Making dismissals on an administration and the impact of TUPE – Walker Morris successfully represents Crystal Palace FC at the Court of Appeal

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The facts

Crystal Palace FC (2000) Limited went into administration in January 2010 to avoid the prospect of liquidation.  In May 2010, the administrators dismissed 29 staff with the intention of ‘mothballing’ the club and having a ‘skeleton workforce’ over the closed season.  Only those staff who were absolutely crucial to enable the club to continue its core operations were retained.  The administrators ultimately sold the club as a going concern in August 2010.

The law

The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) (Regulation 7 (1)) provides:

“Where either before or after a transfer, any employee of the transferor or transferee is dismissed, that employee shall be treated as unfairly dismissed if the sole or principal reason for his dismissal is:

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

If a dismissal is connected to the transfer but is not for an ETO reason then it will be automatically unfair and liability for it will pass to the transferee.  Conversely, if a dismissal is for an ETO reason then the dismissal will not be automatically unfair (although it will still be subject to the normal rules on fairness of dismissals) and liability for it will remain with the transferor.

The Court of Appeal’s decision

In the first instance, the Employment Tribunal concluded that the reason for the dismissals in May 2010 was that the administrators had run out of money.  This was distinguished from the overall objective of the administrators which was to secure a sale of the business.  Accordingly, the Employment Tribunal found that the employees had been dismissed for an ETO reason and that liability for those dismissals did not transfer to the purchaser of the Club.  However, this decision was overturned by the Employment Appeal Tribunal on the basis that, since the dismissals were with a view to the sale of the business, they could not have been for an ETO reason.  The matter was then referred to the Court of Appeal.

The Court of Appeal reinstated the Employment Tribunal’s decision on the basis that the Employment Tribunal had been correct in distinguishing the reason for the dismissals from the administrators’ overall or ultimate objective.  In this case, the reason was found to be the fact that the administrators had run out of money, with the ultimate objective of the administrator being to secure a sale of the club.

Link to press release on the Crystal Palace FC Court of Appeal case.

Walker Morris comment

This case demonstrates the real tension between TUPE (which has the primary objective of protecting employees) and the UK insolvency regime (which is designed to encourage the salvation of struggling businesses).  The ‘legal fulcrum’ to resolve such tension, the Court of Appeal said, is the ETO provisions in TUPE.  It went on to comment that “care has to be taken not to enable those administering a company to arrange matters artificially to contrive an ETO reason and thus illegitimately avoid the TUPE regime”.  Conversely, and in recognition of the policy of business rescue encapsulated in the Insolvency Act 1986, it cautioned against characterising an arrangement by an administrator as an illegitimate manipulation of the TUPE regime.

The Court of Appeal noted that the application of regulation 7 of TUPE requires “a subjective fact-sensitive analysis of the sole or principal reason for the relevant dismissal”.  In each case, tribunals must take great care in establishing the actual reason for any transfer-connected dismissals.  This will necessitate an assessment of what was in the administrators’ minds at the time that the decision to dismiss was made.  To this extent, the decision highlights the importance of evidencing and documenting reasons for dismissals to make it clear that they are being made for an ETO reason, rather than purely for the purposes of facilitating a sale.