In its decision in Kavanagh & Others v Crystal Palace FC (2000) Ltd & Others, the Employment Appeal Tribunal (“EAT”) considered the circumstances in which an administrator’s reason for dismissals made before a business sale will come within the ‘economic, technical or organisational’ (“ETO”) permitted exception under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”). The EAT held that where the reason for dismissal is to change the workforce and continue to conduct the business of the company in administration, this can be an ETO reason. In contrast, where a dismissal is “part and parcel of a process, with the purpose of selling the business”, there is no ETO defence available and the liability for unfair dismissal will pass to the buyer.
When a buyer has been identified, it will be difficult for an administrator to rely on the ETO defence. The decision in Kavanagh has been a cause for concern for insolvency practitioners who fear that it has the potential to fly in the face of the rescue culture of administrations.
Crystal Palace FC (2000) Ltd (“the Company”) went into administration on 26 January 2010.
In March 2010, a consortium was incorporated as CPFC 2010 Ltd (“CPFC”) and given preferred bidder status in respect of the proposed sale of the football club. Due to difficulties in negotiating and achieving a sale of the club to CPFC, which was partly as a result of a separation of ownership between the business of the football club, owned by the Company, and its ground Selhurst Park, owned by Selhurst Park Ltd, the administrators of the Company took the decision to dismiss the employees, including Mrs Kavanagh and three others, in May 2010 in order to minimise the costs tothe business during the close
season pending a possible sale.
When a sale to CPFC was eventually concluded the claimants brought tribunal complaints that they had been automatically unfairly dismissed under TUPE, and that liability for their unfair dismissals had therefore passed to the transferee, CPFC. Rejecting their complaints, the tribunal found:
- Reason connected with the transfer – The Administrator’s reason for dismissing the claimants was that he could no longer afford to pay all of the club’s employees. He had to “mothball” the club to keep it alive in the hope that a sale could eventually be agreed. As at the date of dismissal, a sale to CPFC remained a possibility but no more than that. In these circumstances, the reason for dismissal was not the eventual transfer itself, but was a reason connected with that transfer.
- ETO reason – The Administrator’s reason for dismissal was the necessity of reducing the wage bill in order to continue running the business. That was an ETO reason, which could be distinguished from the administrator’s ultimate objective of selling the business in the future.
The claimants appealed to the EAT, arguing that there had been no ETO reason for dismissal.
The EAT held, considering the decision in Spaceright Europe Ltd v Baillavoine, that the Employment Tribunal had erred in law in misapplying the facts of the case to the statutory regime. Had it done so without error it would have concluded that the dismissal of the Appellants was not for an ETO reason as the dismissals were not for the purpose of continuing the business but with a view to achieving a sale or liquidation. In the circumstances, the only possible conclusion that the tribunal could have drawn was that the dismissals were for the purpose of selling the business. It followed that the employees’ dismissals were automatically unfair under TUPE, and liability for those dismissals passed to the transferee.
The narrow construction of the concept of an ETO reason within the context of pre-transfer dismissals has been a cause for concern for insolvency professionals for some time in that it has the potential to conflict with the rescue culture of administrations in general. This is because the administrator may not be able to dismiss in some situations without running high risks that the dismissal would be unfair in the event that a transfer subsequently takes place. If a buyer is found, liability for automatic unfair dismissal for any dismissals by the administrator, where the sole or principal reason for them was connected to the transfer, transfers to the buyer under TUPE. This in turn may deter buyers from buying any part of the business at all, or, if they do purchase it, it may reduce the price that they pay for the transfer.
The available statistics from the Insolvency Service suggest that, so far, the narrow interpretation of ETO reasons for dismissal following Kavanagh and the increased risk of a buyer picking up liability for dismissed employees on a transfer of a going concern has not impacted on the number of companies placed into administration in Q1 and Q2 of 2013, or the exit strategy decided upon. What the statistics cannot tell us is what commercial terms the parties are prepared to agree to when addressing this point, nor whether buyers are still prepared to provide broad indemnities against employee liability risk.
It will be interesting to see how the concern for transferees raised by the case is affected by the outcome of the current consultation issued by The Department for Business, Innovation and Skills (“DBIS”) on proposed amendments to TUPE (“the Consultation”). The Consultation, issued on 7 January 2013, shares the concern of insolvency professionals that the current rules deter the rescue of insolvent companies, on the basis that liability for dismissals carried out by the administrator might pass to the buyer, thereby putting the buyer off or seeking to reduce the price. Of particular interest in the Consultation are the proposals to amend the meaning of “entailing changes in the workforce” so that it can cover changes in the location of the workforce and allowing a transferor to be able to rely upon a transferee’s ETO reason for fairly making an employee redundant during a transfer. In Kavanagh, that transfer did not involve collusion between the administrator and the transferee and the ETO reason specified was not that of the transferee, so the proposed changes would not necessarily have assisted the transferee. The proposals under the Consultation will clearly assist administrators and prospective transferees on a transfer of a going concern out of an administration. We will await DBIS’ response to the Consultation, due in September 2013 with interest.