Vol 11 (2014) - Issue 4

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Crystal Palace FC Limited & another v Kavanagh & others [2013] EWCA Civ 1410: Administrator Wins on Points Difference

Introduction
The administrator of any insolvent business who needs to make employees redundant will inevitably face the provisions of two, sometimes conflicting, regimes. The Transfer of Undertakings (Protection of Employment) Regulations 2006 (SI 2006/246) ('TUPE') protect employees on the transfer of their employer's business, but is frequently a source of tension with the regime implemented by insolvency legislation where such a transfer takes places in respect of a business in an administration. Whilst TUPE protects the interests of employees, one of the goals of the administration regime is to achieve the best result for the company's creditors as a whole, rather than its employees.
As explained below, Regulation 7 of TUPE addresses this inherent tension, at least to some extent, and it is with this Regulation that the Crystal Palace case is concerned. The Court of Appeal in this case, on appeal from a decision of the Employment Appeal Tribunal, provides some useful guidance as to how that provision operates, though it is recognised that their application is highly fact specific. Notwithstanding that the application of Regulation 7 of TUPE is so fact specific though, administrators can certainly take some comfort from the Court of Appeal's decision, which allowed the appeal restoring the decision of the Employment Tribunal.
The Court of Appeal recognised that, although an administrator will often have the ultimate goal of selling the company's business, it does not automatically follow that any dismissals are made with a view to making the business more attractive to a potential purchaser, thus avoiding what seemed to follow from the Employment Appeal Tribunal's decision, that liability for dismissals where a sale of the business is contemplated will almost always pass to the transferee. This matters from an insolvency point of view because, where the transferee assumes liability under TUPE, the purchase price will often be reduced to take that liability into account and that obviously means there is less money available to pay the insolvent company's creditors as a whole.

The Regulations
Regulation 7 of TUPE provides that where either before or after a relevant transfer an employee of the transferor or transferee is dismissed, the employee shall be treated as unfairly dismissed if the sole or principal reason for his dismissal is:
'(a) the transfer itself; or
(b) a reason connected with the transfer that is not an economic, technical or organisational reason entailing changes in the workforce.'
Under Regulation 4 of TUPE where the dismissal of a transferor's employee is treated as unfair pursuant to Regulation 7, liability in respect of the dismissal is transferred to the transferee. That being the case, whether or not the sole or principal reason for the transfer is the transfer itself or a reason connected with the transfer is of huge importance. Similarly, if the sole or principal reason for the transfer is a reason connected with the transfer, it is crucial to determine whether that reason is an economic, technical or organisational reason entailing changes in the workforce ('an ETO reason').
Prior to the Crystal Palace case, the question of what amounts to an ETO reason had been the subject of much discussion, and some case law.

The Spaceright decision
Spaceright Europe Limited v Baillavoine [2012] ICR 520 concerned the dismissal by administrators of the Chief Executive of a company in administration, on the day the company went into administration. A few weeks later the company's business was sold and, in the context of that sale it fell to be determined whether the reason for the Chief Executive's dismissal was an ETO reason. The Court of Appeal (as well as the Employment Tribunal and the Employment Appeal Tribunal) concluded that, the reason for the Chief Executive's dismissal was connected with the transfer, but it was not an ETO reason.