A recent decision of the Court of Appeal has held that dismissals made by the administrator in advance of a subsequent sale were for an economic, technical or organisational reason entailing changes in the workforce (sometimes referred to as an "ETO reason").   This meant that liability for such dismissals did not pass to the new owners under TUPE and such dismissals were not automatically unfair.   

 The facts

In Crystal Palace Football Club (CPFC) v Kavanagh and others, CPFC went into administration in January 2010. In May, a deal was struck for the sale of the club. For various commercial reasons matters were delayed and by then the club was experiencing major cash flow problems. The administrator took the decision to "mothball" the club over the closed season and made 29 employees, who were not essential to the club's reduced activities, redundant. Shortly after the dismissals the sale of the club took place. 
 

An employee will be automatically unfairly dismissed under TUPE if the sole or principal reason for his dismissal is a reason connected to the transfer (if there is no ETO reason). The liability for such dismissal passes (under TUPE) to a purchaser of the business.  However, if the dismissal is considered to be for an ETO reason then the dismissals will not be automatically unfair, and importantly, liability does not transfer to a purchaser.

The Employment Tribunal found that there was an ETO reason for the dismissals which were to reduce the wage bill. On appeal, the EAT saw matters differently and decided that the reason for the dismissals was related to a future business sale and were therefore unfair. The Court of Appeal concluded that the reason for the dismissals was economic; the reduction of the wage bill in order to allow the business of the club to continue to operate for the immediate future. That was separate to the administrator's longer term goal of selling the business.

Comment

The Court of Appeal distinguished the case from the Court of Appeal decision of Spaceright Europe Limited v Ballavoine. That case held that the dismissal of an employee was to make a business more attractive to a potential purchaser and that there was not therefore an ETO reason (even although there was no sale imminent at the time of dismissal).

The Court of Appeal in the CPFC case did not interfere with that principle; rather, it took the view that what the administrators of CPFC had done had not been done with a view to making a sale of the business more attractive to a purchaser. However, the Court did acknowledge that there will be a fine line between Spaceright scenarios and CPFC scenarios. Each case will turn on its own facts.