Pre-transfer dismissals and ETO reasons

The Court of Appeal has overturned the decision of the Employment Appeal Tribunal (“EAT”) in the case of Crystal Palace FC Ltd and another v Kavanagh and others, holding that the dismissals of employees made by the administrator of the Football Club shortly before the Club was sold in 2010 were for an “ETO reason” and thus not automatically unfair pursuant to TUPE.

25th November 2013

The Court of Appeal has overturned the decision of the Employment Appeal Tribunal (“EAT”) in the case of Crystal Palace FC Ltd and another v Kavanagh and others, holding that the dismissals of employees made by the administrator of the Football Club shortly before the Club was sold in 2010 were for an “ETO reason” and thus not automatically unfair pursuant to TUPE.

As we reported in April, the administrator of the Club dismissed a number of employees as redundant in May 2010, in order to preserve the Club over the close season, in the hope that it would be able to sell the Club at a future date.  Ultimately the Club was sold relatively quickly thereafter, and the dismissed employees claimed that their dismissals were either because of the transfer, or for a reason connected to the transfer, and were not for an “economic, technical or organisational reason entailing a change in the workforce” (“ETO reason”), and were thus automatically unfair pursuant to TUPE.  The Employment Tribunal rejected this argument, and held that whilst the reason for the dismissals was connected to the transfer (i.e. keeping the Club alive in the hope that a sale could be achieved), they were for an ETO reason, namely the necessity of reducing the wage bill, in order to keep the Club alive.  It distinguished this from the ultimate objective of selling the business in the future.

The EAT then overturned this decision, based upon its interpretation of the Court of Appeal’s decision in Spaceright Europe Limited v Baillavoine, holding that if any dismissal is made as part and parcel of a process with the aim of achieving a sale of the company, then there could never be a dismissal for an ETO reason.  The impact of this decision appeared to be that an administrator could never make a fair dismissal, if his ultimate goal was to sell the company in administration. 

The Court of Appeal has now reinstated in the original decision of the Employment Tribunal. It noted that whether or not an ETO reason existed in a particular case was always a fact sensitive question, and a distinction could be made between dismissals made to allow the business carry on trading, and dismissals made to make the business more attractive to a potential purchaser and thus achieve a sale.  It stated that administrators “will almost always have a transfer of the undertaking as their ultimate objective” but that does not mean that the reason for dismissals will always be to make the business more attractive to a purchaser. On the facts of this case, the dismissals at the Club had been made to reduce the wage bill, to allow the business to keep trading pending a sale, and this was clearly an economic reason that entailed changes in the workforce.  This could be distinguished from the Spaceright case, where the reason for the dismissal of the Chief Executive was found to not relate to the conduct of the business as a going concern, but related to the sale of the business only.

Impact for Employers and Administrators

  • This is an extremely helpful decision for both employers and administrators, who need to make dismissals for genuine economic reasons, to keep a business going, in circumstances where a potential sale of the business is possible.  Provided that there are genuine economic (or technical or organisational) reasons for the dismissals, that relate to the conduct of the business as a going concern, the fact there is an ultimate sale of the business in mind should not, of itself, prevent there being an ETO reason for those dismissals, once a sale is achieved.
  • This is clearly a sensible decision, after the EAT arguably interpreted the Spaceright decision too narrowly.  The Court of Appeal noted that under the Insolvency Act 1986, an administrator's primary purpose is to rescue the company in administration as a going concern. However, if this is not reasonably practicable, the administrator can seek to sell the business in order to make a distribution to creditors.  In most cases, in reality, a sale is the key objective, and everything an administrator does will be to achieve that objective.  If the EAT decision was upheld, it would be almost impossible for an administrator to then make any dismissals fairly, even in the most dire economic circumstances.  The Court of Appeal was more willing to recognise the importance of being able to rescue failed businesses and so save at least some jobs.
  • Whilst this decision concerns a company in administration, and dismissals made by administrators, the principles it establishes are equally applicable to any employer who makes dismissals for economic, technical or organisational reasons in advance of a sale of the business.