Football club administrations and pre-transfer dismissals: a good result for the rescue culture

Football in the back of a net Print publication


The Court of Appeal judgment in Kavanagh v Crystal Palace FC (2000) Ltd, in which Walker Morris acted for the successful appellant, the purchaser of a business out of administration, determined an important issue involving the interaction of the law concerning the position of employees on the transfer of the undertakings of their employer and the regime governing companies in administration.

The appeal centred on the interpretation of provisions of the Transfer of Undertakings Regulations 2006 (TUPE).  This legislation protects employees’ continuity of employment and terms and conditions of employment when an undertaking is transferred from one owner to another.  Employees of the previous owner when the business changes hands automatically become employees of the new employer on the same terms and conditions.

Under Regulation 7(1) of TUPE, the dismissal of an employee with continuous employment of a year or more is automatically unfair where the sole or principal reason for the dismissal is the relevant transfer, or a reason connected with the relevant transfer that is not an “economic, technical or organisational reason” entailing changes in the workforce (an ETO reason).

In this case, Crystal Palace football club had gone into administration.  The administrator sought to sell the club as a going concern.  The respondents were four employees who had been given letters of dismissal by the administrator before the sale took place.  The issue was whether the principal reason for the dismissals was a reason connected with the transfer that was not an ETO reason.  The employment tribunal found that the reason for the dismissals was connected with the transfer and it was for an ETO reason.  Accordingly, liability remained with the transferor and did not pass to the consortium that subsequently bought the club.  That decision was, however, overturned by the Employment Appeal Tribunal, which ruled that there was no ETO reason.

The principal authority on the issue of the application of the ETO reason to companies in administration, referred to at some length in the Court of Appeal judgment, is Spaceright Europe Ltd v Baillavoine [1].  In that case, the Court of Appeal had held that a dismissal could be “connected with the transfer”, for the purposes of Regulation 7(1) “even though that particular transfer or transferee was not known, identified or contemplated at the date of dismissal”.  However, an ETO reason was not available in Spaceright, where the dismissal had been made in order to enable the administrators to make the business of the company a more attractive proposition to prospective transferees.

The Court of Appeal distinguished Spaceright.  It did so partly because of the “unique features pertaining to the financial affairs of a failing football club” – its business is seasonal and the most valuable assets of a football club are its contracted players, so that the liquidation of a football club will leave few if any assets available to meet the claims of creditors.  The administrator’s aim, in laying off the staff, was to enable the club to continue to operate and avoid liquidation.  The fact that the administrator’s ultimate objective remained a sale did not detract from the finding that the reason for the dismissals was to reduce staff costs and avoid liquidation.

The Court stressed that, as in Spaceright, context is all-important.  Regulation 7 requires a “subjective fact-intensive analysis” of the “sole or principal reason” for the relevant dismissal.  Tribunals must be alive to situations where the office holder of an insolvent company attempts to dress up a dismissal as an ETO reason, whereas in reality it is not.  This was not such a case – the administrator’s stated reason for the dismissal being the genuine reason.  Unlike in Spaceright the decision was not taken so as to make the club more attractive to a potential purchaser.

Following Spaceright there was some concern that the rescue culture might be stymied by the prospect of former employees being able to bring unfair dismissal claims following a transfer to the purchaser of a business from a company in administration.  This case restores the balance.  It shows that in each case the courts will look very closely at the reason for the dismissal.  The fact that there is a potential purchaser on the horizon when employees are laid off will not necessarily mean that there cannot be an ETO reason.

[1] [2001] EWCA Civ 1565