The Court of Appeal have overturned the EAT.
The EAT had held that reason for dismissing the employees for redundancy was so that the liquidator could sell the football club and not for the purpose of continuing the business and this was not a valid ETO reason. The Court of Appeal disagreed. It held that the reason for the redundancy dismissals was so that the club could continue to trade during the closed season. The purpose was to cut the wage bill to avoid the club going into liquidation at the end of the 2009/2010 season and so that it could continue in business through the closed season.
CP FC was put into administration in January 2010. The objective of the administrator was to sell the club as a going concern. A potential buyer was identified in February 2010 but negotiations stalled because the stadium was owned by another party and the potential buyer wanted to both the club and the stadium. Because of serious cash flow difficulties, the administrator decided to mothball the club over the closed season with the intention to revive negotiations later. The club’s administrative staff, which included the Claimants, were made redundant in May 2010.
The ET held that there was an economic, technical or organisational (“ETO”) reason entailing changes in the workforce and therefore the dismissals were not unfair (Reg 7(1)(b)). The ETO reason was that the the Administrator “could no longer afford to pay all the Club’s employees and he had to reduce the workforce and wage bill in order to mothball the Club in the hope that a purchaser would be found”.
The EAT judgment
The EAT considered Spaceright Europe Ltd v Baillavoine  EWCA Civ 1565 and judgment of Mummery LJ at paragraph 47:
“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 EAT held that this paragraph posits two alternative positions: first, where the reason for a dismissal was the intention to change the workforce and to continue to conduct the business; second, and distinguished from that position, was where the dismissal was part and parcel of a process, with the purpose of selling the business. In the former case, there could be a dismissal for an ETO reason, but in the latter case there could not.
Here the ET had erred in deciding that the reason for the dismissals was that the administrator could no longer afford to pay the employees. The EAT agreed that the administrator wanted to save costs by making redundancies, but this was to preserve the business so that it could be sold in the future. In light of Spaceright this was not an ETO reason and, as such, the dismissals were automatically unfair and liability for those dismissals passed to the purchaser under TUPE.
The Court of Appeal judgment
In their judgments Kay LJ (at §11) and Briggs LJ (at § 18) consider the tension that exists between protecting employees’ rights under TUPE and the policy aims of Schedule B1 of the Insolvency Act 1986 of favouring corporate rescue and achieving a better result for creditors by an administration than would be achieved in liquidation. Both point out that the mechanism for resolving this tension is Reg 7 which implements Art 4.1 of the Directive.
Kay LJ went onto distinguish, on its facts, Spaceright. This case was different, due in part, because of the unique features of the financial affairs of failing football clubs. The main assets being the contracted players and therefore there were stronger reasons then usual for averting liquidation and to continue to trade.
Briggs LJ gave a reminder that that the purpose TUPE is not to place employees in a better position than they would otherwise have been in (a point not infrequently unconsciously overlooked). Where employees have been dismissed because the money has run out Reg 7 cannot be relied on to improve their position. Reg 7 ‘unambiguously requires a subjective fact sensitive analysis of the sole or principal reason’ for the dismissal. If the reason for the dismissal, as here, was to keep the club going until so that it could ultimately be sold that was permissible – the purpose was not to make the club more attractive to sell but was to allow it to continue to trade.
What this case emphasises is the need to have a rigorous factual analysis of the reason for the dismissal when consider the ETO exception in Reg 7. As Briggs LJ (at § 27) points out that where the administrator is seeking to achieve a better result from the company’s creditors as a whole than would be likely if the company were wound up (without first being in administration), (under paragraph 3(a) of Schedule B1 of the Insolvency Act 1986), then he will almost always have the transfer as his ultimate objective. Everything that he does will be tailored to this achievement. If that objective, without more, is the sole or principal reason for dismissal then the ETO exception will never, or hardly ever, be made out. However, if there is another reason then the ETO exception is available. In this case the reason was that the club could not pay the staff during the closed season.