An important decision of the Court of Appeal in November 2013 has overturned the decision of the Employment Appeal Tribunal in the case of employees made redundant by the administrator of a football club prior to its sale. The decision is relevant to purchasers of business and assets from companies in administration. The club was Crystal Palace FC, then owned by a company called Crystal Palace FC (2000) Ltd. The relevant events took place at the end of the 2009/10 football season when the club was near the bottom of the Championship and struggling with severe financial difficulties. The case concerns the question whether the dismissal of four employees was unfair under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). As explained below, the effect of the changes to TUPE as from 31 January 2014 is unlikely to alter the significance of this decision.
The football club had been put into administration in January 2010 at the instigation of its secured lender, Agilo Master Fund Ltd. The administrator was aware of interest in buying the club from a consortium. Selling the club would be complicated because it did not own the stadium. The stadium was owned by another company, Selhurst Park Ltd, which was put into administration about a month after the club, in February 2010. A different administrator was appointed to the stadium company and the main creditor of the stadium company was its bank. The bank was effectively the beneficial owner of the stadium and thus had a great deal of leverage in the negotiations. These facts led to an additional complication in the negotiations for the sale of the club and the stadium to the proposed purchaser.
The administrator advertised the sale of the club in the Financial Times in early February.
Apart from the consortium, which signed a confidentiality agreement with the administrator, there were no other credible bidders. By May, the consortium purchaser and the administrator had agreed the terms of a sale and purchase agreement which was signed and held in escrow pending an agreement for the sale and purchase of the stadium. At this time a further loan of £1m was taken from Agilo but that was also quickly used up and the club’s future was hanging by a thread.
The club was rapidly running out of funds and e-mail correspondence between the administrator and the managing director indicated the administrator’s intention to cut costs by making redundancies given the continued uncertainty over the sale of the stadium and therefore the sale of the club. The administrator decided ‘to sell the playing assets and mothball the club’s trading operations’ as of the end of May. He asked the managing director to provide a list of employees ‘divided by those [the MD] would wish to retain in a mothball operation and those we can make redundant as of 31 May’.
At the end of May dismissal letters were given to the staff on behalf of the administrator. Twenty-nine employees were dismissed. Following a further round of negotiations in early June an agreement was reached for the sale of both the club and the stadium to the consortium.
Four of the 29 dismissed employees brought proceedings for unfair dismissal. They submitted that the effect of regulations 4 and 7 of TUPE was that their dismissals were for a reason connected with the sale of the club and were automatically unfair because they were for a reason that was not an economic, technical or organisational (ETO) reason entailing changes in the workforce. Because of that, the liability of the club to the dismissed employees had transferred to the purchaser. The claimants also argued that the decision of the Court of Appeal in Spaceright Europe Ltd v Baillavoine  meant that the dismissal could not have been for an ETO reason.
THE RELEVANT LAW UNDER TUPE
Prior to changes to TUPE introduced with effect from 31 January 2014 (discussed below) the relevant provisions of TUPE in relation to employees with the requisite two-year period of continuous employment were as follows.
Regulation 4 provided, in summary, that where an employee’s dismissal was automatically unfair under TUPE, liability for the employees’ contracts passes to the transferee.
Regulation 7(1) provided:
‘Where either before or after a relevant transfer, any employee of the transferor or transferee is dismissed, that employee shall be treated… as unfairly dismissed if the sole or principle 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 reason entailing changes in the work force.’
DECISION OF THE EMPLOYMENT TRIBUNAL
The Employment Tribunal (ET) concluded that the administrators’ ostensible reason for dismissing the employees was in fact the genuine reason. The ET concluded that the administrator:
‘… dismissed the claimants in order to keep the club alive as a going concern, in the hope that that there would be a sale in the future. When he dismissed the claimants a transfer of the club to the consortium remained a possibility, but it was no more than that.’
The ET went on to comment that, if the administrator’s reason for the dismissals was the necessity of reducing the wage bill in order to continue the business, that would be an ETO reason. The ET also said that such an ETO reason is separate from a longer-term objective of being able to sell the business in due course. However, if the administrator’s reason for dismissal had been that a smaller workforce would make the business more attractive to a prospective purchaser, that would not be an ETO reason.
THE DECISION OF THE EMPLOYMENT APPEAL TRIBUNAL
The Employment Appeal Tribunal (EAT) found the decision of the ET to be ‘a wholly surprising conclusion’. The EAT came to the conclusion that the dismissal of the employees was not for an ETO reason because the dismissals were not for the purpose of continuing the business but were with a view to sale or liquidation. The judgment then goes on to discuss Spaceright, in which Mummery LJ said:
‘For an ETO reason to be available there must be an intention to change the workforce and to continue to conduct the business, as distinct from the purpose of selling it. It is not available in the case of dismissing an employee to enable the administrators to make the business of the company a more attractive proposition to prospective transferees of a going concern.’
THE COURT OF APPEAL DECISION
The Court of Appeal restored the ET’s decision. The Court commented that it is very important to recognise that the application of Regulation 7 is an ‘intensely fact-sensitive process’. Care must be taken to ensure that administrators are not artificially contriving an ETO reason and thus illegitimately avoiding the TUPE regime. However, the Court also commented that, due to the policy geared to the encouragement of corporate rescue, care has to be taken before characterising an arrangement by an administrator as an illegitimate manipulation of the TUPE regime.
The Court of Appeal commented that there are special circumstances relating to the financial affairs of a failing football club. Since its business is seasonal and its most valuable and realisable assets are its contracted players, the liquidation of a football club will often leave few or no assets to be realised for the benefit of the creditors, therefore, although liquidation remained a possibility, there were stronger reasons than usual for averting it.
The Court held that the dismissals unquestionably entailed changes in the workforce and it was permissible for the ET to conclude that there was an ETO reason, specifically an economic reason for the dismissals; the Court said: ‘Just as Spaceright was fact sensitive, so too is this case’.
The Court of Appeal took the view that the passage from Mummery LJ’s judgment in Spaceright quoted above caused the EAT to conclude that there was not an ETO reason for the dismissal by the administrator. The lead judgment of Maurice Kay LJ indicated that the decision of Mummery LJ in Spaceright has to be seen in the context of that case. The claimant had been employed as chief executive but his role had become redundant on the appointment of the administrators who dismissed him on the first day of the administration. On the finding of the ET, the chief executive in Spaceright was redundant ‘because no purchaser of the business… would require such an officer.’
Maurice Kay LJ goes onto conclude that the ET was justified in distinguishing between the administrator’s reason in the case of the football club for implementing the dismissals (to cut the overheads) and his ultimate objective (the sale of the business). The administrator needed to reduce the wage bill in order to continue running the business to avoid liquidation. For this reason the Court of Appeal found that the ET did not make a legal error in coming to its conclusion that the employers were dismissed for an ETO reason.
THE JUDGMENT OF BRIGGS LJ IN THE COURT OF APPEAL
Briggs LJ in his judgment in the Court of Appeal said that the appeal raised some fundamental issues about the interaction between two statutory regimes. On the one hand, the TUPE regime protects employment on the transfer of undertaking: on the other hand, the administration regime seeks to preserve jobs from the consequences of corporate insolvency. There is clearly tension between the two. Briggs LJ pointed out that if the rights of employees dismissed before the transfer of the business can be enforced against the purchaser then the purchaser would seek to subtract from the purchase price the amount needed to discharge those employment liabilities. The effect of that would be to reduce the amount available by way of distribution to creditors generally. The end result is that the claims of dismissed employees will achieve a priority in the insolvent distribution not contemplated by the Insolvency Act. In fact, under the Insolvency Act, unfair dismissal claims, even by employees initially kept on by the administrators, do not enjoy the priority afforded to payment of their wages and salaries. Regulation 7 of the 2006 Regulations makes this clear as it provides:
‘… the transfer of the business shall not in itself constitute grounds for dismissal by the transferor or the transferee. This provision shall not stand in the way of dismissals that may take place for economic, technical or organisational reason entailing changes in the workforce.’
POST SCRIPT: THE AMENDMENTS TO TUPE BY THE 2014 REGULATIONS
Since the Court of Appeal decision in Crystal Palace, the TUPE regulations have been amended by the Transfer of Undertakings (Protection of Employment) (Amendment) Regulations 2014 (the 2014 Regulations). These have changed the test under Regulation 7 to mean that a dismissal is no longer automatically unfair (but only potentially unfair) if the sole or principal reason is an ETO reason entailing changes in the workforce.
The decision of the Court of Appeal is in line with the 2014 Regulations, which aim to increase the freedom to make dismissals on a TUPE transfer without the risk of a claim for automatically unfair dismissal. It will remain difficult in many cases to distinguish between dismissals that are by reason of the transfer and dismissals that are for an ETO reason. The government has indicated that it hopes the changed wording will introduce more certainty than previously existed. Obviously, such certainty will only come about through further cases being decided.
Generally, the Court of Appeal’s decision is to be welcomed as practical and conducive to commercial outcomes for administrators and buyers of the business from administration companies. While individual employees might lose out in certain cases, this will be an unfortunate but necessary side effect of the sale of the business and the preservation of other jobs. Clearly, an administrator that is legally restrained from making job cuts for an ETO reason would also be prevented from carrying on a business in order to sell it, with the unfortunate consequence that all members of the workforce of the administration company would lose their jobs when, inevitably, the business would have to be closed down and liquidated.
LEARNING POINTS FOR PURCHASERS
Points for purchasers of business and assets from administrators can be summarised as follows:
1.Dismissal of employees can be a legitimate means by which administrators can achieve necessary economies to keep the business going pending a sale.
2.Each case must be looked at carefully on its own facts to ascertain whether the dismissal is for an ETO reason.
3.Purchasers and their advisors will need to judge the facts for themselves as to whether the administrator dismissed the employee(s) for a genuine ETO reason.
4.If the dismissal is not for a genuine ETO reason then the burden of the unfair dismissal(s) will pass to the purchaser.
5.The recent amendments to the TUPE law will not affect the significance of the Court of Appeal’s decision.
By Richard Baines, partner, and Rachel Mathieson, trainee solicitor, of Druces LLP’s Turnaround, Restructuring & Insolvency team.