the decision of the ET, stating that the tribunal’s “findings of fact pointed unambiguously to the fact that there was no intention on the part of [the administrator] to continue to conduct the business”. As the dismissals were made with a view to sale or liquidation of the business, they could not be an ETO reason and liability for the dismissals would transfer to the purchaser.
The Company appealed the decision.
The Court of Appeal considered the decisions of the ET and EAT in light of the Court of Appeal authority, Spaceright  ICR 520. In that case, Mummery LJ stated that, for there to be an ETO reason, there must be an intention both to change the workforce and to continue to conduct the business: it is not sufficient that the dismissal of employees would make the sale of the business more attractive to prospective purchasers. In Spaceright, a CEO was dismissed immediately upon his employer company entering into administration on the basis that the proposed purchaser of the company in administration would either have their own CEO or promote an existing director to the role.
Maurice Kay LJ distinguished Spaceright as the facts of the instant case were “significantly different” due in part to the cyclical nature of business of football clubs and also because their main assets are contracts with players which would be incapable of realisation upon liquidation. It was therefore crucial to reduce the wage bill of the Company to avoid liquidation and, importantly, the intention to carry on in business was demonstrated by the fact that sufficient staff was retained to keep the club open. The ET was therefore correct to distinguish between the reason for the dismissals and the ultimate objective, namely the sale of the business. Therefore, it was held that the employees were dismissed for an ETO reason and liability for their dismissal would remain with the Company in administration rather than transferring to the purchaser.
The Court of Appeal in this case took a step back from the approach in its earlier decision, Spaceright. The Court carefully considered the relevant facts to determine that liability for employees dismissed by the administrator for the purpose of keeping the business alive did not transfer over to the purchaser.
Briggs LJ concurred with the leading judgment and made the point that administrators’ work, by its very nature, involves dealing with businesses that require radical and urgent reform due to financial difficulties. Following their appointment, administrators have to both maximise the period within which the company can continue to run (most commonly through restructuring and reducing costs) and, where the business cannot be rescued as a going concern, make the business more attractive to prospective purchasers. In reality, the reduction of staff costs serves both purposes. If the “ultimate objective” of reducing wages (ie sale of the business) is considered as the sole or principal reason for dismissal then it would never be open to administrators to rely upon the ETO exception, which can surely not have been the intention of the TUPE regulations.
Administrators will welcome this decision as it potentially provides scope to reduce staff costs in businesses in order to keep trading where a future sale is proposed. Briggs LJ, in particular, noted the importance of this decision in an insolvency context, where it is regularly the case that administrators will be seeking to sell a company to achieve a better result for the company’s creditors than would be achieved through liquidation. However, the outcome in this case was fact-specific and administrators should be warned that a period of continuing trade between dismissal and sale of the business will be a minimum requirement to benefit from the ETO exception.
For more information please contact Prav Reddy, Partner
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