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Can you dismiss staff to make a business sale more attractive?

A recent court case has yet again raised an interesting question for both administrators and owners of a business in difficulties: can you dismiss staff prior to a business transfer to make that business more attractive to a purchaser?

Obviously, the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) were put in place precisely to ensure that the sale of a business cannot be used as an excuse to unfairly dismiss employees.

But the case of Crystal Palace FC Ltd v Kavanagh and others focuses on a specific situation around the sale of a business when it is required to dismiss staff to enable the company in administration to continue to trade up until the point of purchase.

Under TUPE, you are allowed to dismiss employees for economic, technical or organisational (ETO) reasons, but is it okay to do this before a sale in this situation or is this an underhand way of trying to avoid TUPE?

What did the Employment Tribunal decide?

In considering the situation, the Employment Tribunal found that Crystal Palace Football Club’s (the Club) administrator was within its rights to dismiss staff because this fell within the ETO reason exception.  This meant that liability for these employees and their dismissals did not pass to the Club’s purchaser.

This was because the dismissals were made to ensure the Football Club could continue to trade as a business and be sold to the purchaser.

However, the Employment Appeals Tribunal (EAT) reversed this decision, saying that it contradicted the finding of an earlier case: Spaceright Europe Ltd v Baillavoine.  In this case the Court of Appeal had decided that an ETO reason could not be used to dismiss an employee so a company becomes a more attractive proposition to a prospective purchaser.

The EAT, therefore, reversed the Tribunal’s decision and ruled that TUPE liability should pass to the Club’s purchaser.

Why did the Court of Appeal rule differently in this case?

In the Crystal Palace case, the Court of Appeal said the EAT was wrong to use the ruling in Spaceright in this particular case.

That is because, in this specific instance, they felt that the administrators had not made the dismissals simply to make the purchase of the business more attractive to the buyer. Instead, the staff had been dismissed to enable the business to go on trading and have the prospect of being purchased.

Whilst this is only a subtle difference, it makes it clear that administrators cannot just dismiss employees to make a sale more attractive.  On the other hand, if it is the case that without such dismissals there may be no business at all, then this may be justified under the ETO reason exception.

This is good news for administrators who in the past may have felt they have to fold the whole business with the loss of all staff just because they could not restructure it prior to a sale for fear of breaching TUPE.

It may also protect employers who are likely to need to sell their business and feel they need to shed staff to ensure it keeps trading.

If you have any other queries then please contact our Employment & HR Team.

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