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Cite as: [2007] ScotCS CSIH_16, [2007] CSIH 16, [2007] IRLR 338

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FIRST DIVISION, INNER HOUSE, COURT OF SESSION

Lord President

Lord Reed

Lord MacLean

[2007] CSIH 16

XA158/04

OPINION OF THE COURT

delivered by LORD REED

APPEAL TO THE COURT OF SESSION

under section 37 of the Employment Tribunals Act 1996

ROBERT GRAHAM HYND

Appellant;

against

(FIRST) DAVID J. ARMSTRONG and OTHERS; and (2) MESSRS. BISHOPS, SOLICITORS and OTHERS

Respondents:

_______

Act: Fairley; Harper Macleod (Appellant)

Alt: Napier, Q.C.; MacRoberts (Respondents)

27 February 2007

INTRODUCTION

[1] On 1 January 1999 the appellant became an employee of Bishop & Robertson Chalmers, a Glasgow firm of solicitors. On 1 August 1999 that firm merged with an Edinburgh firm, Alex Morison & Co, to form the firm of Morison Bishop, with offices in both Edinburgh and Glasgow. Following the merger, the appellant was employed by Morison Bishop at their Glasgow office. He worked there as a solicitor specialising in corporate law and education law, with the title of "commercial consultant".

[2 ] In January 2002 three of the partners in the firm ("the pension partners") intimated that they were resigning with effect from 31 July 2002. Later in 2002, most of the partners based at the firm's Edinburgh office ("the Edinburgh group") intimated that they were dissolving the partnership with effect from 31 July 2002. It was their intention to form a new Edinburgh-based firm, to be known as Morisons, with effect from 1 August 2002. The remaining partners ("the Glasgow group") then explored a number of possibilities. By early June 2002, they had decided to form a new Glasgow-based firm, to be known as Bishops, also with effect from 1 August 2002.

[3 ] During June and July 2002 the Glasgow group undertook preparations for the formation of Bishops. One of the matters which they had to consider was the range of services to be offered by Bishops and the staff which it would require to employ. The Glasgow group included two of the partners in Morison Bishop's corporate law department. Below partner level, the corporate law department employed two solicitors, namely the appellant and Ms R. The Glasgow group decided that the corporate law department of Bishops should comprise the two partners and Ms R. During June 2002, the appellant was informed that he was likely to be made redundant. He was finally made redundant on 31 July 2002. A letter to him from Morison Bishop, dated 31 July 2002, stated:

"The decision has now been taken to discontinue the post of Commercial Consultant and in the circumstances I must formally advise that your employment will terminate at close of business today by reason of redundancy."

The decision to make the appellant redundant was taken by the Glasgow group on behalf of Morison Bishop, under authority that had been agreed with the other partners in the firm.

[4 ] On 1 August 2002 Morisons and Bishops each commenced practice, and the pension partners joined the firm of Biggart Baillie.

[5 ] In Scotland, a firm is a legal person distinct from the partners of whom it is composed: Partnership Act 1890, section 4(2). It was common ground, in the submissions before us, that the firm of Morison Bishop ceased to exist on 31 July 2002, and that the firm of Bishops came into existence on 1 August 2002.

[6 ] Following his dismissal, the appellant brought proceedings before an employment tribunal against the former partners of Morison Bishop (the first respondents) and Bishops (the second respondents), complaining that he had been unfairly dismissed. Before the tribunal, both parties' submissions proceeded on the basis that there had been a transfer of an undertaking (or part of an undertaking) by Morison Bishop to Bishops, within the meaning of the Transfer of Undertakings (Protection of Employment) Regulations 1981 (SI 1981 No.1794) ("the Regulations"). The submissions to this court proceeded on the same basis.

[7 ] The respondents' primary contention before the tribunal, as narrated in its decision, was "that the appellant's dismissal was a redundancy per se and that the transfer and the circumstances surrounding it were merely the occasion of what was otherwise a redundancy dismissal." What this appears to mean is that the appellant was dismissed because he was surplus to the requirements of Morison Bishop. That contention was rejected by the tribunal:

"While it is true that there was some material that might suggest that a redundancy situation may have materialised at some stage had the de-merger not occurred, we think that that was only possible - and by no means probable ... [W]e are not prepared to hold that the dismissal was a redundancy per se and we reject [the respondents'] submissions on that point."

The tribunal's decision on that matter was not challenged before this court.

[8 ] The remaining contentions before the tribunal concerned the application of regulation 8 of the Regulations. The appellant relied on regulation 8(1):

"(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."

The respondents, on the other hand, submitted that the appellant had been dismissed for an economic, technical or organisational reason falling within regulation 8(2):

"(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 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."

[9 ] In relation to these provisions, the respondents' submissions, as recorded by the tribunal, appear to have focused on the intention of the Glasgow group of partners in Morison Bishop, prior to the transfer, that Bishops should concentrate on litigation and property law, with less emphasis on corporate law.

[10 ] The primary submission for the appellant, on the other hand, as recorded by the tribunal, was to the effect that the dismissal was in fact by reason of the transfer, and regulation 8(1) therefore applied. In those circumstances, regulation 8(2) could not apply. Reliance was placed in that connection on the decision of the Employment Appeal Tribunal in Kerry Foods Ltd v Creber [2000] ICR 556. That argument was rejected by the tribunal, and was not pursued before this court. The tribunal proceeded on the basis that paragraphs (1) and (2) of regulation 8 were not mutually exclusive, but that paragraph (2) operated to displace a preliminary conclusion that paragraph (1) was applicable (cf Warner v Adnet Ltd [1998] ICR 1056). Secondly, it was submitted that for there to be an "economic, technical or organisational reason" falling within regulation 8(2), that reason would have to have been held by Morison Bishop, rather than by the new firm, since it was Morison Bishop which dismissed the appellant. Morison Bishop could not have had such a reason, since they were ceasing to exist. If in reality what happened was that the Glasgow group of partners in Morison Bishop decided to dismiss the appellant on the basis of their intentions as to the extent to which the Morison Bishop workforce would be taken on by Bishops, that was not a decision as to the future conduct of the business of Morison Bishop.

[11] The tribunal held that regulation 8(2) was applicable. They referred in that connection to the decision of the Court of Appeal in Whitehouse v Charles A. Blatchford & Sons Ltd [2000] ICR 542, which concerned a situation where an employee had been made redundant by the transferee following the transfer of an undertaking, on the basis that he was surplus to the future requirements of their business. The tribunal stated:

"In Whitehouse the Court of Appeal emphasised that the words 'economic, technical and organisational reason ... entailing changes in the workforce' clearly meant that the reason must be connected with the future conduct of the business (see also Wheeler [Wheeler v Patel [1987] ICR 631]). In Whitehouse the dismissal was related to carrying on the service which the respondents had been successful in obtaining the contract for. While it is true that in that case the redundancy selection exercise was carried out after the transfer, we do not think that matters, given the wording of reg 8(2). Morison Bishop's (the transferee) reason for the dismissal was an ETO one [i.e. an economic, technical or organisational reason] entailing it changes in prospective firm of Bishops (the transferee) in connection with the future conduct of the business, i.e. the part of the undertaking which was the subject of the relevant transfer to them. That appears to us to fall plainly within Reg 8(2) ...

Finally for the sake of completeness we hold that the reason was a composite reason of economic (predominantly) and organisational factors entailing changes in the workforce of the transferee after the relevant transfer. The applicant was not required for the future conduct of the transferee's business after the transfer.

[The solicitor for the appellant] also submitted that what was important to look at here was the transferor's reason rather than the transferee's and the transferee's reason could not matter as they were not in existence. While that might be true from a technical point of view (i.e. that the partnership of Bishops did not come into existence until after the transfer) we are of the opinion that that point in itself does not affect the operation of Reg 8.

The 'Glasgow group' were intending to form themselves into a particular type of legal person (a partnership). What happened was that the 'Glasgow group' (as prospective partners in the firm of Bishops) instructed themselves wearing their hats as partners in the firm of Morison Bishop (but with the authority of the rest of the partners in Morison Bishop) to dismiss the applicant because, looking to the future conduct of the entity which was to be transferred to them under Regulation 3, they did not have a requirement for the applicant."

[12 ] This passage contains a number of mistakes. In the first paragraph quoted, Morison Bishop was the transferor, not the transferee. Later in the same paragraph, the words "entailing it changes in prospective firm" should presumably read "entailing changes in the prospective firm". In the second paragraph quoted, the phrase "entailing changes in the workforce of the transferee after the relevant transfer" is not entirely apt: it was the workforce of the transferor which changed, not that of the transferee (indeed, the transferee did not exist, and therefore did not have a workforce, when the appellant was dismissed); and the transferor's workforce changed before the transfer, not after it. The tribunal's reasoning is however clear: the appellant was dismissed by Morison Bishop in anticipation of the transfer of part of their undertaking to Bishops, because the prospective partners in Bishops had decided, for economic and organisational reasons, that the appellant would not be required for the future conduct of the business by Bishops following the transfer.

[13 ] On the basis that regulation 8(2) was applicable, the tribunal found that the selection of the appellant for redundancy was lawful, and that the appellant had not therefore been unfairly dismissed. An appeal to the Employment Appeal Tribunal, on grounds which have not been pursued before this court, was refused.

THE PARTIES' SUBMISSIONS

[14 ] Before this court, counsel for the appellant submitted that, in order for regulation 8(2) to apply, the reason (or principal reason) for dismissing an employee must be "an economic, technical or organisational reason entailing changes in the workforce of either the transferor or the transferee before or after a relevant transfer". Since the appellant had been dismissed by the transferor prior to the transfer, the relevant reason in the present case must be that of the transferor. It was clear from the authorities that a reason falling within regulation 8(2) must relate to the future conduct of the business. On the facts found by the tribunal, the transferor's reason for dismissing the appellant did not relate to the future conduct of its business, and was not a reason which entailed changes in its workforce: the appellant was not dismissed because he was surplus to the future requirements of Morison Bishop. Nor, for that matter, was the transferor's reason for dismissing the appellant a reason which entailed changes in the workforce of the transferee: the transferee had no workforce at the time of the appellant's dismissal. An economic, technical or organisational reason for which the transferee might have dismissed the appellant after the transfer could not be relied on by the transferor prior to the transfer, where the transferee did not exist at the time of the dismissal. Where a dismissal by the transferor was said to have been effected for a reason entailing changes in the workforce of the transferee, the transferee had to be in existence at the time when the dismissal was effected. Reference was made to Gorictree Ltd v Jenkinson [1985] ICR 51, Wheeler v Patel, Gateway Hotels Ltd v Stewart [1988] IRLR 287, Ibex Trading Co Ltd v Walton [1994] ICR 907, BSG Property Services v Tuck [1996] IRLR 134, Case C-319/94 Jules Dethier Equipement SA v Jules Dassy and Sovam SPRL [1998] ECR I-1061, Wilson v St Helens Borough Council [1999] 2 AC 52, Whitehouse v Charles A Blatchford & Sons and Thompson v SCS Consulting Ltd [2001] IRLR 801.

[15] Alternatively, counsel submitted, a dismissal by a transferor for a reason based upon the anticipated conduct of the business after the transfer by the transferee could not fall within regulation 8(2) (even if the transferee existed and had a workforce at the time of the dismissal). Such a dismissal was not the result of the transferor's own thought processes, but was the result of speculation as to the future thought processes of the transferee. In addition, a construction of regulation 8(2) which permitted the transferor to dismiss for reasons relating to the future conduct of the business by the transferee would result in practical disadvantages to employees. In that regard, counsel referred to a passage in Harvey on Industrial Relations and Employment Law (Division D1, paragraph 2262), in which it was observed that, if the transferor could rely upon the transferee's reasons, certain important consequences followed. They included the following:

"(iii) If there is a reg 8(2) dismissal but it is unfair in all the circumstances, it

seems likely that the liability will not transfer to the transferee but will remain with the transferor. This is a powerful reason why in practice a transferor may prefer not to dismiss but to leave the transferee to do so.

(iv) If a fair dismissal can be effected in this way, it has one significant

practical advantage for the transferee. Often if there is a transfer and the transferee is choosing to select persons for redundancy, it will be unfair to select purely from the transferor's workforce. The principle lying behind the Regulations is that the employees should be treated after the transfer as if they had always been employed by the transferee, with full continuity of employment. Accordingly any selection solely from the transferor's workforce may well be unfair, unless there is a proper justification for this, e.g. they comprise a separate geographical unit from which the redundancies have to be made. However, if the dismissals are effected by the transferor prior to the transfer, the selection must then be from the transferor's own workforce, and the transferee avoids having to make any of his existing workers redundant."

Regulation 8(2) should not be interpreted so as to bring about these results, which were inconsistent with the purpose of the European directive on which the Regulations were based (Council Directive No. 77/187/EEC, subsequently replaced by Council Directive 2001/23/EC). In particular, an interpretation of regulation 8(2) which allowed the selection of employees for redundancy, in the context of a transfer, to be made solely from the workforce of the transferor would be inconsistent with the purpose of the Directive. Reference was made to Case 19/83 Wendelboe v LJ Music ApS [1985] ECR 457, Case 105/84 Foreningen af Arbejdsledere i Danmark v A/S Danmols Inventar [1985] ECR 2639, Case 287/86 Landsorganisationen i Danmark for Tjenerforbundet i Danmark v Ny Mølle Kro [1987] ECR 5465, Case C-362/89 D'Urso v Ercole Marelli Elettromeccanica Generale SpA [1991] ECR I-4105, Joined Cases C-132/91, C-138/91 and C-139/91 Katsikas v Konstantinidis [1992] ECR I-6577 and Litster v Forth Dry Dock & Engineering Co. Ltd. 1989 SC (HL) 96.

[16] In reply, counsel for the respondents submitted that the first argument advanced on behalf of the appellant, that a dismissal could not be for a reason entailing changes in the workforce of the transferee if the transferee was not then in existence, was based on an unduly narrow interpretation of regulation 8(2). If the dismissal of the appellant had been effected by Bishops after the transfer, it would clearly have been for a reason falling within the scope of regulation 8(2). Why, counsel asked, should it make any difference if the dismissal was effected by Morison Bishop, before Bishops had come into existence, but for the same reason, namely that the appellant was surplus to the requirements of the business to be carried on by Bishops? There was no prejudice to the appellant: on the tribunal's approach, he was entitled to a redundancy payment in consequence of his dismissal before the transfer, just as he would have been entitled to such a payment if he had been dismissed after the transfer. Indeed, even if the appellant's contentions were accepted, he had not suffered any loss in consequence of unfair dismissal by Morison Bishop, since he would otherwise have been dismissed by Bishops after the transfer. In relation to the second argument advanced on behalf of the appellant, there was no reason why the transferor should not be permitted to dismiss an employee where there would otherwise be a redundancy situation following the transfer. The Regulations, and the Directive, were not concerned with the identity of the employer effecting the dismissal. Any problem arising from collusion between the transferor and the transferee could be dealt with by the tribunal. The purpose of the Regulations, and of the Directive, was to safeguard existing rights, not to create new ones. In particular, the Directive was intended to protect employees against dismissal solely on the ground of a transfer. The dismissal of the appellant was not solely because of the transfer, but because of an impending redundancy. Reference was made to the authorities mentioned above and, in addition, to Berriman v Delabole Slate Ltd [1985] ICR 546, Addison v Denholm Ship Management (UK) Ltd [1997] IRLR 389 and Warner v Adnet Ltd.

[17 ] It was common ground between counsel that it was unnecessary for the court to refer any question as to the interpretation of the Directive to the European Court of Justice for a preliminary ruling.

DISCUSSION

1. Introduction

[18 ] It was not in dispute before the tribunal, or before this court, that the appellant had been dismissed by Morison Bishop prior to the transfer of the relevant part of its undertaking to Bishops. It was equally not in dispute (subject to the respondents' argument that this was a straightforward redundancy, which was rejected by the tribunal and was not renewed before this court) that the appellant's dismissal fell within regulation 8(1), unless that provision was disapplied by regulation 8(2). The issue is therefore whether the appellant was dismissed for a reason falling within regulation 8(2). If he was not, then by virtue of regulation 8(1) his dismissal must be held to be unfair. If the case does come within regulation 8(2), on the other hand, then paragraph (1) does not apply; and, in that event, the tribunal's finding that the circumstances surrounding the dismissal did not render it unfair, for the purposes of section 57(3) of the 1978 Act, is not challenged. The crucial question which arises is therefore whether the tribunal correctly directed itself as to the scope of regulation 8(2), in particular in proceeding on the basis that a dismissal by the transferor of an undertaking prior to the transfer, for reasons relating solely to the future conduct of the business by the transferee after the transfer, could fall within regulation 8(2) in any case, or at least in a case where the transferee did not exist at the time of the dismissal.

[19 ] We note that the Regulations have been replaced by the Transfer of Undertakings (Protection of Employment) Regulations 2006 (SI 2006 No. 246). It is however the former regulations which are relevant to the present case, and we were not addressed on the 2006 Regulations.

2. Directive 2001/23/EC

[20 ] The Regulations were made under the European Communities Act 1972 in order to implement Council Directive No.77/187/EEC on the approximation of the laws of the Member States relating to the safeguarding of employees' rights in the event of transfers of undertakings, businesses or parts of businesses. It is accordingly to the Directive that one must turn in order to understand how the Regulations are to be interpreted so as to achieve their objective. As Lord Slynn of Hadley said in Wilson v St Helens Borough Council at page 69:

"It is common ground that, both under English law and under Community law, the national court should construe a regulation adopted to give effect to a Directive as intended to carry out the obligations of the Directive and as not being inconsistent with it if it is reasonably capable of bearing such a meaning: see Garland v British Rail Engineering Ltd [1983] 2 AC 751 and Litster v Forth Dry Dock & Engineering Co Ltd [1990] 1 AC 546. In von Colson v Land Nordrhein-Westfalen (Case 14/83) [1984] ECR 1981, 1909, para. 26 the European Court of Justice said that, pursuant to member states' obligations under article 5 of the EEC Treaty (Cmnd.5197-II):

'national courts are required to interpret their national law in the light of the wording and the purpose of the Directive in order to achieve the result referred to in the third paragraph of article 189.'"

[21] Directive 77/187 was amended (in respects which are not material to the present case) by Council Directive 98/50/EC, and both directives were subsequently repealed and replaced by a codifying measure, Council Directive 2001/23/EC on the approximation of the laws of the Member States relating to the safeguarding of employees' rights in the event of transfers of undertakings, businesses or parts of undertakings or businesses. As the preamble to Directive 2001/23 makes clear, and as a comparison of the texts of the directives confirms, Directive 2001/23 was not intended to effect an alteration in the law, but to codify the earlier provisions and to clarify the concept of "transfer" in the light of the case law of the Court of Justice. By virtue of article 12 of Directive 2001/23, the obligations of the Member States concerning the time limits for implementation of Directive 77/187 are to be construed as referring to the corresponding provisions of Directive 2001/23. It is accordingly the latter provisions which are now relevant to the construction of the 1981 Regulations. The material provisions of the two directives are in any event in almost identical terms.

[22 ] The central provisions of Directive 2001/23 are articles 3 and 4. So far as material, they provide:

"Article 3

1. The transferor's rights and obligations arising from a contract of employment or from an employment relationship existing on the date of a transfer, shall, by reason of such transfer, be transferred to the transferee.

...

Article 4

1. The transfer of the undertaking, business or part of the undertaking or business shall not in itself constitute grounds for dismissal by the transferor or the transferee. This provision shall not stand in the way of dismissals that may take place for economic, technical or organisational reasons entailing changes in the workforce."

[23 ] These provisions have been considered by the Court of Justice in a number of cases. Several points which are material to the present case were made clear by the Court of Justice in its judgment in Case 19/83 Wendelboe v LJ Music ApS at paragraphs 13 to 16:

"13. It follows from a textual interpretation of [Article 3(1)] in the various language versions that it refers only to the rights and obligations of workers whose contract of employment or employment relationship is in force on the date of the transfer and not to those who have ceased to be employed by the undertaking in question at the time of the transfer ...

15. That interpretation of the scope of Article 3(1) is also in conformity with the scheme and the purposes of the directive, which is intended to ensure, as far as possible, that the employment relationship continues unchanged with the transferee, in particular by obliging the transferee to continue to observe the terms and conditions of any collective agreement (Article 3(2)) and by protecting workers against dismissals motivated solely by the fact of the transfer (Article 4(1)). Those provisions relate only to employees in the service of the undertaking on the date of the transfer, to the exclusion of those who have already left the undertaking on that date.

16. The existence or otherwise of a contract of employment or an employment relationship on the date of the transfer within the meaning of Article 3(1) of the directive must be established on the basis of the rules of national law, subject however to observance of the mandatory provisions of the directive and, more particularly, Article 4(1) thereof, concerning the protection of employees against dismissal by the transferor or the transferee by reason of the transfer."

One implication of that passage is that a person who has been dismissed prior to the date of the transfer cannot claim the benefit of article 3, unless the dismissal was contrary to article 4(1). Where an employee is dismissed in breach of article 4(1), on the other hand, his rights are safeguarded in the manner explained by Lord Slynn of Hadley in Wilson v St Helens Borough Council at page 84:

"Where the transferee does not take on the employees who are dismissed on transfer the dismissal is not a nullity though the contractual rights formerly available against the transferor remain intact against the transferee. For the latter purpose, an employee dismissed prior to the transfer contrary to article 4(1), i.e. on the basis of the transfer, is to be treated as still in the employment of the transferor at the date of transfer."

[24 ] In Case 105/84 Foreningen af Arbejdsledere i Danmark v A/S Danmols Inventar the Court of Justice described the purpose of the Directive, at paragraph 26, as follows:

" ... Directive No. 77/187 is intended to achieve only partial harmonization essentially by extending the protection guaranteed to workers independently by the laws of the individual Member States to cover the case where an undertaking is transferred. Its aim is therefore to ensure, as far as possible, that the contract of employment or the employment relationship continues unchanged with the transferee so that the employees affected by the transfer of the undertaking are not placed in a less favourable position solely as a result of the transfer."

[25 ] In Case 101/87 P Bork International A/S v Foreningen af Arbejdsledere i Danmark [1988] ECR 3057 the Court of Justice said, at paragraphs 17-18:

"17. ... Directive 77/187 may be relied upon solely by workers whose contract of employment or employment relationship is in existence at the time of the transfer. Whether or not such a contract or relationship exists at that time must be assessed on the basis of national law subject, however, to compliance with the mandatory provisions of the directive concerning protection of employees from dismissal as a result of the transfer.

18. Accordingly, the employees of the undertaking whose contract of employment or employment relationship was terminated with effect from a date prior to that of the transfer, contrary to Article 4(1) of the directive, must be regarded as still in the employ of the undertaking on the date of the transfer, with the result, in particular, that the employer's obligations towards them are automatically transferred from the transferor to the transferee in accordance with Article 3(1) of the directive."

[26 ] In Case C-362/89 D'Urso v Ercole Marelli Elettromeccanica General SpA the Court of Justice observed, at paragraph 15, in answer to the argument that the Directive curtailed the freedom to carry on business, that "such a restrictive effect is inherent in the very purpose of the Directive."

[27 ] In Joined Cases C-132/91, C-138/91 and C-139/91 Katsikas v Konstantinidis the Court of Justice reiterated, at paragraph 21, that

"the directive is intended to safeguard the rights of workers in the event of a change of employer by making it possible for them to continue to work for the new employer on the same conditions as those agreed with the transferor. The rules applicable in the event of a transfer of an undertaking or a business are thus intended to safeguard, to the maximum possible extent in the interests of the employees, the existing employment relationships which form part of the economic entity transferred."

[28 ] Finally, in Case C-319/94 Jules Dethier Equipement SA v Jules Dassy and Sovam SPRL the Court of Justice held (at paragraph 32) that, although the Directive did not apply to the transfer of an undertaking in the course of insolvency proceedings, it applied to the transfer of an undertaking which was being wound up by the court and which continued to trade. That decision followed earlier cases, discussed at paragraphs 21-25 of the judgment, in which the Court of Justice had held that the Directive applied to the transfer of an undertaking which was subject to other forms of administrative or judicial procedures (such as judicial leave to suspend the payment of debts) under which it was enabled to continue trading while in financial difficulties. One implication is that the Directive can be applicable to the transfer of an undertaking where the transferor is unable to meet its financial liabilities.

[29 ] It does not appear, from the authorities cited to us, that the Court of Justice has required to consider whether, consistently with article 4(1), the transferor might dismiss employees because the transferee would not require those employees, for economic, technical or organisational reasons, following the transfer. It nevertheless appears to us to be reasonably clear that article 4(1) does not permit dismissal in such circumstances. In that regard the following considerations appear to us to be relevant.

[30 ] First, considering the text of article 4(1), when the first sentence refers to "dismissal by the transferor", it can only be referring to the dismissal, prior to the transfer, of an employee belonging to the workforce of the transferor. The second sentence of article 4(1) is a proviso to the prohibition contained in the first sentence. When it provides that the first sentence "shall not stand in the way of dismissals ... for economic, technical or organisational reasons entailing changes in the workforce", that proviso, in its application to dismissals by the transferor, is therefore naturally construed as referring to the workforce of the transferor, and to reasons held by the transferor. The second sentence, in its application to dismissals by the transferor, would therefore appear to be concerned with dismissals for economic, technical or organisational reasons held by the transferor which entail changes in the workforce of the transferor. So interpreted, the second sentence would not cover dismissals by the transferor for reasons which did not entail changes in the transferor's own workforce but which, failing such dismissals, would entail changes in the workforce of the transferee following the transfer.

[31 ] Secondly, the purpose of the Directive is "to ensure that the rights of employees are safeguarded", as the Court of Justice has repeatedly stated. It is not intended to expand the circumstances in which an employer may dismiss his employees on the ground of redundancy. The second sentence of article 4(1), in particular, cannot be intended to have that effect. As Buxton LJ observed in Whitehouse v Charles A Blatchford Ltd, at page 552:

"Looked at, article 4 says no more than two things. First of all, a transfer cannot in itself justify a dismissal; second, in a situation involving a transfer, it is still open for dismissals to take place that would otherwise be justified according to the law of the country to which it applies. The words 'dismissals ... for economic, technical or organisational reasons entailing changes in the workforce' are, in my judgment, merely a very broad description of the whole range of circumstances that might, in the law of any one of the member states, give rise to a justification for dismissal. And it goes no further than that."

In the present case, Morison Bishop could not lawfully have dismissed the appellant on the ground of redundancy, according to the findings of the tribunal, if they had had regard only to their own requirements as employers. A finding of unfair dismissal could therefore be avoided only on the basis that regulation 8(2) extends the circumstances in which an employer can make his employees redundant: in particular, by entitling an employer to dismiss his employees prior to a transfer of the undertaking, on the ground of redundancy, where the employees are surplus to the requirements of the transferee. To interpret article 4(1) as having that effect would not in our view be consistent with the intention of the Directive, as the Court of Justice has explained it.

[32 ] That conclusion is fortified by two further considerations. First, if article 4(1) is interpreted as permitting the transferor to dismiss employees prior to the transfer because the employees will otherwise be surplus to the transferee's requirements, the consequence is that article 3 will not apply in such circumstances (since there will be no contract of employment in existence on the date of the transfer), and the obligations of the transferor arising from the dismissal will therefore not be transferred to the transferee. In a situation where the transferor is insolvent, there will be every incentive (if article 4(1) is so interpreted) for redundancies to be effected by the transferor in advance of the transfer rather than by the transferee after the transfer, so that liabilities to the employees made redundant can in practice be avoided. That result would be inconsistent with the objective of the Directive, mentioned in the third recital, "to provide for the protection of employees". Secondly, in a situation where the combined workforces of the transferor and the transferee are greater than the transferee will require after the transfer, and where redundancies will therefore be necessary, an interpretation of article 4(1) which permits the transferor to effect redundancies for that reason in anticipation of the transfer will enable the selection of employees for redundancy to be made solely from the transferor's workforce, and will thus relieve the transferee of the need, which would otherwise arise, to consider all the employees of the combined workforces on an equal footing. Such a conclusion would again run counter to the intention of the Directive

"to ensure, as far as possible, that the contract of employment or employment relationship continues unchanged with the transferee, in order to prevent the workers concerned from being placed in a less favourable position solely as a result of the transfer"

(Case 287/86 Landsorganisationen i Danmark for Tjenerforbundet i Danmark v Ny Mølle Kro, paragraph 25).

[33 ] The remaining question is whether the Regulations are capable of being construed in conformity with that interpretation of the Directive.

3. The Regulations

[34 ] Article 3 of the Directive is intended to be implemented by regulation 5 of the Regulations, paragraph (1) of which provides:

"(1) ... a relevant transfer shall not operate so as to terminate the contract of employment of any person employed by the transferor in the undertaking or part transferred but any such contract which would otherwise have been terminated by the transfer shall have effect after the transfer as if originally made between the person so employed and the transferee."

Paragraph (2) of regulation 5 further provides that, on the completion of such a transfer

"(a) all the transferor's rights, powers, duties and liabilities under or in

connection with any such contract, shall be transferred by virtue of this Regulation to the transferee; and

(b) anything done before the transfer is completed by or in relation to the

transferor in respect of that contract or a person employed in that undertaking or part shall be deemed to have been done by or in relation to the transferee."

Paragraph (3) of regulation 5 makes it clear that the reference to a person employed is a reference to a person employed immediately before the transfer.

[35 ] Article 4 of the Directive is intended to be implemented by regulation 8, the relevant paragraphs of which were quoted earlier. In short, paragraph (1) provides that the dismissal of any employee of the transferor or transferee, before or after the transfer, is deemed to be unfair if the transfer, or a reason connected with it, is the reason or a principal reason for his dismissal. Paragraph (2) however disapplies that provision

"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 principal reason for dismissing an employee ...".

In such circumstances, the dismissal is to be regarded as having been for a substantial reason of a kind such as to justify the dismissal for the purposes of the legislation concerned with unfair dismissals.

[36 ] Since the "reason" referred to in regulation 8(2) is "the reason... for dismissing an employee", it must be the reason of the employer who dismissed the employee. Where the employee is dismissed prior to the transfer, the reason must therefore be that of the transferor. Where the employee is dismissed after the transfer, the reason will be that of the transferee. In implementation of article 4(1) of the Directive, regulation 8(2) applies only where the relevant reason is "an economic, technical or organisational reason entailing changes in the workforce": those words are derived directly from article 4(1). The succeeding words in regulation 8(2) - "of either the transferor or the transferee before or after a relevant transfer" - do not appear in the Directive. It is their effect which is critical in the present case. On one interpretation, the phrase simply makes explicit what would otherwise be implicit: that the workforce in question may be that of either the transferor before the transfer (where the dismissal is effected by the transferor), or that of the transferee after the transfer (where the dismissal is effected by the transferee). An alternative interpretation is that the workforce in question may be that of either the transferor or the transferee, before or after the transfer, regardless of whether the dismissal is effected by the transferor or by the transferee.

[37 ] Although this question does not appear to have been directly addressed in earlier cases, there are a number of decisions which are of some assistance. The first of these is Wheeler v Patel, which was concerned with the interpretation of the adjective "economic" in regulation 8(2). Delivering the judgment of the Employment Appeal Tribunal, Scott J said (at page 640):

"The references to 'technical' and to 'organisational' reasons seem to us to be references to reasons which relate to the conduct of the business. In our view, the adjective, 'economic', must be construed eiusdem generis with the adjectives 'technical' and 'organisational'. The 'economic' reasons apt to bring the case within paragraph (2) must, in our view, be reasons which relate to the conduct of the business. If the economic reason were no more than a desire to obtain an enhanced price, or no more than a desire to achieve a sale, it would not be a reason which related to the conduct of the business. It would not in our judgment, be an 'economic' reason for the purposes of paragraph (2). We think that an eiusdem generis approach to construction justifies giving a limited meaning to the adjective 'economic' in paragraph (2). We think the need to leave a sensible scope for paragraph (1) similarly requires a limited meaning to be given to the adjective 'economic' in paragraph (2)."

On that basis, the Tribunal held (at page 640) that where the transferor's reason for dismissing the employee was his wish to comply with a requirement of the intended purchaser of the business, that was not an economic reason within the meaning of regulation 8(2):

"It did not relate to the conduct of the business; it related simply to the desire of [the transferor] to sell."

[38 ] This decision suggests that, where the dismissal is effected by the transferor, the question under regulation 8(2) is whether the transferor's reason for dismissal related to the conduct of the business. Where the transferor has no economic interest or involvement in the conduct of the business subsequent to the transfer, one might infer that a reason which relates solely to the conduct of the business after that date cannot be an economic, technical or organisational reason for dismissal by the transferor. The decision also suggests that a dismissal by the transferor in order to meet the requirements of the transferee will not be a dismissal for an economic, technical or organisational reason (even if the transferee's requirements are based on reasons of that nature).

[39 ] It is also material to note the decision of the House of Lords in Litster v Forth Dry Dock & Engineering Co Ltd. The case concerned the sale of an undertaking by receivers. The transferee did not want to take on the employees, and they were dismissed by the transferor shortly before the transfer. The transferee's reason for not wanting the transferor's workforce was not argued to be a reason falling within regulation 8(2); and the question at issue in the present case therefore did not require to be considered. Certain of the observations made by their Lordships, concerning the dangers of permitting dismissals to be effected by the transferor at the behest of the transferee, are nevertheless relevant also in the present context.

[40 ] Lord Keith of Kinkel, for example, noted at page 101 the consequences if the transferee could arrange with the transferor for the latter to dismiss its employees a short time before the transfer became operative, in order to avoid the alternative of dismissing the employees itself:

"In the event that the transferor is insolvent, a situation commonly forming the occasion for the transfer of an undertaking, the employee would be left with worthless claims for unfair dismissal against the transferor. In any event, whether or not the transferor is insolvent, the employees would be deprived of the remedy of reinstatement or re-engagement. The transferee would be under no liability towards the employees and a coach and four would have been driven through the provisions of reg 5(1)."

This point was reiterated by Lord Oliver of Aylmerton, at page 108:

"It will be seen that, as is to be expected, the scope and purpose of both the Directive and the Regulations are the same, that is, to ensure that on any transfer of an undertaking or part of an undertaking, the employment of the existing workers in the undertaking is preserved or, if their employment terminates solely by reason of the transfer, that their rights arising out of that determination are effectively safeguarded. It may, I think, be assumed that those who drafted both the Directive and the Regulations were sufficiently acquainted with the realities of life to appreciate that a frequent - indeed, possibly, the most frequent - occasion upon which a business is transferred is when the original employer is insolvent, so that an employee whose employment is terminated on the transfer will have no effective remedy for unfair dismissal unless it is capable of being exerted against the transferee."

His Lordship returned to the point at page 120:

"The remedies provided by the 1978 Act in the case of an insolvent transferor are largely illusory unless they can be exerted against the transferee as the Directive contemplates ... ".

Lord Templeman, with whose speech Lord Keith of Kinkel, Lord Brandon of Oakbrook and Lord Jauncey of Tullichettle expressed agreement, noted one of the consequences of article 4(1) of the Directive, and of regulation 8(1), at page 102:

"The result of art 4(1) is that the new owner intending to dismiss the workers cannot achieve his purpose by asking the old owner to dismiss the workers immediately prior to the transfer taking place ... The result of reg 8(1) is the same as art 4(1), namely, that if the new owner wishes to dismiss the workers he cannot achieve his purpose by procuring the old owner to dismiss the workers, prior to the transfer taking place ... "

[41 ] It is relevant to note that Lord Oliver of Aylmerton, with whose speech Lord Keith of Kinkel, Lord Brandon of Oakbrook and Lord Jauncey of Tullichettle expressed agreement, distinguished (at page 118) the earlier case of Secretary of State for Employment v Spence [1987] Q.B. 179 by drawing attention to the findings in the latter case

"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 reg 8(1) did not render the dismissals unfair."

The material factor in concluding that regulation 8(1) was inapplicable in the circumstances of Spence appears therefore to have been that the transferor had dismissed the employees for an economic reason relating to the future conduct of its own business prior to the transfer, entailing a reduction in its workforce.

[42 ] Warner v Adnet Ltd provides another illustration of a situation of the latter kind. The employee in question was dismissed by reason of redundancy before agreement had been reached on a transfer. Redundancies of non-essential staff, such as the employee in question, were required in any event, quite apart from the transfer of the undertaking. In these circumstances, an economic reason for dismissal was found to be established, and regulation 8(2) was therefore held to apply.

[43 ] Finally, we refer to the case of Whitehouse v Charles A Blatchford Ltd, in which the Court of Appeal followed the approach which had been adopted in Wheeler v Patel, for a passage in the judgment of Beldam LJ (with which the other members of the court expressed agreement) at page 548:

"It is to be observed that the transferor in that case [Wheeler v Patel] had no intention of continuing the business and consequently his reason for dismissing the employee could not have been related to his future conduct of the business. It seems to me that the words 'economic, technical or organisational reason entailing changes in the workforce', clearly support the conclusion that the reason must be connected with the future conduct of the business as a going concern."

The first sentence we have quoted appears to proceed on the basis that, for regulation 8(2) to apply where an employee is dismissed by the transferor, the transferor's reason for dismissal must relate to the transferor's future conduct of the business: a condition which cannot be met where the transferor has no intention of continuing the business.

[44 ] That approach to the interpretation of regulation 8(2) achieves a result which is consistent with article 4(1) of the Directive. Just as the Directive is intended to ensure that the rights of an employee under domestic law - whatever they may be - are safeguarded in the event of a transfer, without otherwise adding to or subtracting from those rights, so regulation 8(2) can be understood as preserving the ordinary right of an employer to dismiss for "an economic, technical or organisational reason entailing changes in the workforce" without necessarily incurring a liability for unfair dismissal. That right arises, however, where the employer dismisses the employee for a reason of its own, relating to its own future conduct of the business, and entailing a change in its own workforce (as, for example, in Warner v Adnet Ltd and Thompson v SCS Consulting Ltd), and not where the employer dismisses the employee for reasons unrelated to the future conduct of its own business (as, for example, in Wheeler v Patel).

CONCLUSIONS

[45 ] For the foregoing reasons, it appears to us that the tribunal's conclusion that Regulation 8(2) applied to the appellant's dismissal was based upon a mistaken interpretation of that provision. On a correct interpretation of Regulation 8(2), the only conclusion open to the tribunal, on the facts which it found, was that Regulation 8(2) was inapplicable. It follows that the appellant's dismissal fell within Regulation 8(1), and was accordingly unfair. We are not deterred from reaching that conclusion by the consideration that it may be, as counsel for the respondents argued, that if the appellant had not been dismissed by Morison Bishop prior to the transfer, he could fairly have been dismissed by Bishops after the transfer, on the ground of redundancy. An unfair dismissal could readily have been avoided, on that hypothesis, if the dismissal had been effected at a time when the appellant was actually redundant, by the employer to whose requirements the appellant was actually surplus, rather than being effected in advance of that date, by a different employer, in anticipation of those circumstances.

[46 ] In view of our conclusion as to the correct interpretation of Regulation 8(2), it is unnecessary for us to address the argument based upon the fact that the transferee in the present case had not come into existence by the time that the dismissal was effected. If, contrary to our view, Regulation 8(2) permitted a transferor to dismiss employees in anticipation of a redundancy situation which would otherwise exist following the transfer, we would not have regarded the non-existence of the transferee at the time of the dismissal as necessarily preventing the application of that provision.

[47 ] We shall accordingly allow the appeal. Parties were agreed that the case should in that event be remitted to the tribunal for compensation to be assessed.