Crystal Ball

Liabilities for dismissals, made by Administrators, didn’t transfer under TUPE to a later buyer in a recent Court of Appeal decision (CrystalPalace -v- Kavanagh). Some would say that this is an important decision worth noting for both Administrators and buyers of insolvent businesses. Why? Read on to find out.

The background

The case concerned Crystal Palace Football Club which entered administration in January 2010. In May 2010, the Administrator had no firm buyer in prospect and an urgent need to cut the wage bill. A number of staff were therefore dismissed. Later, in August 2010, CrystalPalace was successfully sold on to a new company, ‘CPFC 2010’. The key question was whether the liability for these earlier dismissals was passed on to the buyer.

The central legal issue for the Court was whether the dismissals were for an Economic, Technical or Organisational reason (an ‘ETO’). It was argued that the Administrator made the dismissal for legitimate ETO reasons which ‘entailed a change in the workforce. Such an argument, where successful, would result in liabilities remaining with the company in administration.

The Court found that the Administrator did indeed have his own genuine reasons to reduce headcount: to cut the wage bill. That reason could be distinguished from the ultimate objective of this administration, a sale. As a result, no liabilities relating to the dismissal transferred to the buyer, CPFC 2010.

The implications

It is common for administrators to make dismissals early on in an administration in order to keep a business alive. This decision shows that where they do so (for genuine reasons of their own) liabilities shouldn’t pass to the buyers of the company’s business.

The Court also stressed, however, that Courts in the future will be alert for Administrators who collude with a buyer. The judgment suggests that Courts will be on the look out for administrators who ‘dress up’ dismissals made for a buyer’s benefit as something else.

As a result, the reasons for administrators’ decisions to dismiss employees (and the evidence around it) are likely to be centre stage in any future cases of this sort.

What are your thoughts on this decision?

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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.