In the case of Kavanagh and others v Crystal Palace FC (2000) Ltd and others UKEAT/0354/12 the Employment Appeal Tribunal (EAT) ruled that the Employment Tribunal had erred in law when it decided that a dismissal carried out by an administrator before the sale of an insolvent business was for an economic, technical or organisational (ETO) reason and therefore not automatically unfair.

Under regulation 7(1) of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (SI 2006/246) a dismissal of an employee is automatically unfair if the sole or principal reason for the dismissal is either the relevant transfer or a reason connected with the relevant transfer that is not an ETO reason entailing changes in the workforce.

In the case of Spaceright Europe Ltd v Baillvoine and another [2011] EWCA Civ 1565, the Court of Appeal held that for there to be an ETO reason in a pre-transfer dismissal by an administrator, the reason for the dismissal must be to change the workforce and to continue to conduct the business and this had to be distinct from the purpose of selling it. It was also explicitly highlighted that it is not necessary to know the identity of the potential transferee.

In the current case the claimants worked for Crystal Palace Football Club (2000) Ltd, which went into administration in January 2010. The Employment Tribunal rejected the claimants’ arguments that they had been automatically unfairly dismissed and found that the administrator’s reason for the dismissals was that he could no longer pay all the club’s employees, and that he therefore he had to “mothball” the club in order to keep it alive. The ETO reason which was approved by the Employment Tribunal was that the administrator had to reduce the wage bill in order to continue running the business. However, the EAT stated that the facts “pointed unambiguously to the fact that there was no intention on the part of the administrator to continue to conduct the business” and therefore the dismissals were “part and parcel of a process, with the purpose of selling the business”. The EAT ruled that the dismissals were automatically unfair and that the liability did pass to the transferee.

The EAT applied an overly robust approach to the test laid down by Spaceright. The government is now concerned that the current rules deter the rescue of a company subject to insolvency proceedings and has issued a consultation on proposed changes to TUPE. In order to amend the strict status quo the government has sought views on whether a transferor should be able to rely upon the transferee’s ETO reason when making dismissals before the transfer.

Please speak to Richard Monkcom, Head of Druces LLP’s Employment team, for further information.

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