Dismissals in an insolvent business - Is the buyer always liable?

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Can an administrator dismiss employees without the liability transferring to a purchaser under TUPE?  Yes, says the Court of Appeal in Crystal Palace FC (2000) Ltd v Kavanagh and ors,

Crystal Palace went into administration in January 2010.  Employees of the club were given letters of dismissal by the administrator in May 2010.  Following negotiations, agreements were reached for the sale of the club which completed in August 2010.

The issue for the Tribunal to decide was whether the dismissals were unfair by virtue of the Transfer of Undertakings (Protections of Employees) Regulations 2006 (TUPE).  TUPE provides that a dismissal is automatically unfair if the sole or principal reason for the dismissal is the transfer itself, or a reason connected with the transfer unless there is an economic, technical or organisational reason entailing changes in the workforce (an ETO).

In this case, the reason for the dismissals was not the transfer itself, because at the date of termination, no agreement had been reached in relation to the transfer.  The issue was therefore whether the dismissals were for a reason connected with the transfer.

At first instance, the Employment Tribunal held that the reason for the dismissals was connected with the transfer, and that there was an ETO reason.  Therefore, liability for the dismissals rested with the club and did not pass to the purchaser under TUPE.

On appeal, the Employment Appeal Tribunal overturned that decision.  It held that the employees had not been dismissed for an ETO reason, and that liability for unfair dismissal had passed from the club to the purchaser.

The Court of Appeal overturned the EAT's decision.  It found that the administrator of the club had resolved to sell it as a going concern and had advertised it for sale in February 2010.  He had then located a possible purchaser in mid February 2010.  The negotiations for the sale were complex because the purchaser only wanted to acquire the club if it could at the same time acquire the stadium, which was not owned by the club, but which was also in administration.

The terms of the sale were reached in May 2010, but the sale could not be completed at that time due to the issues with the stadium.  The club faced severe cashflow difficulties and the situation became critical.  The administrator felt that unless the staff costs were reduced, the club would have to be liquidated. He therefore decided to "mothball" the club as the football season had ended in the hope that it might be possible to sell the club at a future date.   He asked the Managing Director to produce a list of employees who could be made redundant, whilst allowing the core operations of the club to continue during the closed season.

The distinction was drawn between dismissing an employee to make a company a more attractive proposition to a prospective buyer (which would not be an ETO), and dismissal designed to ensure that a company can continue to trade. 

The Court of Appeal held that as a matter of fact, the reason for dismissing the employees was in order to keep the club alive as a going concern in the hope that there would be a sale in the future.  This was connected with the transfer, but there was an ETO reason (an economic reason).  Although the ultimate objective remained the early sale of the club, in this case, the reason was to reduce the wage bill in order to continue running the business and to avoid liquidation. 

Although the case is fact specific, this guidance from the Court of Appeal will come as welcome news for purchasers of insolvent businesses where dismissals have been made by administrators.