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	United Kingdom Employment Appeal Tribunal
You are here: BAILII >> Databases >> United Kingdom Employment Appeal Tribunal >> Honeycombe 78 Ltd v. Cummins & Ors [1999] UKEAT 100_99_1012 (10 December 1999) URL: http://www.bailii.org/uk/cases/UKEAT/1999/100_99_1012.html Cite as: [1999] UKEAT 100_99_1012

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APPEARANCES

 

For the Appellants	MR M BARKLEM (of Counsel) Fishers 6-8 Kilwardby Street Ashby-de-la-Zouch Leicestershire LE65 2FU
For the First Respondents For the Second Respondent	THE FIRST RESPONDENTS NEITHER BEING PRESENTED NOR REPRSENTED MR R H BRITTEN (Solicitor) Legal Services Directorate Department of Trade & Industry 10 Victoria Street London SW1H 0NN


 


JUDGE PETER CLARK:

1. The parties before the Southampton Employment Tribunal in this case, heard on 20th November 1998 were as follows: the applicants, Mrs P A Cummins and others ['the applicants']; Hobbs Welch Ltd t/a The Silver Crane Co. ['Hobbs Welch'] the first respondents; Honeycombe 78 Ltd ['Honeycombe'] second respondent; the Secretary of State for Trade and Industry ['the Secretary of State'] the third respondent.
2. The issue before the Employment Tribunal was whether Honeycombe or the Secretary of State was liable for any payments due to the applicants arising out of their dismissal by Mr P A Hall, the Administrator of Hobbs Welch, an insolvent company, on 27th January 1998.
3. The tribunal, by a decision with extended reasons promulgated on 8th December 1998, found Honeycombe to be liable to the applicants for such claims as they may prove for pay, pay in lieu of notice and redundancy payments and dismissed the Secretary of State from the proceedings. Against that decision Honeycombe now appeals.

The facts

4. The tribunal heard evidence from Mr Hall, Mrs Goodman, a director both of Hobbs Welch and Honeycombe and from each of the applicants. On that oral evidence and the documentary evidence produced by the parties, the tribunal made the following material findings of facts.
5. From 1981 Mr and Mrs Goodman were directors of Hobbs Welch and from 1989 were the sole directors and shareholders in that company. They were also the directors and shareholders in Silver Crane Co Ltd ['SCCL'] and from 1989 were partners in the firm of Silver Crane Designs ['SCD']. Their business was the distribution of decorative tin plate boxes.
6. The designs of that product were registered in the name of SCCL and the design rights were owned partly by SCCL and SCD. Neither SCCL nor SCD employed any staff. Hobbs Welch employed some 25 staff engaged in management/sales, art room, warehouse and distribution and administration. The product was manufactured by sub-contractors, Lawson, using tools and plates the property of Hobbs Welch.
7. A contractual dispute arose with Lawsons, as a result of which production was seriously affected so that Hobbs Welch missed much of the 1997 Christmas market.
8. On 15th January 1998 Mr Hall, an insolvency practitioner with Grant Thornton & Co, presented a report to the directors of Hobbs Welch. In that report he stated that a sale of the business should be pursued, but the only likely purchasers would be the directors, Mr and Mrs Goodman. Further, he opined that continued trading by Hobbs Welch for any length of time was not likely to be achievable unless costs could be cut appreciably or the directors supply funding. The directors indicated a willingness to consider that option if credit facilities could be obtained from suppliers.
9. On 16th January 1998 Lawson petitioned for a winding-up order to be made in respect of Hobbs Welch and on the same day Mr and Mrs Goodman petitioned for an Administration Order on the basis that that would be more likely to achieve the survival of Hobbs Welch as a going concern, or a better realisation of the assets than would a winding-up order.
10. In a subsequent report dated 23rd January 1998 Mr Hall concluded that on the evidence he had seen a sale to the directors was likely. Such a sale was likely to take place if an administration order was made.
11. An administration order was made on 26th January and on that day Mr Hall was appointed Administrator, together with Mr James Earp, also of Grant Thornton.
12. On 27th January Mr Hall visited the premises of Hobbs Welch, called the workforce together and issue all members of staff, including the four applicants, save for two employees who are not material, with letters of dismissal to take immediate effect. Accordingly these four applicants and their colleagues were dismissed by the administrator on 27th January.
13. The question arises in this case as to what was Mr Hall's reason or principal reason for dismissing the applicants on 27th January. Having heard his evidence the tribunal made the following findings of fact. The company was no longer in a position to make payments to the staff for services rendered. Mr Hall insisted that Hobbs Welch had to cease to trade immediately, irrespective of an offer of funding by Mr and Mrs Goodman and their outline proposal to purchase the business. At paragraph 12 of their reasons the tribunal said this:

"The Administrator in turn made it clear immediately on his appointment that he would not allow [Hobbs Welch] to trade and would dismiss the staff because there were no assets to pay them at that stage and that is what he did on 27 January."

14. Mrs Goodman told Mr Hall that she intended to make offers of employment to all the dismissed employees if the Court Order (later made on 6th February) was in favour of a new company, which she and Mr Goodman intended acquiring, purchasing the assets of Hobbs Welch. She made that offer to the dismissed employees on 27th January, immediately after Mr Hall had dismissed them.
15. Hobbs Welch's premises were occupied under a licence granted to SCCL.
16. On 30th January a conditional sale agreement was entered into between Hobbs Welch and the proposed new company, which was Honeycombe, bought off the shelf by Mr and Mrs Goodman on 11th February. Under that agreement Honeycombe was to purchase the assets of Hobbs Welch for £97,001 conditional upon the making of a Court Order. That order was made on 6th February, and the sale agreement became unconditional on 11th February. It is and was common ground that on that date a relevant transfer of the undertaking of Hobbs Welch to Honeycombe took place for the purposes of Regulation 3 of the Transfer of Undertakings (Protection of Employment) Regulations 1981 ['TUPE'].
17. The majority of the workforce of Hobbs Welch continued working in the business transferred to Honeycombe. However the four applicants did not. They brought claims for payments due on their dismissal.

The Employment Tribunal decision

18. The critical question for the tribunal was whether the applicants had been employed in the undertaking immediately before the transfer which took place on 11th February within the meaning of Regulation 5(3). If not, liability for the applicants' claims lay with the Secretary of State as statutory guarantor of the liabilities of the insolvent company Hobbs Welch; if so, then that liability of Hobbs Welch transferred to Honeycombe.
19. As to that question the tribunal directed themselves as to law at paragraph 10 of their reasons in this way:

"10. In Litster –v- Forth Dry Dock & Engineering Co Ltd [1989] IRLR 161 the House of Lords held that, where an employee has been unfairly dismissed before a transfer for a reason connected with the transfer, he is to be deemed to have been employed in the undertaking "immediately before the transfer" and the employment is statutorily continued with the transferee. Regulation 5(3) must be read as if there were inserted after the words "immediately before the transfer" the words "or would have been so employed if he had not been unfairly dismissed in the circumstances described in Regulation 8(1)." The House of Lords held that such a construction was necessary for the Regulations effectively to fulfil the purpose for which they were made of giving effect to the provisions of EEC Directive 77/187. Further, UK courts are under a duty to give a purposive construction to directives and to regulations issued for the purpose of complying with directives."

20. Having so directed themselves they arrived at their conclusion as follows:

"11. In the present case, for good commercial reasons, the directors of the first respondents decided to have an administrator appointed. It was throughout apparent that any sale which he effected would more probably than not be in favour of the directors, or some legal body which they set up. This was because of the way in which the ownership of the assets upon which the first respondents depended for their trading, was distributed. There was a possibility that the first respondents' manufacturing contractors might make a counter-bid, but in fact they did not respond to the administrator's approaches.

12. The administrator in turn made it clear immediately on his appointment that he would not allow the first respondents to trade and would dismiss the staff because there were no assets to pay them at that stage, and that is what he did on 27 January. By 30 January the first respondents acting through the administrator, and Honeycombe 78 had concluded a substantial agreement for sale of the assets. That agreement was conditional, in reality, only on the obtaining of a court order which was duly obtained, so that the agreement became unconditional and was concluded on 11 February. From the date of the appointment of Mr Hall as administrator to that date was 15 days.

13. In those circumstances we conclude that the applicants were dismissed by reason of the transfer which had been in the offing ever since Mr Hall made his first report prior to the court hearing. Accordingly, liability for the payments which the applicants seek as a result of the termination of their employment by the administrator of the first respondents, passes to Honeycombe 78, who are liable to make payments which would otherwise have been due to the applicants from the first respondents."

The Appeal

21. At the outset of this hearing Mr Britten for the Secretary of State drew our attention to the judgment of Morison J in Smith v Secretary of State for Trade and Industry (EAT/741/97). We have been supplied with a transcript of that judgment in which the former President raised, without deciding, the question as to whether an Employment Tribunal and indeed this EAT could properly adjudicate on a case in which the Secretary of State was a party having regard to Article 6 of the European Convention on Human Rights and the Constitution of the tribunals here and below. Mr Britten submitted that no breach of Article 6 arises, without developing the point; Mr Barklem, who had advance notice of the point, having considered his client's position, expressly declined to take the point. Accordingly, we have not felt it necessary to consider that question in this judgment.
22. The substantive point taken by Mr Barklem in the appeal is this. In Secretary of State for Employment v Spence [1986] 3 AER 616 the Court of Appeal were asked to consider the reference in Regulation 5(3) to the employee being employed in the undertaking "immediately before the transfer" in this factual context. The applicant employees were employed by a company (Spencers), which went into receivership in November 1983. It continued to trade for a short time thereafter whilst attempts were made to find a purchaser for the business. On 25th November the receivers decided to cease trading and to dismiss the workforce because there was no guarantee that there would be a successful outcome to the sale negotiations. On 28th November at 11 a.m. the workforce, including the applicants, were dismissed with immediate effect. At 2 p.m. on the same day the business was sold. The following day the workforce, including the applicants, were re-employed by the new owners and given fresh contracts of employment. The applicants applied for a redundancy payment arising out of their dismissals by the receiver. Any liability for such payments by Spencers fell on the Secretary of State, that company being insolvent.
23. Two questions arose for determination by the Industrial Tribunal. First, whether a relevant transfer took place between the receivers and the purchasers of the business. It was held that it did. Secondly, were the applicants employed in the business "immediately before the transfer"? The tribunal resolved that question against the Secretary of State, who argued that they were. Accordingly liability for redundancy payments lay with the Secretary of State. In so deciding they expressly found that there was no collusion between receivers and the purchasers.
24. An appeal by the Secretary of State to the EAT was dismissed. On further appeal the Court of Appeal upheld the decisions below. The Court held that unless the contracts of employment were subsisting at the moment of transfer, the employees were not employed immediately before the transfer.
25. Spence fell to be considered by the House of Lords in Litster v Forth Dry Dock & Engineering Co Ltd (in receivership) and another [1989] IRLR 161. There, the 12 applicants were employed by Forth Dry Dock, a company which went into receivership in September 1983. On 6th February 1984 at about 3.30 p.m. they were summarily dismissed by the receivers and informed that no further funds were available to pay their wages and no payment would be made in respect of outstanding holiday pay or pay in lieu of notice. Later that day, Forth Estuary purchased the business assets of the company from the receivers.
26. Immediately following that acquisition Forth Estuary began recruiting staff, but did not offer employment to the applicants. They complained of unfair dismissal by the receivers. Forth Estuary were joined as second respondents.
27. A Scottish Industrial Tribunal held that a relevant transfer took place between receivers and Forth Estuary, and that the applicants had been employed in the business immediately before the transfer, directing themselves in accordance with the English EAT decision in Alphafield Ltd (t/a Apex Leisure Hire) v Barratt [1984] IRLR 224, a case disapproved by the Court of Appeal in Spence. They further found that the dismissal was for a reason connected with the transfer under Regulation 8(1), rendering the dismissals automatically unfair; alternatively they found that if the reason for dismissal was for an economical, technical or organisational (ETO) reason under Regulation 8(2), the employers (the transferees, Forth Estuary) had not acted reasonably under s.57(3) of the Employment Protection (Consolidation) Act 1978 (now s.98(4) of the Employment Rights Act 1996), and the dismissals were unfair on that footing.
28. On appeal, the EAT held that the Industrial Tribunal had erred in finding that the dismissal did not fall within Regulation 8(2). The reason for dismissal was redundancy and that was an economic reason. However, they upheld the finding of unfairness on the basis that the transferors (the receivers) did not need to dismiss the employees when they did. The EAT did not consider whether Regulation 5 applied.
29. On appeal to the Court of Session it was argued on behalf of Forth Estuary that in the light of Spence the applicants were not employed in the business immediately before the transfer under Regulation 5(3), so that liability rested with the transferors. The Court agreed.
30. In the House of Lords, in the leading speech given by Lord Oliver, his Lordship held that, construing the Regulations in accordance with Council Directive 77/187, and with particular regard to the European Court of Justice (ECJ) decision in Bork [1989] IRLR 41, it was necessary to insert after the words "immediately before" in Regulation 5(3) "or would have been so employed if he had not been unfairly dismissed in the circumstances described in Regulation 8(1)".
31. Regulation 8 provides:

"(1) Where either before or after a relevant transfer, any employee of the transferor or transferee is dismissed, that employee shall be treated for the purposes of Part V of the 1978 Act and Articles 20 to 41 of the 1976 Order (unfair dismissal) as unfairly dismissed if the transfer or a reason connected with it is the reason or principal reason for his dismissal.

(2) Where an economic, technical or organisational reason entailing changes in the workforce of either the transferor or the transferee before or after a relevant transfer is the reason or the principal reason for dismissing an employee-

(a) paragraph (1) above shall not apply to his dismissal; but

(b) without prejudice to the application of section 57(3) of the 1978 Act or Article 22(10) of the 1976 Order (test of fair dismissal), the dismissal shall for the purposes of section 57(1)(b) of that Act and Article 22(1)(b) of that Order (substantial reason for dismissal) be regarded as having been for a substantial reason of a kind such as to justify the dismissal of an employee holding the position which that employee held."

32. On the facts of Litster Lord Oliver concluded that the dismissals by the receivers were engineered, in collusion with the purchaser transferees, Forth Estuary, to avoid liability for those dismissals transferring to Forth Estuary. There was no ETO reason for the dismissals. Accordingly the employees were, under the revised Regulation 5(3) as devised by Lord Oliver, employed in the business immediately before the transfer. The applicants were unfairly dismissed by Forth Estuary for a reason connected with the transfer.
33. Spence was approved on its facts. The reason for dismissal in that case was not connected with the transfer, but due to economic considerations. At paragraph 47 Lord Oliver said:

"… It is worth noting that it was found as a fact by the Industrial Tribunal, first, that the sequence of events was the result of independent action by the receivers and the transferees and that there was no collusion between them and, secondly, that the reason why the receivers decided to dismiss the workforce was that, until a contract could be renegotiated with the company's principal customer, there was no prospect of any work for the business. It follows from these findings that the reason for the dismissal was not one connected with the transfer but was due to economic considerations, with the result that regulation 8(1) did not render the dismissals unfair. …"

34. In these circumstances, submits Mr Barklem, the critical question for the Employment Tribunal in the present case was, what was the reason or principal reason for the dismissal of these applicants? That must be the reason in the transferor administrator, Mr Hall's mind (see BSG Property Services v Tuck [1996] IRLR 34). Looking at the scheme of Regulation 8, if the reason or principal reason was an economic one, then Regulation 8(1) does not apply; it is not for a reason connected with the transfer. In these circumstances the additional words added to Regulation 5(3) in the speech of Lord Oliver in Litster do not apply. Here, the dismissals took place on 27th January; the relevant transfer took place on 11th February. The applicants cannot be said to have been employed in the business immediately before the transfer. Liability to the applicants remains with the transferor and thus rests with the Secretary of State as statutory guarantor of that liability.
35. Looking at the tribunal's reasoning, they fell into error in failing to direct themselves as to that critical question. Had they done so, on their findings of primary fact, they would have been bound to conclude that the reason or principal reason was economic, not for a reason connected with the transfer. On 27th January, the day after his appointment as Administrator, Mr Hall concluded, so the tribunal found, that he would have to dismiss the staff because there were no assets to pay them at that stage and that is what he did. Although the possibility of a sale of the business to Mr and Mrs Goodman existed, he reached his decision to dismiss the workforce irrespective of their offer to provide funding and their outline proposal to purchase the business. That was the obverse of the situation in Litster, where the transferor and transferee were in collusion to avoid liability transferring to the transferees. The facts here are more closely akin to those in Spence; a fortiori, temporally, these applicants were not employed in the business immediately before the transfer.
36. In these circumstances he asks us to reverse the Employment Tribunal decision, all the necessary primary facts having been found, and substitute a declaration that any liability to the applicants rests with the Secretary of State.
37. Mr Britten submits that the tribunal reached a permissible decision on the facts as found, properly directing themselves as to the law. They patently had in mind the Litster test. The applicants were dismissed by reason of the transfer which had been in the offing ever since Mr Hall made his first report, prior to his appointment as Administrator, on 15th January. That transfer duly took place. It is not necessary for there to be collusion between transferor and transferee, in the Litster sense. It is enough that the receiver dismissed the workforce principally in order to effect a sale of the business as a going concern. The fact that there were no assets out of which to pay the workforce may have been a contributory factor to the decision; perhaps even a subsidiary reason, but the tribunal was entitled to and did conclude that the reason or principal reason for dismissal was a reason connected with the transfer. There are no grounds in law for our interfering with the tribunal decision. He has referred us to a passage in the ECJ judgment in Bork at paragraph 18:

"… In order to determine whether the only reason for dismissal was the transfer itself, account must be taken of the objective circumstances in which the dismissal occurred and, in particular, in a case like the present one, the fact that it took place on a date close to that of the transfer and that the workers concerned were re-engaged by the transferee."

38. He took a further point on the terms of the sale agreement which, the tribunal found, contemplated that the TUPE Regulations would apply to what the agreement referred to as "this transfer". The tribunal made that observation, at paragraph 7 of their reasons, in the context of their finding that a relevant transfer took place. That is not in dispute before us. We do not find the terms of the sale agreement of assistance in determining the issue in this appeal, which turns on the application of Regulation 5(3) read with Regulation 8(1) and (2).
39. Accordingly, Mr Britten invites us to dismiss the appeal. Alternatively, if we are against him to any extent, he invites us to remit the case for rehearing before a fresh tribunal.
40. Finally and for the sake of completeness, we invited the parties' submissions on the effect, if any, on this case of the EAT decision in Michael Peters Ltd v Farnfield [1995] IRLR 190 (Tucker J presiding). Two points arise. The first is the continuing debate, as yet unresolved in the Court of Appeal, at this EAT level over the significance of the definite article in Regulation 8(1). See the earlier cases of Harrison Bowden Ltd v Bowden [1994] ICR 186 and Ibex Trading Co Ltd v Walton [1994] IRLR 564. In short, must the actual transferee have been identified at or before the moment of dismissal? We agree with the submissions made to us on both sides that the point does not arise in this case, where Mr and Mrs Goodman, by whatever trading vehicle they chose, were identified as potential transferees by Mr Hall before he dismissed the applicants and their colleagues and it was they, through Honeycombe, who effected the transfer on 11th February.
41. Secondly, on the facts of Farnfield the EAT would have upheld the Industrial Tribunal decision (reversed on other grounds) insofar as the tribunal held that the applicant was dismissed by reason of the transfer within Regulation 8(1). The tribunal found that there was no deliberate plan between the receivers and transferees to avoid the Regulations (collusion) but that the principal reason for the applicant's dismissal was connected with the transfer because, in order to achieve it, it was deemed necessary to reduce the number of staff.
42. Mr Britten submits that Farnfield assists his cause. Effectively, the Employment Tribunal in the present case reached the same conclusion as did the tribunal in Farnfield, a conclusion which the EAT would have upheld in that case, but for other grounds of appeal. Mr Barklem invites us to distinguish Farnfield on its facts; there, the tribunal clearly found that the principal reason for dismissal was to trim down the business to equip it for a sale. Here, on the contrary, the eventual transferee, through Mr and Mrs Goodman, asked the Administrator to keep on the staff and offered to provide funding, but despite those offers and the proposals to purchase the business he decided that for economic reasons it was necessary to dismiss the staff forthwith on 27th January. At that time there was no certainty that a sale of the business would be effected. The economic reason for dismissal was paramount. It was the principal reason under Regulation 8.

Conclusion

43. We have concluded that Mr Barklem's submissions are to be preferred to those of Mr Britten.
44. Employment Tribunals will be astute to detect any collusive agreement between transferor and transferee to avoid the effect of the Regulations. Litster is one example; the point has been recently emphasised by the Court of Appeal in ECM (Vehicle Delivery Service) Ltd v Cox [1999] IRLR 559, upholding the decision of the EAT, Morison J presiding [1998] ICR 631, a case concerned with the issue as to whether or not a relevant transfer had taken place under Regulation 3.
45. In the present case there was no finding of collusion between the Administrator and Mr and Mrs Goodman. We accept that such collusion is not a prerequisite for a transfer-related reason for dismissal under Regulation 8(1). See Farnfield. However, we are satisfied that the tribunal fell into error by patently failing to consider whether or not the reason or principal reason for dismissal by the Administrator was an economic reason, thus negativing a transfer-related reason under Regulation 8(1).
46. We are quite clear that in reformulating Regulation 5(3) as he did, Lord Oliver was concerned only with dismissals for a reason connected with the transfer, a Regulation 8(1) unfair dismissal. As we understand his speech in Litster, particularly paragraph 50, in order to comply with Article 4 of the Directive, as interpreted by the ECJ in Bork, the provision contained in Regulation 8(1) is another way of saying that the transfer is not to constitute a ground for dismissal. Hence the need to add words to Regulation 5(3) to prevent the protection of the Regulations being disapplied where the employee has been dismissed prior to the transfer in time, but for a reason connected with the transfer.
47. Thus, provided that the transferee can show that the transferor's reason or principal reason for dismissing the employees prior to the transfer was an ETO reason, then the transfer-related reason envisaged in Regulation 8(1) is displaced even if the Regulation 8(2) ETO dismissal could be held to be unfair under s.98(4) of the 1996 Act.
48. Having found that the tribunal's reasoning is flawed as a matter of law, the question then arises as to what course we should take. Ought we to remit the matter for rehearing by a fresh Employment Tribunal, as Mr Britten submits; or are we in a position to reverse the tribunal's finding on the basis of the facts as found, as Mr Barklem invites us to do?
49. We bear in mind the guidance provided by the Court of Appeal in cases such as Dobie v Burns International [1984] ICR 812; Hellyer Bros. v Mcleod [1987] ICR 526 and Westminster City Council v Cabaj [1996] IRLR 399, and have concluded that on the facts as found by this tribunal the decision is, as a result of their failure to properly ask themselves and answer the question, what was the reason or principal reason for dismissal by the Administrator in this case (that being the effective dismissal. Wilson v St Helens Borough Council [1998] IRLR 706), plainly and unarguably wrong and that the tribunal's findings of fact do not require amplification or reinvestigation at a rehearing.
50. On the primary facts as found the Employment Tribunal was bound to conclude that Mr Hall's principal reason for dismissal was economic. There was no money to pay the wages. That a possibility existed of a subsequent sale to the Goodmans or their new company (Honeycombe) formed part of the background, as did the subsequent conditional sale agreement which then became unconditional, following the necessary Court Order, on 11th February. However that was not the reason for dismissal in Mr Hall's mind, on the tribunal's findings. He decided to dismiss the staff in spite of that potential sale, not with a view to effecting it, for an economic reason.
51. In these circumstances we shall allow the appeal; set aside the decision of the Employment Tribunal; dismiss Honeycombe from the proceedings and substitute a declaration that no relevant transfer of the business of Hobbs Welch to Honeycombe took place; accordingly, the Secretary of State is responsible for any payments due to the applicants arising out of their dismissals for which he is statutorily liable.