Crystal Palace FC Ltd & Anor v Kavanagh & Ors

When the current football season began in August 2013 Crystal Palace had just rejoined the elite of the Premier League. However, at the end of the 2009-2010 season they were near the bottom of the Championship and were in dire financial straits. The company which then owned them, Crystal Palace FC (2000) Limited was faced with the serious prospect of liquidation. It had been put into administration on 26 January 2010. The administrator was Mr Brendan Guilfoyle. Mindful of the fact that, as the Employment Tribunal (ET) found, the liquidation of a football club will often leave few or no assets to be realised for the benefit of its creditors, Mr Guilfoyle sought to sell the Club as a going concern. He was aware of the interest of a consortium led by Steve Parish. Any sale was bound to be complicated because Crystal Palace (2000) (as I shall refer to it) did not own the Selhurst Park stadium. That was owned by Selhurst Park Limited. On 12 February 2010 Selhurst Park Limited too went into administration and Price Waterhouse Coopers (PWC) were appointed administrators. Its principal creditor was its bank. Eventually, following complex negotiations, agreements were reached for the sale to the consortium. All formalities were completed by 19 August 2010, at which point the purchaser was CPFC Limited, rather than CPFC 2010 Limited as had been envisaged in June. Nothing turns on that late variation.

Lisa Kavanagh, Kevin Watts, Elizabeth Roake and David Moss were employees of Crystal Palace (2000) when it went into administration. They and some 25 others were given letters of dismissal by Mr Guilfoyle on 28 May 2010. Some were dismissed with immediate effect, the remainder with effect from 31 May. This case is concerned with the question whether the dismissals of these four named employees were unfair by reason of the operation of Regulation 7 of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). TUPE contains the current transposition into domestic law of the requirements of Council Directive 2001/23 (the Directive) on the approximation of the laws of the Member States relating to the safeguarding of employees’ rights in the event of transfers of undertakings, businesses etc. Regulation 7 of TUPE is headed “Dismissal of employee because of relevant transfer”. It provides:

“(1)

Where either before or after a relevant transfer, any employee of the transferor or transferee is dismissed, that employee shall be treated for the purposes of Part X of the [Employment Rights Act 1996] (Unfair Dismissal) 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.”

As is customary, I shall refer to “an economic, technical or organisational reason entailing changes in the workforce” as an ETO.

It is common ground that the principal reason for the dismissals was not “the transfer itself” because, at the effective date of termination, no agreement had been reached in relation to the transfer. The issue is whether the principal reason for the dismissals was a reason “connected with the transfer” that was not an ETO. When the unfair dismissal claims came before the ET, it concluded that the reason for the dismissals was connected with the transfer and that it was an ETO reason. Accordingly, any liability arising out of the dismissals remained with Crystal Palace (2000) and did not pass to CPFC. The employees appealed to the Employment Appeal Tribunal (EAT) comprising Wilkie J, Mr G Lewis and Mr P Smith. The EAT came to the contrary conclusion. It held that, on the facts found by the ET, the correct analysis was that the employees had not been dismissed for an ETO reason and that liability for unfair dismissal had passed from Crystal Palace (2000) to CPFC (2010) or CPFC. On appeal to this Court, CPFC (2010) and CPFC seek to restore the decision of the ET. Before turning to the appeal, it is necessary to describe in more detail the factual background.

I have described how Crystal Palace (2000) went into administration. That was at the behest of Agilo Master Fund Limited which had lent it a sum in excess of £5million pounds. I have also described how Selhurst Park Limited was put into administration at the behest of its bank. In describing the next stages I gratefully draw on the summary contained in the judgment of the EAT. Having resolved to do his utmost to sell the Club as a going concern and to avoid the disaster of liquidation, Mr Guilfoyle advertised the Club for sale in the Financial Times on 9 February 2010. He already knew of the likely interest of Mr Parish and his consortium. By 18 February Mr Parish had signed a confidentiality agreement with Mr Guilfoyle. It soon became apparent that there were no other credible bidders. The consortium was incorporated as CPFC (2010) and was granted preferred bidder status. Unsurprisingly, the negotiations became complex because the consortium was only interested in acquiring the Club if it could at the same time acquire the stadium. 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. However, as between the consortium and Mr Guilfoyle, the terms of a sale purchase agreement were reached in May. On 24 May a copy of the agreement was signed on behalf of CPFC (2010) but it was held in escrow pending an agreement for the sale and purchase of the stadium. At that time, the football season had recently ended with the Club narrowly avoiding relegation from the Championship. Towards the end of May, Mr Guilfoyle found that the Club faced severe cashflow difficulties. Some short term relief was provided when Agilo loaned a further £1 million pounds to keep the Club going but that was soon exhausted. Negotiations with Mr Parish for a loan of £1.5 million pounds came to nothing when Agilo objected to its being given preferential ranking.

At this point the facts become critical and what follows is taken from the judgment of the ET.

“In view of the parlous funding position and the absence of an imminent purchase, Mr Guilfoyle decided, as he put it, to ‘mothball’ the Club over the closed season when no matches would be played, in the hope that it might be possible to sell the Club at a future date. To that end, he told Ms Hammond [his assistant] to ask Mr Alexander [managing director of Crystal Palace 2000] to produce a list of employees who could be made redundant, and still permit the core operations of the Club to continue during the closed season. Mr Alexander took his instructions from Mr Guilfoyle. During the administration, he managed the Club on a daily basis. Ms Hammond wrote to Mr Alexander as follows:

‘Given the continued uncertainty over the sale of the stadium and therefore the sale of the Club, we have decided to sell the playing assets and mothball the Club’s trading operations as of the end of this month. Could you please provide us with a list of employees divided by those you would wish to retain with you in a mothballed operation and those we can make redundant as of 31 May 2010?’”

Further email exchanges took place including one on 25 May when Ms Hammond related that:

“We have had no funding throughout May and we are now reliant on the sale of Darren Ambrose [the most valuable player] to discharge May’s liability. Brendan … is concerned that we are not where we need to be with the sale of the Club and has therefore made the decision that we will not trade into June and that the CVA proposal will not be issued to creditors. We propose to make the majority of the administrative staff redundant on Friday and proceed with the immediate sale of the Club’s more valuable players. Should your clients wish to prevent this course of action, we will require immediate funding and confirmation that the stadium sale has been agreed by no later than this Friday 28 May.”

The email traffic continued into 28 May when:

“Mr Alexander met Mr Jani, the Club’s Head of Finance, and prepared a list of staff to be made redundant, retaining staff who he believed would be necessary to continue to run the Club. The initial list was sent to Ms Hammond who replied that further redundancies were needed in order to receive costs sufficiently to allow the Club to continue to trade. Mr Alexander and Mr Jani prepared a revised list that was sent to Ms Hammond.”

Much was going on at both ends of the negotiations which was, in the ET’s words, “a fast moving transaction, with scope for misunderstandings”. The judgment continues:

“On 28 May, the dismissal letters were given to the staff, signed on Mr Guilfoyle’s behalf. 29 employees were dismissed, including all the claimants. The contracts of employment were either terminated summarily or at the latest with effect from 31 May.”

News of the dismissals was soon picked up by the media. The impression was given that the impediment to a sale of the Club was the reluctance of the bank to agree a deal in relation to the stadium. The pressure on the bank had the desired effect and, by 7 June, the sale of the Club had been agreed subject to various formalities and technicalities which arise in relation to the sale of a football club.

I now turn to the ET’s ultimate conclusions:

“73.

We find that Mr Guilfoyle’s ostensible reason for dismissing the claimants is the genuine reason. Mr Guilfoyle dismissed the claimants in order to keep the Club alive as a going concern, in the hope that there would be a sale in the future. When he dismissed the claimants a transfer of the Club to CPFC (2010) remained a possibility, but it was no more than that.

74.

Mr Guilfoyle’s reason was not ‘the transfer itself’ … but it was ‘connected with the transfer’. The connection is Mr Guilfoyle’s decision to reduce the workforce in order to maintain the Club as a going concern, with a view to a future sale.

75.

We next consider whether that reason connected with the transfer was an ETO reason.

…

81.

It seems to us that the answer to this question requires a distinction between the administrator’s reason for the dismissal, and his … ultimate objective. ‘A reason for the dismissal of an employee is a set of facts known to the employer, or it may be of beliefs held by him which cause him to dismiss the employee’ – Cairns LJ in Abernethy v Mork Hay and Anderson [1974] IRLR 213.

82.

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.

83.

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.

…

85.

We accept Mr Guilfoyle’s evidence that the reason for the dismissals was that the administrators had run out of money, and unless the staff costs were reduced, the Club would have to be liquidated. That is an economic reason entailing changes in the workforce. Mr Guilfoyle’s intention was to continue to conduct the business of the Club with a skeleton staff in the hope that it might be sold in the future.

86.

It was not in Mr Guilfoyle’s contemplation that the very fact of making the redundancies and the subsequent publicity about the likelihood of the Club being liquidated, would very quickly result in sufficient pressure on [the bank] to agree to sell the stadium, the step which enabled the sale of the Club.

87.

… our judgment is that the reason for the dismissals was that an ETO reason, so that liability for the dismissals rests with CPFC (2000), and does not pass to CPFC or CPFC (2010).”

The EAT found the decision of the ET to be “a wholly surprising conclusion”. In allowing the appeal of the employees, it stated (at paragraph 30):

“In our judgment, that conclusion flies in the face of the evidence and were it necessary for us to reach a conclusion for the purposes of this decision, we would identify it as a perverse decision. However, it is not necessary for our purposes to make any such finding, because, in our judgment, standing the very clear findings that they have made about the intentions of Mr Guilfoyle from the outset to sell the Club as a going concern, failing which there would have to be a liquidation, the fact that that remains his intention throughout and that, by the 28^th of May, his purpose was to put the Club in mothballs pending the possibility of a sale to Mr Parrish or some other purchaser, it was an erroneous application of those findings of fact to the law … to conclude that the dismissal was for an ETO reason. In our judgment, their findings of fact pointed unambiguously to the fact that there was no intention on the part of Mr Guilfoyle to continue to conduct the business. On the contrary, his decision was to put the Club in mothballs (that is to say, not to conduct any business but to preserve it so that it could, in new hands, if that came about, resume the conduct of business).”

Put another way, and in the words of the summary provided by the EAT, the only possible conclusion was that the dismissal of the appellants was not for an ETO reason because the dismissals were not for the purpose of continuing the business but were with a view to sale or liquidation. On this basis, liability for the various claims passed to CPFC (2010) or CPFC.

In Spaceright [2012] ICR 520 the administrators had dismissed the claimant, the chief executive of a company in administration, on the very day that the administration commenced. A month later, the administrators sold the assets and the business to a transferee. The claimant succeeded in the ET, the EAT and this Court in establishing that his dismissal had been for a reason connected with the transfer and that it was not an ETO reason. Mummery LJ (with whom Richards LJ and Sir David Keene agreed) said (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.”

In the present case it was this passage from the judgment of Mummery LJ which caused the EAT to conclude that, self-evidently, there was not an ETO reason for the dismissals.

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 legal fulcrum for resolving such tension is the ETO provisions in Regulation 7 of TUPE. It is important to recognise that its application is an intensely fact-sensitive process. 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 (discussed more fully by Lord Justice Briggs) care has to be taken before characterising an arrangement by an administrator as an illegitimate manipulation of the TUPE regime.

The passage from the judgment of Mummery LJ in Spaceright has to be seen in the context of that case. The claimant had been employed as chief executive but this role had become redundant on the appointment of the administrators who dismissed him on the first day of the administration. On the finding of the ET, he was redundant “because no purchaser of the businesses … would require such an officer. The purchaser would either be an existing company with its own chief executive officer or it would be a new venture, where the chief executive officer would come from the ranks of the directors. It was therefore necessary for the administrators to dispense with the claimant’s services.” Moreover, the reason for his dismissal did not entail changes in the workforce. In these circumstances the dismissal, while connected with the subsequent transfer, was not for an ETO reason entailing changes to the workforce. Although in Spaceright the EAT analysed some of the facts differently from the approach of the ET in that case, it came to the same conclusion, expressed as follows:

“… it is in our judgment plain that the administrator’s reason as found by the tribunal … was not an ETO reason entailing changes to the workforce. The reason did not relate to the conduct of the business as a going concern; the business was always going to need a managing director. It did not contemplate a diminution in the number of employees in the ongoing business, for it was contemplated that the claimant would be replaced (as indeed he was). The reason was related to the sale of the business.”

I infer that this was reasoning with which Mummery LJ expressed his agreement at paragraph 47 of his judgment when concluding that the dismissal had not been for an ETO reason.

The facts of the present case seem to me to be significantly different. This is partly because of the unique features pertaining to the financial affairs of a failing football club. Its business is seasonal and, as the ET found, the fact that its most valuable and realisable assets are its contracted players, the liquidation of a football club will often leave few or no assets to be realised for the benefit of creditors. Thus, although liquidation remained a possibility, there were even stronger reasons than usual for averting it. On 28 May, Mr Guilfoyle (through Mr Alexander) took steps which were designed to ensure that costs were reduced sufficiently to enable Crystal Palace (2000) to continue to trade, whilst retaining such staff as were necessary to continue to run the Club. Plainly, the ultimate objective remained the early sale of the Club which would have to be achieved in time for the commencement of the following season.

At this point, it seems to me that the ET was justified in distinguishing between Mr Guilfoyle’s reason for implementing the dismissals on 28 May and his ultimate objective. He needed to reduce the wage bill in order to continue running the business and to avoid liquidation. I do not consider that there was any legal error in the reasoning of the ET at paragraphs 82-86 of its decision which I have set out at paragraph 8, above. Unlike the EAT, I do not find this conclusion to be “surprising”. Moreover, I believe that the EAT attached too much significance to the word “mothballing”. It was not used as a precise term of art. It has to be seen in the fooball context in which it was used by or on behalf of Mr Guilfoyle. Whilst the non-playing staff was being reduced so as to enable the Club to carry on, the players were retained, as were sufficient other staff to enable the Club to remain in business rather than sink into liquidation. The dismissals unquestionably entailed charges in the workforce. In my judgment, it was permissible for the ET to conclude that there was an ETO reason, specifically an economic reason for the dismissals. Just as Spaceright was fact-sensitive, so too is this case.

It follows from what I have said that, in my judgment, the EAT was wrong to hold that the ET had fallen into legal error. Accordingly, I would allow this appeal and restore the judgment of the ET.

I agree with both judgments.

I agree that this appeal should be allowed, essentially for the reasons given by Maurice Kay LJ. I add some words of my own because I have throughout my consideration of this appeal been troubled by the wider implications thrown up by the outcome in the Employment Appeal Tribunal, and by the potential consequences of the application of paragraph 47 of Mummery LJ’s judgment in the Spaceright case outside its factual context.

This appeal raises, to my mind, some fundamental issues about the interaction between two statutory regimes, namely that which protects employment on the transfer of undertakings (TUPE) and that which seeks to preserve jobs from the consequences of corporate insolvency (administration). The sale of a business lies at the heart of both regimes. The reasons why it does in the TUPE regime are too obvious to call for description. The reason why it does in the administration regime is slightly more complicated.

Paragraph 3 of Schedule B1 to the Insolvency Act 1986 sets out the purposes of administration, which include:

“a)

Rescuing the company as a going concern,

b)

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)…”

Purpose (a) will not generally involve a transfer of the undertaking of the company, but purpose (b) very commonly will. Indeed, one of the main advantages of administration over liquidation is precisely that administrators have power to continue the insolvent company’s business, protected (unlike the company’s directors) 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 the proceeds of sale distributed to the company’s creditors, either by the administrators themselves, or (less commonly now) in a subsequent liquidation.

In administrations of type (b), continuation of the company’s business is commonly a prerequisite of a beneficial sale. Once a business is closed down, its value rapidly declines to an amount no greater than the aggregate of the forced sale value of its constituent assets.

Sometimes, the business sale is arranged prior to the company going into administration, and concluded almost immediately afterwards. This is commonly known as a “pre-pack”. But there are many administrations, and the present case is an example, where the administrator continues the business in the hope or expectation of a sale, for as long as the resources necessary for that purpose are available to him, and while a beneficial sale (i.e. at a price greater than the break-up value) remains a realistic possibility.

An administrator’s ability to continue the business pending sale is inevitably constrained by acute economic considerations. The company will not be in administration unless it is insolvent and, indeed, hopelessly insolvent, in the sense that the directors had reached the view that, without protection from its creditors, the company could not realistically expect to trade out of its difficulties. In most cases, that insolvency will have arisen because of the manner in which the company had been conducting its business. Thus, leaving aside pre-packs, administrators will typically need urgently to reform and economise upon the manner in which the business is being conducted immediately prior to their appointment, both to maximise the period before a lack of resources compels closure, and to make the business more attractive to purchasers. Dismissal of employees is, unfortunately for them, a principal method by which the administrators can achieve the economies necessary for those two purposes. Those who are kept on have to be paid their wages and salaries in full, as a prior claim on the limited funds available to the administrators.

The insolvency legislation contains an elaborate code which prescribes the proportions in which a company’s stakeholders (who include creditors, employees and shareholders) share in the misfortune constituted by the company’s insolvency. The TUPE regime is not part of that legislation but, since it plainly applies to the transfer of a corporate undertaking by the administrators of an insolvent company, it has an undoubted effect upon it, and one which is designed to be for the protection of the interests of employees. It affects the operation of the insolvency code because, if the rights of employees who are dismissed before the transfer are enforceable against the transferee, then the purchaser of the business from the administrators will generally subtract from what might otherwise have been the purchase price an amount sufficient to discharge those liabilities, thereby reducing the amount which the sale will contribute by way of distribution to creditors generally. The result is that those dismissed employees’ claims will achieve a priority in the insolvent distribution not contemplated by the insolvency code, under which for example unfair dismissal claims, even by employees initially kept on by the administrators, do not enjoy the priority afforded to payment of their wages and salaries. It is the propensity of the application of the TUPE regime in those circumstances to produce that favourable result that calls for an anxious consideration of the relationship between the two regimes.

Plainly, the tie-breaker which must be applied to resolve the potential conflict between the insolvency code and the TUPE regime for the protection of employees is, in the UK at least, reg. 7 of the 2006 Regulations. It was designed to implement in the UK the spirit and intendment of Art. 4.1 of the Directive, which provides as follows:

“ The transfer of the undertaking or business shall not in itself constitute grounds for dismissal by the transferor or the transferee. This provision shall not stand in the way of dismissals that may take place for economic, technical or organisational reasons entailing changes in the workforce.”

In Whitehouse v C. A. Blatchford Ltd [2000] ICR 542, at 555, Jonathan Parker J (sitting as an additional judge of the Court of Appeal) said this, after a review of relevant ECJ authority:

“… the purpose of the Council Directive is to safeguard the rights of employees, vis-à-vis their employers, where an undertaking or business is transferred, but not to place employees in any better position vis-à-vis their employers by virtue of such a transfer”

The Whitehouse case was not about an insolvent transferor, but if that identification of the general purpose of the directive is applied to an insolvency situation such as the present, (and counsel did not suggest otherwise), a conclusion that reg. 7 should protect employees who have of necessity been dismissed by administrators because the money to pay them has run out would at first sight seem to conflict with it. It would place the dismissed employees in a much better position by reason of the transfer because, but for the transfer, their rights on dismissal would have been those less valuable rights afforded to dismissed employees under the insolvency code. That does not of course mean that this purpose test can simply be applied wherever an issue arises as to whether reg. 7(1) is satisfied. But it does serve as a reality check, in cases where the resolution of the reg. 7 issue appears to produce a result apparently in conflict with the underlying purpose.

Reg. 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. In the present case the Employment Tribunal carefully assessed and rejected a case by the employees that this is indeed what had occurred, leading to their finding that Mr Guilfoyle’s ostensible reason for the dismissals was the genuine reason.

The need to keep the operation of reg. 7 within the bounds contemplated by the Directive is also a powerful reason why in my view the Employment Tribunal was correct to draw a careful distinction between Mr Guilfoyle’s reason for these particular dismissals and his ultimate objective. Office holders conducting a type (b) administration with a view to a sale of the business will almost always have a transfer of the undertaking as their ultimate objective. Everything they do will be tailored to its achievement. If that objective is applied without more as the sole or principal reason for the dismissal then the ETO exception to the operation of reg. 7(1) will never, or hardly ever, apply in the context of this common type of insolvency process.

For the same reason it is important to understand paragraph 47 of Mummery LJ’s judgment in the Spaceright case in the context of its facts. There the dismissal of the CEO was not because the money to pay him had run out, but solely or principally because it would make the business more attractive to a purchaser, who would naturally wish to put a person of his own choice into the top job. In the present case by contrast, these dismissals made the business of the club not a whit more attractive to a 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 these employees had, most unfortunately, to be dismissed.