04/01/2012

Employment e-Brief – Buyers beware! Purchasers held liable for pre-transfer unfair dismissal claims

Seen a bargain? Acquiring a business as a going concern?

Ensure that you are clued up on the existence of pre-transfer employee claims or you will be in for a nasty, expensive shock once the deal is done. You may find yourself lumbered with employee claims for unfair dismissal dating back to before you were even involved.

The Court of Appeal in Spaceright Europe Limited v Baillavoine [2011] EWCA Civ 1565 confirms that employees can be considered as unfairly dismissed pre-transfer for “a reason connected with the transfer.” In short, even if there is no particular buyer on the horizon, the intention to sell in the future will be enough to link any pre-transfer dismissal with the eventual transfer and may be classed as automatically unfair.

How does this affect me as a purchaser?

If the pre-transfer dismissal made is considered to be automatically unfair, liability will pass to the purchaser under regulation 4 of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE 2006”).

As you can imagine, defending such claims can be very expensive and the rewards for claimants potentially high. In short, this is a headache you can surely do without and the intention of this note is to, at the very least, increase your awareness of this issue.

The Spaceright situation

To provide some context; Mr Baillavoine was the Chief Executive Officer (“CEO”) of Ultralon Limited (the “Transferor”) when it entered administration. The administrators intended to sell the business as a going concern and so dismissed a number of employees including the CEO. They obtained bank funding to continue trading whilst marketing the business for sale. One month later the administrators sold the business to Spaceright. The CEO claimed unfair dismissal.

The CEO’s dismissal was seen as automatically unfair. The reason for his dismissal was connected with the transfer in that he had been dismissed to enable Spaceright to acquire the business without having to pay his salary of £120,000 per annum. The CEO’s dismissal was not seen as effected for an economical, technical or organisational reason entailing changes in the workforce (an ETO reason) under regulation 7(1) of TUPE 2006. The dismissal took place to achieve a sale at a future date. This was enough for it to fall within regulation 7(1).

Spaceright appealed. The administrators asserted that the original reason for dismissal was to save costs whilst running the business, essentially making the CEO redundant and that it was not connected to the transfer.

The tribunal’s view

The business was to be transferred as a going concern, so why did the administrators make the decision to dismiss the CEO? The financial exigencies did not leave the administrators without choices – the bank had continued to fund the business whilst a transfer was sought.

Rather, the reason for dismissing the CEO was not an ETO reason entailing changes in the workforce. It was simply to make the business more of an attractive proposition to a purchaser. The business was always going to need a chief executive officer and it was contemplated that the CEO would be replaced (as he was after the transfer). The reason related to the sale of the business.

Usefully, the construction of regulation 7(1) TUPE 2006 was affirmed, ending a semantic conundrum. Reference to the transfer in regulation 7(1) TUPE 2006 rather than, for example, a transfer, now creates no difficulties. An event may sensibly be considered to be “connected with” a later event even though it was not known, contemplated or foreseen at the time.

How can I avoid liability as a purchaser?

With difficulty, as the chance of obtaining indemnities from a transferor is rare. However the risk can potentially be mitigated by:

  • Carrying out extensive and thorough due diligence, especially in relation to employees and any dismissals that have taken place during the period preceding the transfer
  • Negotiating a reduction in price if you discover potential claims
  • Always expecting and being prepared for some claims from employees dismissed pre-transfer and making appropriate allowances for these.

This is a very fact specific case and it would be prudent to always ask for advice. For more details please contact any member of the Employment, Corporate and Insolvency teams.