United Kingdom Employment Appeal Tribunal

BAILII case number: [1995] UKEAT 1150_94_0702

Appeal No. EAT/1150/94

EMPOLYMENT APPEAL TRIBUNAL

58 VICTORIA EMBANKMENT, LONDON EC4Y 0DS

At the Tribunal

On 7 February 1995

Before

THE HONOURABLE MR JUSTICE MUMMERY (P)

MS R CHAPMAN

MRS TERESA MARSLAND

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MR JOHN OTTON          APPELLANT

SECRETARY OF STATE FOR EMPLOYMENT          RESPONDENTS

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Transcript of Proceedings

JUDGMENT

PRELIMINARY HEARING

Revised


 


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APPEARANCES

For the Appellant MR N GIFFIN

(of Counsel)

Employment Law

Bar Association


 


MR JUSTICE MUMMERY (PRESIDENT): This is the preliminary hearing of an appeal by Mr John Otton against the decision of the Chairman of the Industrial Tribunal held at Bury St Edmunds on 21 September 1994.

The Chairman rejected Mr Otton's claim for payment by the Secretary of State of entitlement in accordance with s.124 of the Employment Protection (Consolidation) Act 1978. The full reasons for that decision were sent to the parties on 12 October 1994. Mr Otton was disappointed with the result and appealed by a notice of appeal served on the Appeal Tribunal on 21 November.

The purpose of the preliminary hearing is to decide whether the appeal raises an arguable point of law. On that question we have had the benefit of helpful submissions, by Mr Giffin, on behalf of Mr Otton. We have also heard additional submissions made by Mr Otton and his wife.

We say at the outset that, like the Chairman of the Industrial Tribunal, we are sympathetic to the predicament in which Mr Otton and his wife find themselves. Like many others, they have been affected by the recession. A business that they were carrying on failed. That has given rise to Mr Otton's claim against the Secretary of State for payment of a redundancy payment, which the company, Anglia Carpets Limited, is unable to pay because it is in insolvent liquidation.

The matter came before the Chairman of the Tribunal in this way. Mr Otton presented an originating application on 21 July 1994, claiming a redundancy payment in the form of a debt owed to him by the insolvent company. He claimed that Anglia Carpets Limited (in liquidation) was his employer.

The claim was contested by the Secretary of State in a letter of 10 August. Although the Secretary of State admitted that Anglia Carpets Limited was insolvent, within the meaning of s.106 and s.127 of the 1978 Act, he did not admit that Mr Otton was an employee of the Company within the meaning of s.153(1).

The issue before the Tribunal was, therefore, whether Mr Otton was an employee of Anglia Carpets Limited. If he was not an employee, he was not entitled to payment from the Secretary of State.

Before examining the reasons for the decision, we deal with one preliminary procedural a point taken by Mr Giffin. That arises from the fact that the decision was given by the Chairman alone after a hearing before him at which Mr Otton represented himself and the Secretary of State was not present. Mr Giffin has pointed out, correctly, that in box 11 of the IT1, the question is asked:

"Do you want your case heard by the chairman alone?"

This is preceded by an explanation that:

"Certain types of complaint may be heard by the Chairman alone, if he agrees. Any complaint may be heard by him alone if you and the respondent agree"

There are then two boxes, "Yes" and "No". Mr Otton ticked the "No" box. It says at the side of boxes:

"You can change your mind later

The Tribunal will take your preference into account but will not be bound by it"

Mr Giffin points out that there was no agreement between Mr Otton and the Secretary of State that the case should be heard by the Chairman alone. He accepts that this was a case of a kind which could be heard by the Chairman alone. That is clear from the provisions of s.128(2B), (2C)(b) and (2F) of the 1978 Act. Mr Giffin's point is that the Chairman did not properly exercise his discretion in this matter; first, Mr Otton had made it clear by ticking the box that he did not agree to the case being heard by the Chairman alone and, secondly, he proceeded to hear it alone without allowing a prior opportunity to Mr Otton at the outset of the hearing to state his objection.

In our view, this is correctly described by Mr Giffin as a technical point. If it is a valid technical point, it is a good point because Mr Otton would have had his case decided by somebody who, in the circumstances, was not properly empowered to decide it. In our view, however, any point that Mr Otton may have had in objecting to a decision by the Chairman alone, is not maintainable now, for this reason: it appears from the decision, which goes into considerable detail, that Mr Otton presented evidence and argument on the merits to the Chairman. In the circumstances, he waived any right that he may have had to object to the Chairman alone deciding the matter.

If an objection is intended to be made to the composition of a Tribunal, whether it is to a case being heard by the Chairman alone or whether it is an objection to one or more Members of a full Tribunal, the objection should be taken at the outset of the hearing and dealt with then. A decision can then be made as to whether to uphold the objection or to overrule it. It is not permissible is to participate in a hearing on the merits by giving evidence and advancing arguments and then later object to the composition of the Tribunal.

We, therefore, find that there is no arguable point of law in relation to the fact that the Chairman heard and decided this case on his own.

A more substantial point arises from the alleged error of law in the decision that Mr Otton was not an employee of the Company. The Chairman set out in the decision a correct statement of the issue in paragraph 4.

"this case has boiled down to whether or not Mr Otton was or was not an employee at the time when the company in this matter, namely Anglia Carpets Limited, was placed in voluntary receivership which was on or about the 25 May 1994 following a resolution passed by the Directors to that effect on or about 21 March 1994 and by which the applicant was also declared to be redundant."

The Chairman set out the history of the case. Mr Otton had originally joined a different company owned by a Mr and Mrs Whalley. That company was called Elm Park Carpets Limited and traded as Anglia Carpet Warehouse. He joined in 1970. It was a family company. In 1986 Mr and Mrs Whalley wanted to retire. They offered the company to Mr Otton. He could not afford to pay for it all himself. He enlisted the support of Mr Derek Brown, who previously had a career in the Fire Service and had been fully employed by Elm Park Carpets for about two years. Together they raised money to buy out Mr and Mrs Whalley and Mr and Mrs Whalley undertook to ensure that all employees would, if at all possible, be employed until their retirement by themselves. Mr Otton saw this as including himself and Mr Brown.

A new company was formed, called Anglia Carpets Limited. As appears from a partnership agreement signed by them and dated 18 July 1986, Mr Brown and Mr Otton were each issued with 10 shares of the 100 £1 shares. They were equal shareholders.

They signed an agreement, drafted by a firm of solicitors. The company traded for the next four years or so successfully. But in 1990 the recession began to affect the business. There were job losses at Fords, whose employees provided the major source of custom to business. Matters got worse. Salaries were reduced. By 1994 advice was taken from bankers in relation to the liquidation of the business.

The Chairman made it clear in his statement of the facts, first, that he was sympathetic to Mr Otton's case and, secondly, that both of the directors had acted honourably throughout. He pointed out that they had, during the period of their association with the company, paid PAYE and National Insurance, on the basis that they were treated as employees for that purpose. They did not take money out of the business. Surplus profits in a good year were devoted to repaying the bank loans.

The Chairman turned to the question whether, in all the circumstances, Mr Otton was an employee. He thought that many factors pointed to Mr Otton being an employee for the purposes of the 1978 Act and, therefore, entitled to payment out of the insolvency fund. He then indicated what he considered a problem and deals with it in paragraph 9 of the decision:

"There were only two directors of equal status but there was no machinery as such instituted to deal with resolving any dispute that might arise between them within the articles of association or any other limited company document. Further there were no contracts of employment written out for them and indeed there were no memoranda within the company records ever written confirming their roles within the limited company ..."

The Chairman discussed the machinery in relation to the running of the company. It is clear from paragraph 13 of his decision that he regarded as decisive against Mr Otton's claim to be an employee the fact that he had entered into a partnership agreement with Mr Brown. He said in paragraph 13:

"I am in making this decision bound to have regard to the concept that a partner cannot be an employee. There is abundant case authority for that proposition and I am particularly referring to Harvey's Volume 1 A/48 paragraph 184 and the heading dealing with partners. A simpler machinery would of course have been for the two directors to have appointed some other person to be Chairman with say one share. Thence to have had contracts of employment regularising that position with the company. Thence there would have been no need, it would appear, for a partnership agreement. Mr Otton had told me that he intended that in the event of a dispute Mr or Mrs Whalley or Mr Scoot the accountant would have been invited to act as umpire."

The Chairman pointed out that that did not occur. He added:

"Bearing in mind the nature of the partnership agreement, and what I have said about the law, I am therefore in my view restricted on how I must find on this case and accordingly having determined that .. in law Mr Otton was a partner his application for relief under the insolvency fund pursuant to Section 124 must fail."

In his helpful submissions, Mr Giffin submitted that there was an error of law in treating the partnership agreement as decisive against an employment relationship between Mr Otton and the company. He pointed out that the Chairman regarded all other factors as pointing to employment. He made submissions about the partnership agreement along these lines: that there could not in fact be a partnership agreement properly so-called between them in relation to this business. The business was not that of Mr Otton and Mr Brown. It was the business of the company. In determining whether Mr Otton was an employee it was crucial to look at the relationship between him and the company. The relationship between him and Mr Brown, as governed by the partnership agreement, was not directly relevant to that. He correctly said that in law there are different legal relationships between Mr Otton and the company and between Mr Otton and his fellow shareholder and director, Mr Brown.

Mr Giffin's main point was that it was a misdirection by the Chairman to say that the partnership agreement concluded the question of employment or no employment. While seeing the force of that point, we are unable to accept that there was an arguable error of law in this decision. The position, as we understand it, was this; Mr Otton and Mr Brown were equal shareholders and directors of this company. They owned and they controlled it. They were not controlled by it. All the decisions of the company were theirs. They had no written agreement of employment with the company. They had a written partnership agreement, which makes it clear that it was entered into in order to give both of them security and equality within the company. It is well known that in private companies with equal shareholdings, situations can arise which amount to a deadlock. One party can block all the decisions that the other attempts to achieve in the company. One can refuse to buy the other one out. The only resolution that is possible in such circumstances, if no agreement can be reached, is either a winding-up order by the Court on the just and equitable ground or some other form of order under s.459 of the Companies Act.

The purpose of this agreement was to protect both Mr Otton and Mr Brown against that situation.

In our view, the written agreement, whether it is called a partnership agreement in relation to the shareholding or a shareholding agreement, was meant to fix the legal relationship between them in this company. The partnership agreement goes into many details, including the sharing of profits and losses, to devoting time and attention to the business, to obligations of fidelity. It even goes into such details as what their holiday entitlement will be in the business.

The agreement is in terms intended to be a statement of the legal relationship between Mr Brown, Mr Otton and the company. It is not an employment relationship. In the context of that agreement we are unable to see any circumstances in which a redundancy payment would have been payable by the company to either of them. In those circumstances, the Secretary of State cannot be liable, since he can only be obliged to make a payment which the company itself would have been liable to pay.

The reason why we are unable to envisage any liability to redundancy payment by the company is this: either Mr Otton and Mr Brown would get on with one another, (and that was likely to happen while the business prospered) in which case, neither would control the other nor be dismissed for redundancy. Or, if they did not get on, they would part amicably, in which case their relationship would be dissolved by agreement. There would be no dismissal by the company for redundancy. If they were unable to reach an agreement about their future together, the matter would have to be resolved by a liquidation by Court Order. It would simply be a winding-up and dissolution of the company, a payment of the debts of the company and the handing over to them of any surplus assets that there might be in proportion to their holding as contributories.

In these circumstances, we are of the view that there was no employment relationship between Mr Otton and the company. It is not arguable in law. There is no error of law on the part of the Chairman and, therefore, this appeal must be dismissed.

We add this: that this is one of many cases of this kind coming before the Tribunal. One source of discontent on the part of directors and shareholders in private companies has been that, for fiscal purposes, they have been treated by the Revenue and the Department of Social Security as employees. They then find it difficult to accept that when they apply for a payment by another Government Department, they are told they are not employees. This is not a satisfactory situation from the point of view of those who are running private companies. We are unable to do anything about it. We have to decide appeals strictly in accordance with the law. It may be that, if Mr Otton wishes to pursue this complaint, the course he should follow is to see his MP and persuade him to take up with the Parliamentary Commissioner what appear to be inconsistent positions taken up by two different Government Departments. It is not for us to advise Mr Otton what to do. We are here simply to decide appeals on questions of law in accordance with the law. The law, in our view, is clear. The Industrial Tribunal Chairman came to the right decision.

The appeal is dismissed.