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Corporate Insolvency and TUPE: Court Gives Guidance

In a case which threw up novel issues on the inter-relationship between insolvency rules and the law relating to transfer of undertakings (TUPE), the Court of Appeal has dashed the hopes of four workers who lost their jobs as the well-known football club they worked for sank into administration (Crystal Palace FC Limited and Another v Kavanagh and Others).

The club was in dire financial straits when the workers were summarily dismissed by the administrator, who was anxious to sell the club as a going concern. At the time of the dismissals, the administrator had been in negotiations with a consortium which ultimately bought the club through a corporate vehicle.

The workers launched Employment Tribunal (ET) proceedings against the purchasing company on the basis that their dismissals had been unfair and that the company was liable to compensate them by virtue of TUPE. Their claims were dismissed by the ET, but their challenge to that decision was later upheld by the Employment Appeal Tribunal.

Allowing the company’s appeal and restoring the ET’s decision, the Court noted that it was accepted on all sides that the principal reason why the workers had lost their jobs was not the transfer itself.  Although the dismissals had been ‘connected with the transfer’, the administrator had had genuine economic reasons for dispensing with the workers’ services that were not related to the club’s sale.

Noting the ‘unique features’ pertaining to the financial affairs of football clubs, which commonly have few assets other than their 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 whit more attractive’ to a potential purchaser.

In its ruling, the Court noted that the case has 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 for the workers’ unfair dismissal remained with their original employers and did not pass to the company following transfer of the club’s assets.