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administrations insolvency TUPE

does anyone, including judges, know the correct approach to ETO dismissals and administrations?

Selhurst_ParkIn March 2011 I commented on the uneasy interplay between insolvency law and employment law. At that time the question was whether highly contentious “pre-pack” administrations provided an opportunity to dispense with a workforce as well as most of the company’s debts by using a TUPE exemption. Oakland v Wellswood (2008) appeared to allow administrators to do so, whereas OTG Ltd v Barke appeared to close that option.

Against this background Crystal Palace FC Ltd & Another v Kavanagh & Ors is a recent and significant Court of Appeal case dealing with the fairness of dismissals by administrators of struggling companies. In 2009 the finances of the company running the club were in a parlous state and it went into administration at the beginning of 2010. The administrator wanted to sell the business as a going concern, if he could. One obstacle to this was that the ground where the club played was separately owned, and the only credible buyer, a consortium, wanted the ground as part of the deal. The next month the ground’s owner was also put into administration by its bankers. Negotiations ensued which were complex, fast moving, and subjected to spin by the parties, but were not immediately productive.

The administrator decided to mothball the club once the season ended (with relegation narrowly avoided), in the hope of selling later. As part of that, in May 2010 he dismissed 25 employees who, he was advised, could be sacked without ceasing the core activities of the company. The administrator finally sold the company to a consortium in August.

An Employment Tribunal found that while the sale was not the reason for the dismissals, they were for a reason connected with the transfer. Normally such dismissals are automatically unfair. However it went on to decide that the dismissals were fair, being for an “economic, technical or organisational” (ETO) reason, in that reducing the wage bill would allow the administrator to keep the business going – a reason separate from the longer term objective of being able to sell the business later. (However, reducing the workforce to make the business more attractive to a buyer would not have been an ETO reason).

The Employment Appeal Tribunal disagreed with the Employment Tribunal about whether the dismissals were for an ETO reason. Because the administrator intended to sell the club eventually, the dismissals could not be regarded as for an economic reason, but could only be treated as being to facilitate the sale, applying the dictum of Mr Lord Justice Mummery in Spaceright Europe Limited v Baillavoine [2012] ICR 520 that:

For an ETO reason to be available there must be an intention to change the workforce and to continue to conduct the business, as distinct from the purpose of selling it. It is not available in the case of dismissing an employee to enable the administrators to make the business of the company a more attractive proposition to prospective transferees of a going concern.

The Court of Appeal in turn took the contrary view, because the circumstances in the present case differed from those in Spaceright – for example footballing is a seasonal trade, and the players tend to be its only realisable asset – and the EAT had put too much emphasis on the term “mothballing”. The Court therefore restored the judgement of the Employment Tribunal. In doing so, Mr Lord Justice Maurice Kay emphasised the fact sensitive nature of both this case and Spaceright and observed:

Care has to be taken not to enable those administering a company to so arrange matters as artificially to contrive an ETO reason and thus illegitimately to avoid the TUPE regime. Equally, because of the policy favouring the encouragement of corporate rescue…care has to be taken before characterising an arrangement by an administrator as an illegitimate manipulation of the TUPE regime.

This decision should be welcomed by administrators, opening the way for a more relaxed interpretation of the ETO defence, so long as the circumstances genuinely support it. However, three significant problems remain. First, the vast majority of administrations (including pre-packs) have the effect disposing of the assets of the insolvent company with the almost inevitable result that after payment of professional fees and prior charges (typically bank debentures and/or factoring debts) the company goes into insolvent liquidation with no remaining assets to pay creditors including former employees. It is therefore likely that the Government will have to pick up the tab for employee claims. Second, TUPE provides (or at least should provide) protection in circumstances in which there is a stable economic entity that retains its identity following the transfer. Putting aside the legislative details pre-pack administrations provide one of the most obvious examples of the application of that description. In other words, it is surely this type of protection that the politicians had in mind when formulating and implementing the Acquired Rights Directive. Third, the lack of judicial consistency demonstrated by two successful appeals in this case provides yet another example of the enormous dilemma that faces employers and lawyers confronted with such a scenario. As I have said on many occasions, if the judges cannot make up their minds what chance is there of those at the sharp end getting it right. A law in respect of which it is effectively impossible to predict its correct application on a case by case basis is, in my view, a bad law. This problem is highlighted in the Court of Appeal judgment:

Just as Spaceright was fact-sensitive, so too is this case.

In other words do not think that by applying the law in the way we have in this case you will be doing the right thing!

The changes to TUPE being introduced on 31 January 2014 (of which more here) may also help – once any uncertainty about what they mean is ironed out.

Martin Malone

By Martin Malone

I'm a solicitor and the chief operating officer at Canter Levin & Berg. I was formerly head of the employment department.
I maintain this website so if you have any suggestions, criticisms or recommendations please email me at martinmalone@canter-law.co.uk.
Outside work my interests include national hunt horse racing, France and French wine and current affairs. I also design and maintain websites.