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Darlington Football Club: what rights do employees have if a company goes into administration?

The UK is once again bracing itself for the possibility of a double-dip recession, after disappointing Christmas sales were announced by high street retailers, writes solicitor Nicola Powell.

It has been suggested that 2012 will see a Europe-wide recession, with the possibility of a number of countries leaving the eurozone; but are the recent decisions of the judiciary assisting in the struggle to re-vitalise the economy or hindering it?

At the start of the recession in 2008, the number of companies going into administration increased dramatically. Although this number has fallen steadily since, it has not dropped to pre-recession levels. This is a reflection of the troubled state that a number of UK firms continue to find themselves in and there are fears that a double-dip recession will produce another sharp increase in the administration statistics.

Despite this bleak outlook, a judgment from the Court of Appeal in 2011 may have offered a glimmer of hope to those facing administration.

Redundancies are commonplace in administration proceedings, with administrators trying to cut costs in order to make the company attractive to potential purchasers. The case of Spaceright Europe Limited -v- Baillavoine and another [2011], however, considered whether the dismissal of an employee by a company in administration could be automatically unfair under The Transfer of Undertakings (Protection of Employment) Regulations 2006 ('TUPE'), even if no transferee had been identified at the time of dismissal.

Previous decisions on this point from the Employment Appeals Tribunal had provided little clarity, with conflicting precedents.

It was held by the Court of Appeal that a pre-transfer dismissal can be in connection with a transfer (and therefore potentially automatically unfair), regardless of whether the identity of the transferee was known at the time of the  dismissal.

The decision in Spaceright secures the protection of employees' rights, even when a company is in significant financial difficulty. While, on the face of it, this appears to be good news, especially with unemployment rising steadily in this country, in reality it may not be so.

The concern is that the judgment in Spaceright will put off prospective purchasers from buying a business in administration, for fear that they will now have to take on employees and all associated liabilities. If there are redundancies to be made, the prospective purchasers will have to assume responsibly not only for the process, but for the redundancy payments due (including those over and above the statutory minimum). In short, prospective purchasers may well conclude that it is simply not worthwhile to purchase struggling companies. The result, should we see a shortage of willing purchasers, is that companies may have no option but to choose to liquidate, meaning that all employees lose their jobs, not just a few.

This issue was highlighted in the recent case of Darlington Football Club. After a number of years of financial problems, last week the club, which was in administration, decided that it had no option but to make its entire playing and backroom staff redundant.

Administrator Harvey Madden stated: "Given the current financial position of the club and, as a consequence of my legal obligations, I have had no alternative but to terminate the contracts of all playing staff and the retained administration staff. Notwithstanding this, there remain parties interested in either injecting funds into the club to enable it to continue operating or acquiring the club."

In light of Spaceright, it is arguable that if the club were to be sold following this announcement, all those staff members who had been made redundant would have a claim for automatic unfair dismissal – the rationale being that their dismissals had been in connection with a transfer, even though no transferor had been identified at the point of dismissal.

Thankfully, Darlington Football Club has managed to secure investment to survive until the end of January and was able to re-hire a number of players. However, the potential for this issue to raise itself again at the end of the month remains.

It is too early to tell what impact this Court of Appeal judgment will have in practice, but it may well lead to fewer company takeovers and an increase in liquidations, resulting in far more job losses – which would hit the economy extremely hard as it struggles not to fall into another recession.

Nicola Powell is a solicitor at IBB Solicitors