When an administrator takes control of a company, they must be wary of the repercussions of all their actions. In considering whether to dismiss the employees of the company, due regard must be had for the relevant employee protection that is given to employees.When considering a sale of the business of the company in administration the Transfer of Undertakings (Protection of Employment) Regulations 2006 provide protection for employees where the ‘undertaking’ in which their work is transferred. Any dismissal arising out of a business transfer situation is automatically unfair if:

• The sole or principal reason for the dismissal is the transfer itself; or
• The dismissal is for a reason connected with the transfer unless that reason is an economic, technical or organisational (ETO) reason entailing changes in the workforce.

Establishing the reason for a pre transfer TUPE dismissal is vital because this will determine whether the transferor or transferee assumes the responsibilities and liabilities for the dismissal and any other employment related liabilities which pass on the transfer.

An important decision was recently given by the Court of Appeal in Dynamex Friction Limited and another v Amicus. It is of particular interest to insolvency practitioners as it addressed the issue of whether the dismissals had been properly carried out by the joint administrators or whether they had 'stage managed' the dismissals with the managing director of the insolvent company, to avoid TUPE related liabilities.

The facts

Friction Dynamics was set up by Mr Smith who was the sole director. The company was in financial difficulties and joint administrators were appointed on 7 August 2003. Because there was insufficient money to pay salaries, the joint administrator immediately dismissed all 93 employees. On 12 August he circulated financial information to nine interested parties to try and sell the business as a going concern.

On 15 August, the parts and machinery were sold to another company Ferotec Realty which was in fact controlled by Mr Smith. The production line and customers were taken over by a different company set up by a former Dynamics employee but with assistance from Mr Smith who in fact acquired a controlling shareholding. Of the 93 employees who had been dismissed by Friction, 60 were then taken on by Dynamex on new terms of employment. Those employees not taken on brought claims in the Employment Tribunal for unfair dismissal and failure to consult.

At the Employment Tribunal, it was argued that Mr Smith had in effect, ‘set up’ the administration of Dynamex so that he could transfer his business to the new companies without incurring any TUPE liabilities. The joint administrator argued that the sole reason for the dismissals was economic; there was no money to pay the wages. The Employment Tribunal held that although it was essential to establish the reason for the dismissal, it was also important to scrutinise the thought process and motivation of the person who made the decision to dismiss as that would go a long way in determining what the actual reason for dismissal was.

The Employment Tribunal accepted there was an economic reason for the dismissals. It rejected the argument that there was some collusion or planning between Mr Smith and the joint administrator who, it was held, had exercised his independent judgment and acted professionally at all times. There was a genuine economic reason for the dismissals rather than a transfer related reason and TUPE did not apply as the employees were not employed in the undertaking before the transfer.

The employees appealed on the basis that the Employment Tribunal had failed to give adequate reasons and to take relevant factors into account when coming to its decision. In particular, the Employment Tribunal had failed to consider the allegation of the transfer being stage managed by Mr Smith who had used the joint administrator as a tool to bring about the reorganisation of assets whilst avoiding TUPE related liabilities. The EAT allowed the appeal and the case was sent back to a fresh Employment Tribunal for a re-hearing. In the meantime though, Dynamex appealed to the Court of appeal.

By a majority, the Court of Appeal restored the Employment Tribunals decision. It found that the Employment Tribunal had given proper consideration to the principal issues of the case. At the material time, that is the time of the dismissals, the employer was the joint administrator and not Mr Smith. The joint administrator’s reasoning had to be ascertained and his reason for the dismissals was economic and not transfer related. At the time the joint administrator made his decision to dismiss the joint administrator had been the directing mind and will of the company, no buyer had been identified and there was no certainty that the business could be sold as a going concern. Mr Smith had had no voice in the conduct of the administration. It was therefore impossible, according to conventional principles of attribution in company law, to attribute knowledge of Mr Smith's stratagem to the joint administrators and to replace their reason for doing what they did with Mr Smith's stratagem. There was no evidence that the dismissals were designed to avoid TUPE related liabilities.

Interestingly, one of the Court of Appeal judges dissented and said it was appropriate to look beyond the motive simply of the employer who carried out the dismissal, but to look broadly at the motives of Mr Smith too.

Comment

This case shows that there is some division within the judiciary about the reasoning and motives the court will look at when considering whether a transfer of employees is caught by TUPE related liabilities.

The position has been clarified by this decision, confirming that it is the decision of the administrator, acting as the directing mind and will of the company that will ultimately determine whether any transfer attracts TUPE related liabilities. Therefore, the administrator must continue to be aware of the potential liabilities that are present under the TUPE legislation and that it will be the reasons behind the administrator’s decision to dismiss employees that will be scrutinised in deciding whether there are any TUPE related liabilities.