Transfer scheme

Dynamex Friction Ltd and anor v Amicus and ors

Under the 2006 Transfer of Undertakings (Protection of Employment) Regulations (TUPE) and TUPE 1981, dismissals that can be shown to be by reason of or connected to the transfer are automatically unfair. In Dynamex Friction Ltd and anor v Amicus and ors, the Court of Appeal said that if there is no money to pay the employees’ wages, then the reason is an economic one and the dismissals are not connected to a subsequent transfer and therefore not automatically unfair.

Basic facts

Following a reorganization of Friction Dynamics in the late 1990s, almost 100 employees were dismissed. They successfully claimed unfair dismissal in 2002 and were awarded compensation of about £3 million, which the company’s owner, Craig Smith, said he could not pay.

The company went into administration on 7 August 2003 and two administrators – Mr Moran and Mr Rutherford – were appointed. Mr Rutherford dismissed all the employees that day and, as there was no time to advertise the sale of the business, sent a letter to creditors asking if any of them wanted to buy it as a going concern.

On 15 August, the company’s production line was sold to Dynamex Friction Limited (a new company which Mr Smith helped to set up and in which he subsequently acquired a 60 per cent interest). The plant and machinery was sold to Ferotec Realty Limited, which was also controlled by Mr Smith. Ferotec then leased its acquisitions to Dynamex Friction.

The union said that the whole process had been stage-managed by Mr Smith who had duped the administrator into doing what he wanted. It argued that as TUPE applied and the dismissals were transfer-related, the employees had been automatically unfairly dismissed.

Tribunal and EAT decisions

The tribunal said that although there had been a “relevant transfer” under TUPE, the principal reason for the dismissals was an economic one (the company could not pay the employees’ wages) and therefore the dismissals were not by reason of or connected to the transfer. There was no evidence of collusion between Mr Smith and the administrator which, if established, would have led the tribunal to conclude that there had been a connection between the dismissals and the transfer.

The EAT, however, disagreed. It said that the tribunal had failed to fully explain its reasons and had not made a finding of fact about whether Mr Smith had “stage managed” the whole process of administration to avoid TUPE, nor whether he had used the administrator as his “unwitting tool” to avoid his obligations to pay compensation. In the EAT’s view, this allegation was relevant to the issue of whether or not the dismissals were effected by reason of the transfer, or for a reason connected with it.

Court of Appeal decision

The Court of Appeal disagreed with the EAT’s decision. It said that the tribunal, having decided that the administrator was the “employer” at the time of the dismissals, was right to decide that it was Mr Rutherford’s actions and decisions that should come “under the microscope”.

The tribunal found as a fact that Mr Rutherford decided that “he had no option but to dismiss the employees because he had no money with which to pay them. That is an economic reason”. Although it was true that at the time that the administrator decided to dismiss the employees, he had already decided to sell the business, he did not have a buyer at that stage and did not find one until a week later.

Nor was there any suggestion that Mr Rutherford thought that dismissing the employees would improve the prospects of selling the business. Mr Rutherford “was not acting at the behest of or in collusion with either Craig Smith or Dynamex”. The Court of Appeal said that he dismissed the employees in spite of any transfer not with a view to effecting it. That finding of fact destroyed any argument that the transfer had anything to do with the dismissals.

The appeal was dismissed and the decision of the tribunal restored.