In the recent case of Kavanagh & Ors v Crystal Palace FC (2000) Ltd, the EAT considered the circumstances in which an administrator’s reason for dismissal pre-transfer will come within the permitted ‘ETO’ permitted exception under TUPE.

 The case involved the ownership of Crystal Palace Football Club and the club’s stadium, Selhurst Park.  The club had gone into administration and the terms of a sale and purchase agreement had been reached with a consortium in May 2010.  The sale of the club was held back pending the sale of the stadium (which was owned by a different entity, also in administration).  However, towards the end of May, the club was running into severe cash flow difficulties.  The club administrator took the decision to “mothball” the club over the close season, in the hope that it would be able to sell the club at a future date.  Certain employees were made redundant, but core operations continued.  Press announcements were then made about the state of the club.  Public protests by supporters and media pressure led to the sale of the stadium being agreed and the sale of the club took place on 19 August 2010.

As Crystal Palace was in administration and not liquidation, the automatic transfer principle under TUPE was not dis-applied.  The redundant employees claimed that their dismissals were automatically unfair.  Under TUPE, the dismissal of an employee with the requisite continuous employment will be automatically unfair, if the sole or principal reason for the dismissal is:

  1. the relevant transfer; or
  2. a reason connected with the relevant transfer that is not an economic, technical or organisational reason entailing changes in the workforce (an ETO reason).

If a pre-transfer dismissal is deemed to be automatically unfair under TUPE, liability will pass to the transferee (the buyer).

The Tribunal had found that the reason for dismissal was not the eventual transfer itself, but a reason connected to the transfer (i.e. the mothballing to keep it alive in the hope that a sale could be agreed).  The Tribunal also found that the dismissal was for an ETO reason, namely the necessity of reducing the wage bill.  It distinguished this from the ultimate objective of selling the business in the future.

When the case was appealled to the EAT, it confirmed that it is not the case that an administrator can never dismiss an employee for an ETO reason.  However, it referred to the Court of Appeal authority (Spaceright Europe Ltd v Baillavoine) and the following distinction:

  • if the reason for a dismissal was the intention to change the workforce and to continue the conduct of the business, as distinct from the purpose of selling it, there could be a dismissal for an ETO reason
  • however, if the dismissal was part and parcel of a process, with the purpose of making the company a more attractive proposition to prospective buyers as a going concern, there could not be a dismissal for an ETO reason.

The EAT found that the intentions of the club’s administrator from the outset had been to sell the club as a going concern, failing which there would have to be a liquidation.  This remained his intention when the club was put in mothballs at the end of May.  This was done to preserve the business so that it could be resumed in new hands, if that came about.   Accordingly, the EAT found that there could be no ETO reason.  The dismissals were held to be automatically unfair under TUPE and liability passed to the transferee, the consortium.

Impact for employers

The decision appears to confirm that, if an administrator is seeking a buyer, it will not be possible to separate out any other motivation at the time of a dismissal from the fact of a contemplated sale.  Therefore, under the current law, any dismissals made in such circumstances would be automatically unfair, regardless of whether or not the dismissals are required in order to keep the business afloat in the meantime.  

The administrator and consortium had not discussed the need for redundancies to be made. Such discussions were not necessary for the consortium to be liable for the unfair dismissals in this case.  However, discussions about redundancies will often form part of the commercial negotiation in the sale of a business in financial difficulties. 

The Government is currently consulting on whether or not a transferor should be permitted to rely on the transferee’s ETO reason when making dismissal pre-transfer.  The Government’s consultation acknowledges that the current rules can make it difficult for companies subject to insolvency proceedings to be rescued, due to a fear that liability for any pre-transfer dismissals may pass to a purchaser. 

The Government is also consulting on whether to restrict automatically unfair dismissals under TUPE to situations where the dismissal was because of the transfer itself rather than a reason connected to the transfer. 

If all of the proposed changes to TUPE are brought into force later this year the outcome in a case like Crystal Palace is likely to be different in the future.  However, as the law stands at the moment the Crystal Palace judgment is a reminder of the difficulties for administrators.