13 November 2013

[2013] EWCA Civ 1410 

Court of Appeal (Maurice Kay VP, Beatson and Briggs LJJ)

Dismissing employees of an insolvent company: when is it unfair?

In Kavanagh v Crystal Palace, a number of employees of Crystal Palace football club claimed that they had been unfairly dismissed within the meaning of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (‘TUPE 2006’).  The Court of Appeal considered the tension between TUPE 2006 and the insolvency regime.

The club was in dire financial straits and had entered into administration in February 2010. The administrator immediately advertised the club for sale.  A number of obstacles prevented the terms of a sale from being agreed until June.  29 employees were dismissed in May.  The administrator’s evidence, accepted by the Employment Tribunal and unchallenged on appeal, was that the dismissals were carried out to reduce the wage bill so that the Club could continue operations with a skeleton staff until a sale could be concluded.  Thus they hoped to avoid liquidation which, where football clubs are concerned, is often fruitless for creditors.

The Court agreed with the first instance tribunal that there was an important distinction between Mr Guilfoyle’s ultimate objective, to sell the Club, and his reason for dismissing the employees, to avoid liquidation.  The latter reason amounted to an “economic, technical or organisational reason entailing changes in the workforce” (an ‘ETO’ reason) and thus an exception from the TUPE 2006 definition of an unfair dismissal connected with the transfer of an undertaking.  Briggs LJ pointed out that a transfer is the ultimate objective in many administrations and it would undermine the ETO exception if it never applied in these cases.

It was noted that these cases are extremely fact-sensitive. Spaceright Europe v Baillavoine [2011] EWCA Civ 1565 was distinguished because in that case the CEO was dismissed in order to make the company more attractive to potential purchasers, who would invariably have wanted to appoint their own CEO.  Maurice Kay VP cautioned against administrators dressing up a dismissal with a contrived ETO reason.

The court will attempt to identify the insolvency practitioner’s real reason for dismissing employees in order to determine whether there was a legitimate economic, technical or organisational reason entailing changes in the workforce.