Thompson v SCS Consulting Ltd & Ors

The case of Thompson v SCS Consulting Ltd & ors has important implications on the sale of insolvent businesses as it considers the “old chestnut” of whether or not an employee had been unfairly dismissed by an insolvency practitioner under Reg. 8(2) of the Transfer of Undertakings (Protection of Employees) Regulations 1981 (TUPE) and, if this is the case, all liabilities with respect to the employee will pass to the purchaser.

A more detailed analysis will follow in due course, but the following is a brief summary of the implications of the case.

The facts of the case are as follows:

• The applicant was employed by the first respondent, and then subsequently by the second respondent. In December 1998 the second respondent was in financial difficulty and receivers were appointed. The receivers concluded that due to the lack of funds, the receivers would have to dismiss all the employees. Around that time the third respondent, Open Text UK, expressed an interest in purchasing the business of the second respondent.
• At the instigation of Open Text UK, it was decided that rather than dismiss all the employees the decision would be delayed to enable Open Text UK to consider the employees which it wished to retain for the future operation of the business.
• Those employees who the purchaser did not wish to retain would be dismissed by the receiver as a precondition to the sale of the business. The applicant was one of the employees dismissed by the receiver eleven hours before the business was transferred to Open Text UK.
• The issue was whether the applicant had been unfairly dismissed for a reason connected with the transfer of the business under Reg. 8(1), and as a consequence his dismissal was unfair and that Open Text UK was liable for his dismissal under Reg. 5(3).

Held

The Tribunal held that the applicant had not been dismissed for a reason connected with the transfer of the business but rather for an economic, technical or organisational reason (an ETO reason) within Reg. 8(2) and hence was not to be treated as having been automatically unfairly dismissed under Reg. 8(1). The applicant appealed.

The Employment Appeal Tribunal (EAT) upheld the decision of the Employment Tribunal. In its judgment the EAT stated:

• determination of whether an employee was dismissed under Reg. 8(1) or 8(2) was a question of fact and the tribunal was entitled to take into account whether there was any collusion between the transferor and the transferee and whether the transferor (or those acting on its behalf) had any funds to carry on the business at the time of the decision to dismiss. In this case, the tribunal found that the business of the first and second respondent was over-staffed, was inefficient in terms of sales and was insolvent. It could only be made viable if the workforce was reduced;
• dismissals under Reg. 8(2) were decided by looking at whether the ETO reason was connected with the future conduct of the business as a going concern;
• given that the employee had been dismissed eleven hours before the transfer, the employer could not be considered as being “employed immediately before the transfer” as required by Reg. 5(3) of TUPE.

Comment:

Although this is a welcome case for insolvency practitioners trying to save businesses, this case adds to existing uncertainty and inconsistency in this area of law. Prior to this case, recent case law had indicated that dismissals (even before negotiations have started) may still be connected with the transfer if the principal reason for the dismissals was to make the business more attractive to a potential purchaser. Unlike any other area of the law, it seems that the decisions in TUPE cases may have more to do with the composition of the tribunal rather than following the precedent of existing case law.

For further information please contact Rita Lowe at [email protected] or on +44 (0)20 7367 2798