Corporate Insolvency and TUPE

In a case which raised new issues on the inter-relationship between insolvency rules and the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE), the Court of Appeal has dismissed the unfair dismissal claims of four employees who lost their jobs at Crystal Palace Football Club as it sank into administration (Crystal Palace FC Limited and Another v Kavanagh and Others).

The club, which was at that time owned by Crystal Palace FC (2000) Limited, was near the bottom of the Championship and in dire financial straits at the end of the 2009/2010 season when the employees were summarily dismissed by the administrator, who was anxious to sell the club as a going concern. Matters were complicated by the fact that Selhurst Park Stadium was owned by a different company and this too was in administration. At the time of the dismissals, the administrator had been in negotiations with a consortium which ultimately bought the club through a corporate vehicle, Crystal Palace FC Limited (CPFC).

The employees commenced Employment Tribunal (ET) proceedings against CPFC on the basis that their dismissals had been unfair and the company was liable to compensate them by virtue of TUPE. Whilst it was common ground that the principal reason for the dismissals was not the transfer itself, as no agreement had been reached with regard to this at the date on which the dismissals took place, the employees claimed that their dismissals were unfair by reason of Regulation 7 of TUPE because they were for a reason connected with the transfer that was not an economic, technical or organisational (ETO) reason entailing changes in the workforce. The ET dismissed their claims but their challenge to that decision was subsequently upheld by the Employment Appeal Tribunal.

Allowing the company’s appeal and restoring the ET’s decision, the Court of Appeal noted that although the dismissals had been ‘connected with the transfer’, the administrator had had genuine economic reasons for dispensing with the employees’ services that were not related to the sale of the club. Noting the ‘unique features’ pertaining to the financial affairs of football clubs, which commonly have few assets other than their squad of players, the Court found that the administrator’s principal motive was to reduce the club’s wage bill in order to continue running the business and to avoid liquidation.

Although the club’s disposal as a going concern was the administrator’s ultimate objective, the sale to the consortium was only hoped for at the time of the dismissals. The Court also noted that the dismissals had not made the business of the club ‘a bit more attractive’ to a potential purchaser. It was only because negotiations for the parallel sale of the stadium dragged on beyond the time during which the administrators could continue to pay all the staff that the employees had to be dismissed.

In its judgment, the Court noted that the case had raised ‘fundamental issues’ relating to the interaction between corporate insolvency rules and the employment protection provided by TUPE. The ruling means that any potential liability arising out of the dismissals remained with Crystal Palace FC (2000) Limited and did not pass to CPFC following transfer of the club’s assets.

If you are seeking to acquire a business in administration, contact us for advice.