One key concern when buying a business in administration is whether a buyer will inherit liabilities arising from pre-transfer dismissals made by administrators.

Under TUPE, buyers should not inherit liabilities relating to pre transfer dismissals made for an economic, technical or organisational (ETO) reason connected with the transfer which entails changes in the workforce. TUPE will, however, transfer liabilities relating to pre transfer dismissals made by reason of the TUPE transfer itself or a reason connected to the transfer that is not an ETO reason entailing changes in the workforce. 

Spaceright Europe v Baillavoine explained the circumstances in which administrators could dismiss employees for an ETO reason connected to the transfer. To have an ETO reason, there must be an intention to change the workforce and to continue to conduct the business.  Dismissals made for the purpose of selling a business (for example, to make a business more attractive to prospective purchasers) will not give rise to an ETO reason.

A harsh application of Baillavonie came in the recent decision of the Employment Appeal Tribunal (EAT) in Kavanagh & Others v Crystal Palace FC. This case concerned employees of Crystal Palace Football Club dismissed by the club’s administrator before the club was sold. 

In total the administrator made 29 redundancies because the club could not afford to pay the employees’ salaries pending any sale. As it was never the administrator’s intention to continue the club’s business, the EAT held that the dismissals were made for the purposes of selling the club. Absent an intention to continue the business, the EAT found no ETO reason. The dismissals were automatically unfair. Liability for the dismissals passed to the club’s buyer.

In the context of an administration it is highly likely that dismissals will be made for economic reasons at the point an administrator is unable to pay the salaries of an employer’s employees. Together Baillavoine and Kavanagh increase the risks in buying a business from an administrator where pre-transfer dismissals have been made. It is seldom the intention to continue a business subject to administration proceedings, which seems to be required by the employment tribunals to give rise to an ETO reason.

As it is rare to receive contractual indemnification from administrators, buyers should take account of the risks created by pre transfer dismissals in the price to be paid for a business.