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Harini Iyengar considers the Court of Appeal's ("CA") latest analysis of the Economic Technical or Organisational Reason Exception ("ETO") under the Transfer of Undertakings (Protection of Employment) Regulations 2006 ("TUPE") and the tension between the employment regime and the insolvency regime
This welcome judgment for employers and their advisors illustrates when the elusive ETO defence can operate successfully. Nevertheless, the CA stressed the highly fact-sensitive nature of the ETO defence. Obtaining the right evidence in TUPE cases is a perennial practical problem and the CA's analysis shows clearly that success will continue to depend upon the quality of the documentary and witness evidence available, and upon cross examination of witnesses, with its inherent uncertainties.
In Crystal Palace FC Ltd and CPFC 2010 Ltd v Kavanagh and others  EWCA Civ 1410 the CA restored the judgment of the Employment Tribunal ("the ET") that the employees should not be treated as unfairly dismissed for a reason connected with a transfer under regulation 7 of the TUPE ("Regulation 7") because the reason for dismissal had been an economic, technical or organisational reason entailing changes in the workforce. Briggs LJ stated:
Regulation 7 unambiguously requires a subjective fact-intensive analysis of the ‘sole or principal reason' for the relevant dismissal, so that the Employment Tribunal needs to be astute to detect cases where office holders of insolvent companies have attempted to dress up a dismissal as being for an ETO reason, where in truth it has not been.
Maurice Kay LJ, giving the leading judgment, pointed out the unavoidable tension between Employment law objectives of protecting employees' acquired rights and Insolvency law objectives of protecting creditors' interests.
This interesting TUPE case arose in the context of the financial difficulties experienced by Crystal Palace Football Club ("the Club"). At the end of the 2009-2010 season, the Club was in dire financial straits and went into administration at the behest of the Agilo Master Fund Ltd ("Agilo"). The club's owner was Crystal Palace FC (2000) Ltd. There was a serious prospect of liquidation and the administrator was Mr Brendan Guilfoyle. It is a fact that the liquidation of a football club will often leave few or no assets to be realised for the benefit of its creditors as the players tend to be the most valuable assets. So, Mr Guilfoyle sought to sell the Club as a going concern. A consortium led by Mr Steve Parish was interested but the position was complicated because the Selhurst Park stadium was owned by Selhurst Park Ltd.
On 9 February 2010, Mr Guilfoyle advertised the Club for sale in the Financial Times, in the knowledge that Mr Parish's consortium was already interested. Three days later, Selhurst Park Ltd also went into administration and PWC were appointed administrators. The principal creditor was the Royal Bank of Scotland, part of Lloyds Bank Group ("the Bank"). Six days later, Mr Parish had signed a confidentiality agreement with Mr Guilfoyle. It became clear to Mr Guilfoyle that there were no other credible bidders and the consortium was incorporated as CPFC (2010) Ltd ("CPFC (2010)") and granted preferred bidder status. Nevertheless, there was an obstacle because, understandably, CPFC (2010) wanted to acquire the Club only if it could also acquire the stadium. The CA found (as so often happens in the context of TUPE and insolvency), "In the course of negotiations, the respective parties adopted positions, sometimes in public, for tactical reasons and what they were saying did not necessarily represent their true thoughts and intentions."
By May 2010 the terms of a sale agreement had been between Mr Guilfoyle and CPFC (2010). On 24 May 2010 it was signed on behalf of CPFC 2010, however, it was held in escrow pending an agreement to acquire the stadium.
Towards the end of May 2010, Mr Guilfoyle found the Club facing severe cashflow problems. Agilo had lent the Club another £1,000,000 but it had been quickly used up. Negotiations for a loan of £1,500,000 from Mr Parish were aborted when Agilo objected to its being given a preferential ranking.
The Facts became Critical
The CA found "the facts became critical" at that point in time and quoted extensively from the findings of fact contained in ET judgment. Mr Guilfoyle decided to mothball the Club over the closed season when no matches would be played. To that end he told his assistant to ask the Managing Director ("MD") for a list of employees who could be made redundant and still permit the core operations of the club to continue during the closed season. The MD took instructions from the administrator and he had been managing the Club on a daily basis during the administration. The letter from the administrator to the MD stated that given the continuing uncertainty over the sale of the stadium and therefore the sale of the Club they had decided to sell the playing assets and mothball the Club's trading operations at the end of May 2010. Later correspondence stated that they had no funding for May and were reliant on the sale of a valuable player to discharge May's liability. The administrator had therefore decided that the Club would not trade in June and the creditors' voluntary agreement would not be issued to creditors. The proposal was to make the majority of administrative staff redundant on Friday and proceed with selling the more valuable players. The MD met the Head of Finance and prepared a list of staff, retaining staff he believed necessary to continue to run the Club. The administrator's assistant wrote back to say more names were required. Then a revised list was sent.
Mrs Kavanagh and three other employees were the Claimants. They and 25 others were given letters of dismissal by Mr Guilfoyle on 28 May 2010, some with immediate effect and others from 31 May 2010.
The CA quoted the ET's words, that it was "a fast moving transaction, with scope for misunderstandings." In fact, the media got notice of the dismissals, and critical reports gave the impression that the Bank's reluctance to agree the sale of the stadium was causing the impediment to the sale of the Club. The Bank gave in to the media pressure. On 7 June 2010 the sale had been agreed subject to formalities and technicalities. The formalities of the sale of the Club to Mr Parish's consortium were completed by 19 August 2010.
Did the ETO Exception Apply?
The ET had found Mr Guilfoyle's reason for dismissing the Claimants was genuine and it was in order to keep the Club alive as a going concern, in the hope that there would be a sale in the future. The transfer of the Club remained a possibility but no more than that.
They drew a distinction between the administrator's reason for the dismissal and his ultimate objective: "If the administrator's reason is the necessity of reducing the wage bill in order to continue the business, in our view that is an ETO reason. That reason is separate from the longer term objective of being able to sell the business in due course. If the administrator's reason for dismissal is that a smaller workforce will make the business more attractive to a prospective purchaser (who may not yet have been identified), that is not an ETO reason." The economic reason entailing changes in the workforce was simply that the administrator had run out of money and unless staff costs were reduced the Club would have to be liquidated. It was not in Mr Guilfoyle's contemplation that the very fact of making redundancies and the subsequent publicity would have the effect of very quickly changing the Bank's mind, which enabled the sale of the Club.
In contrast, the Employment Appeal Tribunal ("the EAT") had held that the ETO defence failed; it was clearly not an ETO reason because the dismissals were not in fact for the purpose of continuing the business but were with a view to sale or liquidation.
The CA considered the EAT's reliance on a particular paragraph in Spaceright v Baillavoine: "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."
Limiting Spaceright to its own facts, the CA held: "These proceedings involve the interaction of the legislative regime governing the position of employees on transfers of the undertakings of their employers and the regime governing companies in serious financial difficulties which have been put into administration. The interaction of the two regimes will often involve tension between two policies. The first is TUPE's policy of protecting employees. The second is the policy of encouraging the achievement of a better result for the company's creditors than would be achieved on liquidation."
The CA described Regulation 7 as the "legal fulcrum" upon which the judgment swung. Its application is "an intensely fact-sensitive process." A warning was issued to ETs and administrators that, "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." The CA acknowledged on the other hand that there is a statutory regime to encourage corporate rescue and care must be taken not to characterise an arrangement by administrator as TUPE avoidance.
Interaction between the Protection of Employment and Insolvency
Briggs LJ provided an interesting discussion of the interaction between the protection of employment regime and the administration regime which operates for corporate insolvency. He said that he had been troubled about wider implications of the EAT judgment and the over extension of Spaceright. His Lordship drew attention to Paragraph 3 of Schedule B1 to the Insolvency Act 1986 which sets out the purposes of administration, which include "rescuing the company as a going concern" and "achieving a better result for the company's creditors as a whole than would be likely if the company were wound up (without first being in administration)". The latter purpose often involves a TUPE transfer. An advantage of administration over liquidation is that the administrators have power to continue the company's business protected by the moratorium on the pursuit of claims by creditors, so that it can be prepared and marketed for sale as a going concern, and proceeds of sale can then be distributed to the creditors, either by the administrators themselves or in a subsequent liquidation. Once a business is closed down its value rapidly declines to an amount no greater than the aggregate value of the forced sale value of its constituent assets.
"Pre-pack" administration, in which the business sale is arranged prior to the company going into administration, is becoming more popular. In many administrations, however, the administrator continues the business in the hope or expectation of a sale for as long as he can, which means for as long as the necessary resources are available to him and while a sale at a price greater than the break-up value remains a realistic possibility. Pragmatically, Briggs LJ pointed out that a company will only be in administration if it is hopelessly insolvent, to the extent that its directors have formed the view that without protection from its creditors it will not be able to trade its way out of its difficulties. In his judgment, the company's poor performance will often have arisen because of the manner in which the business was being conducted, and so the administrator will urgently need to reform and economise. Dismissal of employees is unfortunately a principal method of economising. Where employees make successful TUPE claims, liability will transfer to the purchaser, who will reduce the purchase price accordingly, thus reducing the sums available to creditors.
Describing Regulation 7 as a "tie-breaker", Briggs LJ called for a "reality check" because if Regulation 7 were interpreted so that whenever there was a transfer, the employees' rights on dismissal were transferred, then it would represent a significant enhancement of their employment rights by reason of the transfer, because, but for the transfer they would simply have received the less valuable rights afforded to dismissed employees under the insolvency code.
It is refreshing to see the CA doing a "reality check" so that the ETO defence which exists in theory in the acquired rights regime can be understood and made use of by businesses and administrators in practice at a moment of financial crisis, with a view to optimal long-term outcomes for both employees and creditors.
The status of employment rights on the transfer of an undertaking is an extremely complex area of...