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TUPE law: finding a rescue package for a business under administration?

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If finding a rescue package for a business under administration is like searching for a needle in a haystack, adding the vagaries of TUPE can feel like doing it blindfolded, says solicitor Hannah Saunders.

Take for instance, the Court of Appeal decision in Spaceright Europe Limited -v-Ballavoine and Another concerning a transfer-connected unfair dismissal by administrators.

Baillavoine was CEO of Ultralon Holdings ('Ultralon'), a manufacturer of office products. In May 2008, the company went into administration and the same day, Baillavoine and 43 of his colleagues were dismissed. Ultralon was sold as a going concern by the administrators to Spaceright Europe ('Spaceright') just over a month afterwards. The Transfer of Undertakings (Protection of Employment) Regulations 2006 ('TUPE') provide that dismissals in connection with the transfer are automatically unfair unless they are for an economic, technical or organisational reason entailing changes in the workforce (an 'ETO reason').

Baillavoine brought an unfair dismissal claim, claiming that his dismissal was automatically unfair under TUPE.

There were three main issues before the Court.

First, was the Tribunal entitled to conclude that the dismissal was transfer-connected, given alternative explanations by the administrators? The administrators explained that "this role became redundant on our appointment and given the high salary costs of the Claimant as compared to other employees, his role was identified as being one which the business could operate without and which would make significant cost savings". Spaceright argued that this decision was based on an urgent need to cut costs while a purchaser was sought, and was not connected with the transfer.

Second, had the Tribunal followed the correct approach in concluding that the dismissal didn't need to be connected to the transfer which actually took place, but just to any possible transfer? Since 1994, there has been conflicting case law on this point from the Employment Appeal Tribunal. Ibex Trading v Walton held that the specific transfer must be contemplated at the time of dismissal. Harrison Bowden v Bowden, on the other hand, held that a possible transfer is enough to establish a connection, not a specific transfer to a particular transferee. In recent years, most case law had followed the Harrison Bowden approach, but the conflict had not been definitively resolved.

Third, was the Tribunal correct in finding no ETO reason? An ETO reason could have prevented the dismissal from being automatically unfair.

The Court of Appeal, upholding earlier decisions by lower Tribunals, upheld Baillavoine's unfair dismissal claim.

On the first issue, the Court of Appeal looked at the evidence that the administrators were trying to trade the business in the short-term with a view to selling it as a going concern. Achieving a sale was the real motivation, not interim business conduct, and meant the dismissal was connected to the transfer.

The Court also agreed that the dismissal was transfer-connected even though the administrators did not have the particular transfer in mind at the time. In other words, they preferred the approach in Harrison Bowden to that in Ibex.

Finally, the Court found that, as the role of CEO continued to exist post-transfer, but filled by Spaceright, the dismissal was not for an ETO reason entailing changes to the workforce. An ETO reason defence "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".

The liability for the dismissal passed to Spaceright.

The Baillavoine case gives clarity, for now, on the correct approach where a transfer is loosely envisaged, but has not been tied down to a particular deal – or a purchaser found. But the facts of the situation are important, too. In this case, the steps taken by the administrators were geared towards achieving a sale of the business and assets (for example, obtaining funding to keep going while a purchaser was sought) and the financial situation was not so bad that the administrators had no choice. Baillavoine's unique senior management role was also relevant. Administrators will have to go some way to distinguish their redundancy decisions from Baillavoine if they are to prevent findings of automatically unfair dismissal. Potential transferees will be wary of inheriting the liabilities.

In practice, potential unfair dismissal liabilities relating to dismissals during administration will often be used to bargain down any rescue packages. However, at the time of writing, we await the Court of Appeal decision in Key 2 Law (Surrey)LLP -v- De'Antiquis & others, another case dealing with TUPE and administration. This is one to watch, because it could impact on the Baillavoine approach.

Hope of finding that needle after all?

Hannah Saunders, consultant solicitor at Keystone Law