Kavanagh & Ors v Crystal Palace FC (2000) Ltd & Ors (Transfer of Undertakings : Economic technical or organisational reason)

For the ETO exception to apply to a transfer-connected dismissal, the purpose must be to change the workforce while continuing to conduct the business. It does not apply where dismissal forms part of a process directed to selling the business, even if a sale is uncertain or the business is preserved pending a possible sale.

An administrator may therefore dismiss for an ETO reason in an appropriate fact-sensitive case. However, mothballing a business pending sale is not continuing to conduct it. A dismissal for that purpose is automatically unfair under Regulation 7 of the Transfer of Undertakings (Protection of Employment) Regulations 2006, and the associated liabilities transfer to the transferee.

The claimants were dismissed for redundancy by the administrator of Crystal Palace FC (2000) Ltd shortly before the club and stadium were sold. The Employment Tribunal found that the administrator genuinely intended to reduce costs, mothball the club during the close season, and preserve it in the hope of a future sale. It held that the dismissals were connected with the transfer but were for an economic, technical or organisational reason entailing changes in the workforce. It therefore held that liability did not pass to the second and third respondents.

The claimants appealed. The central issue was whether dismissals made while mothballing a business pending a possible sale could be for an ETO reason under Regulation 7 of the Transfer of Undertakings (Protection of Employment) Regulations 2006.

1. Appeals allowed. The Employment Tribunal correctly treated the availability of an ETO reason as fact-sensitive. Neither Key2Law nor Spaceright established that an administrator can never dismiss for an ETO reason.

2. However, the Tribunal misapplied its findings to the governing distinction in Spaceright Europe Ltd v Baillavoine and Anor [2011] EWCA Civ 1565. An ETO reason may exist where dismissal is intended to change the workforce and enable the business to continue to be conducted. It is unavailable where dismissal is undertaken for the purpose of selling the business.

3. The administrator’s settled purpose was to sell the club as a going concern, failing which it would be liquidated. By the dismissal date, the administrator intended to mothball it pending a possible sale. Mothballing meant preserving the business rather than continuing to conduct it. The Tribunal’s own findings therefore admitted only the conclusion that the dismissals were for the purpose of sale, not for an ETO reason.

4. The dismissals were consequently transfer-connected dismissals falling within Regulation 7 of the Transfer of Undertakings (Protection of Employment) Regulations 2006. The Tribunal’s ruling that liability for unfair dismissal and the ancillary claims did not pass was set aside. A substituted finding was made that liability passed to the second and/or third respondents.

5. The claimants’ alternative grounds would have been dismissed. The Tribunal had been entitled to make its factual findings, and its failure to make further findings on those grounds disclosed no error of law.

• Employment Appeal Tribunal: Allowed the claimants’ appeals and substituted a finding that liability for the claims passed to the second and/or third respondents.

• Employment Tribunal, London South: Found the dismissals connected with the transfer but held that they were for an ETO reason, so that liability did not pass to the later respondents.