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Pre-transfer dismissals: an administrator's own goal

In Kavanagh and others v Crystal Palace FC (2000) Ltd and others (UKEAT/0354/12) the EAT has considered whether an administrator's decision to dismiss four employees was automatically unfair in light of his aim of selling the business as a going concern.

Background

Regulation 7(1) of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) provides that where the sole or principle reason for an employee's dismissal is either the relevant transfer itself, or a reason connected with the relevant transfer that is not an economic, technical or organisational reason entailing changes in the workforce (an ETO reason), then the dismissal will be automatically unfair (providing the employee has the requisite continuous service).

Under Regulation 4 where a pre-transfer dismissal is automatically unfair, liability will pass to the transferee.

The Court of Appeal held in Spaceright Europe Ltd v Baillavoine and another [2011] EWCA Civ 1565 that where an employee is dismissed by an administrator prior to a transfer, such a dismissal can nevertheless be connected with the transfer (and therefore potentially automatically unfair) irrespective of whether the identity of the transferee was known at the time. In addition, the court held that for there to be an ETO reason, the dismissal must be made with a view to continuing to conduct the business as opposed to achieving a sale.

Facts

Crystal Palace Football Club went into administration in January 2010. The administrator's aim was to sell the club as a going concern. In May 2010 the administrator discovered that the club had severe cashflow difficulties and, with a view to agreeing a sale at a later date, made Mrs Kavanagh and the three other claimants redundant. A proposed sale of the club which had stalled over the related purchase of the club's stadium was subsequently resurrected and completed in August 2010.

In rejecting the claimants' claim that they had been automatically unfairly dismissed, the Tribunal found that the reason for dismissal was not the transfer itself, but rather was a reason connected with that transfer (i.e. that the club could not afford to pay all its employees). It considered that at the date of dismissal, the proposed sale of the club was no more than a possibility. The Tribunal went on to find the need to reduce the wage bill was an ETO reason and could be distinguished from the administrator's ultimate objective of selling the business as a going concern. Accordingly, because there had been an ETO reason for the dismissal, the claimants had not been automatically unfairly dismissed.

The claimants appealed.

Decision

The EAT found that the claimants had been automatically unfairly dismissed, and that the liability for the dismissals passed to the new owner of the club.

The EAT's view was that the administrator had not intended to carry on the business, but rather to maintain it until it could be sold as a going concern. The EAT was surprised by the Tribunal's finding that the administrator did not contemplate that the stalled sale would be re-ignited by the redundancies and subsequent publicity. The EAT therefore found that the reason for the dismissals was for the purpose of selling the business. In view of the Court of Appeal's decision in Spaceright the dismissals could not therefore have been for an ETO reason. It followed that liability for the dismissals passed to the purchaser of the club.

Comment

The decision in Kavanagh will raise concerns for those looking to purchase businesses in administration. Purchasers run the risk of assuming liability for all dismissals made by an administrator seeking to sell the business, because the ETO defence will not apply if the dismissal is part and parcel of a process with the purpose of selling the business. This decision implies that simply looking for a potential buyer precludes the possibility of an ETO reason as reason for the dismissal.

Purchasers should this take risk into account when considering the potential value of insolvent businesses.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at March 2013. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.

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