United Kingdom Employment Appeal Tribunal

APPEARANCES

 

For the Appellant	MR J BOWERS QC (of Counsel) Messrs Jackson Heath Solicitors 2 Oxford Place Leeds LS1 3AX
For the Respondents	MR C GARSIDE QC (of Counsel) Messrs Eaton Smith Marshall Mills, Solicitors 14 High Street Huddersfield HD1 2HA


 


MR JUSTICE MORISON (PRESIDENT): By a decision dated 14^th April 1998 an Employment Tribunal sitting at Leeds dismissed Mr Connolly's claim of unfair dismissal on the ground that he did not have two years' continuous employment prior to the date of his dismissal.

1. On 11^th September 1992 Mr Connolly brought a claim of unfair dismissal which was first heard before a tribunal in January and April 1993. The Respondents to the claim were Sellars Arenascene Ltd and Jarvis Porter Plc. The principal issue between the parties was whether there had been a transfer of Mr Connolly's contract of employment to the Respondent. The tribunal dismissed Mr Connolly's claim. That decision was appealed and eventually, after a hearing on 17^th January 1997, the Court of Appeal remitted the case back to a differently constituted tribunal for reconsideration. The case came before the second tribunal in December 1997, with a further day of argument on 6^th March 1998. It is from the decision of that tribunal that both Mr Connolly and the Respondent appeal.
2. The factual background to the matter whilst complex, was well documented by the tribunal in its decision. Mr Connolly formed EGP, a sports promotion business in 1978. Arenascene Ltd was a 99% subsidiary of EGP with Mr Connolly owning the other share. On 25^th June 1987 Mr Connolly entered into a service agreement with EGP by which he was to act as Chairman and Managing Director of EGP and its subsidiary Arenascene Ltd. The agreement recorded that the appointment commenced on 1^st March 1978. The tribunal accepted that although they were separate companies, Arenascene Ltd and EGP were operated as one organisation with Mr Connolly as the Managing Director of the whole.
3. On 1^st November 1990 20% of the shareholding in EGP was sold to Expedier plc and an option to sell the remaining 80% was entered into, though it expired without having been exercised. The 20% shareholding held by Expedier plc was sold to IRH plc on 28^th November 1991 and on 3^rd April 1992 Mr Connolly and his fellow shareholders sold their holding in EGP, which at that time was still the 99% owner of Arenascene Ltd, to IRH plc. Also on 3^rd April 1992 Mr Connolly entered into a contract of service under which he contracted with IRH plc to be a Director of that company and Managing Director of EGP and Arenascene Ltd. The contract commenced on 3^rd April 1992 continuing to the fixed date of 31^st March 1995 at a fixed annual salary, with a car and holiday expenses. The tribunal considered that Mr Connolly was employed by IRH plc from 31^st March 1992 to be Director and Chief Executive of EGP and Arenascene Ltd.
4. On 15^th May 1992 Smith and Williamson were appointed Receivers of IRH plc. Mr Connolly was dismissed by the Receivers on 19^th May 1992, but the tribunal found that he did not appear to receive the letter of dismissal. Mr Connolly remained Director and Chief Executive of EGP and Arenascene Ltd and carried on his functions with those companies until Grant Thornton were appointed Receivers of those subsidiaries of IRH plc on 21^st May 1992.
5. On 15^th June 1992 the Receivers of EGP wrote to Mr Connolly indicating that the appointment of Joint Administrative Receivers did not alter the agreement of 3^rd April 1992 between himself and IRH plc. Mr Connolly continued to work as before until 22^nd June 1992 when the Receivers of EGP and Arenascene Ltd gave him formal notice that his employment was terminated. The tribunal found that the Receivers treated Mr Connolly as an employee of those companies prior to the termination of his employment.
6. On 20^th June 1992 the business of Arenascene Ltd was sold by the Receivers to Expectshow Ltd which subsequently changed its name to Sellers Arenascene Ltd, the Respondent.
7. As at the first hearing, the principal issue before the tribunal was whether Mr Connolly's contract of employment had transferred to the Respondent. It was argued before the tribunal that Mr Connolly worked for either or both EGP and Arenascene and they were the transferors. The Respondents contended that Mr Connolly was dismissed by IRH on 19^th May 1992 and was not employed by the transferor at the time of the transfer to the Respondent.
8. Having considered the facts the tribunal concluded that Mr Connolly had been employed by IRH plc between 3^rd April 1992 and 22^nd June 1992, the effective date of termination. The tribunal then raised the issue of whether Mr Connolly had been an employee of EGP and/or Arenascene Ltd prior to 3^rd April 1992. It was accepted by both parties before us that the issue of continuous employment was not an issue raised by them before either the first or second tribunal.
9. Having heard further argument on the issue of continuous employment, the tribunal made the following findings:

"(d) It was not, however, until April 1992 that the applicant became an employee of IRH PLC and at that stage, although his agreement dated 3 April 1992 provides in a schedule that his employment is regarded as continuous back to the date of the incorporation of EGP, the Tribunal did not find that the applicant had been an employee of EGP prior to that date…He behaved as an employee but had an interest as shareholder over and above that of employee and stood to gain if the company prospered. The tribunal did not find that the applicant was an employee of EGP or Arenascene Limited prior to April 1992.

(e) In reaching that factual conclusion the Tribunal had regard to the situation where the applicant was an accomplished and expert entrepreneur operating a number of businesses; some on a franchise basis, some as joint ventures under the umbrella of a company operating three divisions and a subsidiary. In respect of EGP he was at pains to retain overall absolute control. The Tribunal therefore conclude as a matter of fact that the applicant was not an employee until he sold his majority holding and entered into a service agreement on 3 April 1992."

10. The Tribunal indicated that it had considered the relevant authorities and although they accepted that the agreement under which Mr Connolly was an employee of EGP from 1987 to 1992 could not be considered a sham, they nevertheless came to the following conclusion:

"…the Tribunal had no hesitation in finding that the employment status of Mr Connolly did not begin until he entered an agreement with IRC PLC on 3 April 1992. Mr Connolly therefore had insufficient service to bring a claim of unfair dismissal and the Tribunal is therefore without jurisdiction in relation to this claim."

11. In the event that the Tribunal was subsequently found to be incorrect on the jurisdictional point, and given the length of time spent hearing the matter, the Tribunal went on to make findings in relation to the issue of whether there had been a transfer of Mr Connolly's contract of employment. The Tribunal made the following findings:

"In this respect the Tribunal had, as is clear from the findings of fact, no difficulty in finding for Mr Connolly that there was a transfer of the part of the undertaking in which Mr Connolly was engaged and that undertaking was transferred by a number of transactions to Sellars Arenascene Ltd (formerly Expectshow Ltd). The Tribunal found that the applicant was retained by the Receivers of EGP and Arenascene as an employee working in the business which they were seeking to sell as a going concern.

…

The reason for the applicant's dismissal by the receivers of EGP was related to the transfer of the business in which he worked which included corporate hospitality, events and Arenascene Ltd.

…

…the business in which the applicant was engaged was transferred to the respondent in a number of transactions between June and September 1992. Had the applicant been in a position to show that he had two years' continuous service the Tribunal would have found that the applicant was transferred by virtue of the transfer to Sellers Arenascene Ltd and his dismissal as a result of that transfer was automatically unfair and unjustified for economic, technical or organisational reasons."

12. There are two appeals before us arising from the findings of the tribunal. Mr Connolly appeals on the basis that the decision that he did not have continuous employment with EGP and/or Arenascene Ltd prior to 3^rd April 1992 was wrong in fact and law and was perverse. The Respondent has cross-appealed on the ground that if Mr Connolly's appeal is granted, the Respondent will argue that the tribunal's findings in relation to the transfer were also perverse.
13. We will attempt to summarise Mr Connolly's arguments presented with his customary skill by Mr Bowers QC. His first point was that the Tribunal found in favour of Mr Connolly on all the issues argued between the parties themselves. The Tribunal took the point on continuity of service of its own motion after the closing argument on all other issues had been completed. It was accepted that that submission, of itself, was insufficient to succeed on an appeal. It is occasionally the case that a tribunal will take a point not previously raised by the parties if they consider it to be relevant and they should not be criticised for so doing.
14. The main point raised by Mr Connolly was that the Tribunal had misdirected itself when considering the issue of a person who is a controlling shareholder but may in addition be an employee of the company. The Tribunal, so it was argued, erroneously relied on Buchan (and Ivey) v Secretary of State for Trade and Industry [1997] IRLR 682 when they should have preferred the approach proposed in Fleming v Secretary of State for Trade and Industry [1997] IRLR 682 which was approved in the Court of Appeal decision of Secretary of State for Trade and Industry v Bottrill [1999] ICR 592.
15. In Buchan the EAT held that a person who, by reason of a controlling interest in the shares of a company, is able to prevent their own dismissal from the company is outside the class of persons intended to be protected by what was then the predecessor to the Employment Rights Act 1996. A distinction was drawn between an individual running his own business through the medium of a limited company and an individual employee of a limited company who is subject to the control of a board of directors of that company. It was, nevertheless, accepted that a director or shareholder of a limited company could also be an employee of the company.
16. In Bottrill the Court of Appeal upheld the Employment Appeal Tribunal's decision, and noted that the Employment Appeal Tribunal had considered the decision in Buchan as unsound. Lord Woolf MR made the following concluding remarks:

"…we have no hesitation in preferring the approach of the appeal tribunal in this case and that of the Inner House in Fleming [1997] I.R.L.R. 682.

…

The first question which the tribunal is likely to wish to consider is whether there is or has been a genuine contract between the company and the shareholder. In this context how and for what reasons the contract came into existence (for example, whether the contract was made at a time when insolvency loomed) and what each party actually did pursuant to the contract are likely to be relevant considerations.

If the tribunal concludes that the contract is not a sham, it is likely to wish to consider next whether the contract, which may well have been labelled a contract of employment, actually gave rise to an employer/employee relationship. In this context, of the various factors usually regarded as relevant…the degree of control exercised by the company over the shareholder employee is always important."

17. It must be remembered that the tribunal in the present case did not have the benefit of Lord Woolf's judgment in Bottrill, and accordingly it is understandable that they did not follow his guidelines.
18. In the present case there were no findings that the company was a mere simulacrum and the tribunal specifically stated that the contract of 25^th June 1987 could not be considered a sham. In finding that there was no contract of employment, however, the tribunal placed reliance on a number of other points: Mr Connolly's controlling shareholding; that he stood to gain if the company prospered; that he was a skilled entrepreneur; and that he operated a number of businesses.
19. We have been persuaded that just because Mr Connolly stood to gain if the company prospered it did not exclude him from being an employee. As Mr Bowers rightly pointed out, such a principle would apply to all persons who were shareholders in the company for which they were employees. Likewise, the fact that he was a skilled entrepreneur is also irrelevant to the question of whether he was an employee.
20. The tribunal accepted that Mr Connolly "behaved as an employee", and there was evidence that he had signed a contract making him Managing Director and Chairman, and that he was paid a salary and was subject to PAYE tax and National Insurance contributions. He also obtained benefits consistent with employment, such as entitlement to holiday, sick pay, a pension and a car. However, the tribunal considered that his position as a shareholder precluded him from being an employee. This decision was supported by their findings that Mr Connolly was a skilled entrepreneur and operated in a number of fields and in a number of capacities. Whilst the possession of a controlling interest is a factor to be considered, it is not decisive of the matter. The Court of Appeal in Bottrill found that it was erroneous to say that a controlling shareholder who had the power to prevent his own dismissal, was outside the class of persons given rights under the Employment Rights Act 1996. We have been persuaded that the tribunal misdirected itself in law by placing too much reliance on Mr Connolly's controlling shareholding and on the decision in Buchan. As we have said, the tribunal did not have the benefit of the guidance from the Court of Appeal. They had to choose between the conflicting approach of the EAT in Bottrill and that taken in Buchan. The tribunal sought to distinguish Bottrill on the issue of control, arguing that that case concerned an individual who was a small element in a larger organisation. It is therefore no criticism of them that they came to the decision that they did. However, in the light of the Court of Appeal guidance, we are driven to the conclusion that Mr Connolly, whilst a shareholder of EGP and Arenascene Ltd, was also an employee. The contract he signed as Managing Director was not a sham, and he was treated and rewarded as if he was an employee. For that reason he must be accorded the protection under the Employment Rights Act 1996.
21. In any event, we accept the argument that the facts show that Mr Connolly was not at all times the majority shareholder in EGP and there was no evidence to support a finding that during the period of June 1990 to June 1992, Mr Connolly was involved in any businesses other than those within the EGP group.
22. On the basis of the findings made, we allow Mr Connolly's appeal and in place of the tribunal's findings that he did not have two years' continuous employment, we find that he was an employee of EGP and Arenascene Ltd with the requisite period of continuous service.
23. Having made those findings we must now address the Respondent's cross-appeal. Mr Garside, for whose arguments we were grateful, submitted that the tribunal had erred in finding that there had been a transfer of Mr Connolly's contract of employment to the Respondent. In summary his objections to the tribunal's findings were as follows: the tribunal implicitly made a finding of collusion between the Respondent and the Receivers of IRH and its subsidiaries without giving the Respondent an opportunity to address that issue; the tribunal was wrong to consider EGP and Arenascene Ltd as anything but separate entities; the Respondent purchased the business and assets of Arenascene which did not employ Mr Connolly Ltd on 2^nd September 1992, but the Respondent did not purchase EGP, and any employment he may have had was with EGP and that employment was terminated on 22^nd June 1992; if there was a transfer, the tribunal failed to identify who the transferor was, and it was only open to the tribunal to find that the transferor was either Arenascene Ltd or Mr Charles Webb (a former employee of EGP), neither of whom had ever employed Mr Connolly.
24. The allegation of collusion arose in relation to the sale by Mr Webb to the Respondent, for whom he then worked, of the assets and corporate events division of EGP, which he had previously purchased from the receivers. The tribunal made the following findings:

"The Tribunal found it implausible that the arrangements with Mr Webb were entirely unrelated to the transaction which took place between the Receivers and Sellers International Ltd and the Tribunal regarded that transaction as part and parcel of the related transaction with Mr Webb. The timescale in respect of the two transactions ran from 20 June 1992 to the beginning of September 1992 therefore in this period Sellers International Ltd acquired Arenascene Ltd and the corporate events division of EGP."

25. It was common ground between the parties that an allegation of collusion would not be relied upon before the second tribunal. The tribunal made a finding that the transactions were interrelated; that is not the same as a finding of fraudulent behaviour, which was not made and was not alleged before the tribunal. Having heard both parties on this issue, and having remarked that there had been "considerable conflict" between the parties, the tribunal was entitled to make findings of fact on this issue which cannot be interfered with on appeal.
26. The other issues raised on behalf of the Respondent also related to findings of fact made by the tribunal. These findings were made after at least three days of evidence, and were set out with commendable detail by the tribunal. They were clear findings based on the evidence before them and we have not been persuaded that they were wrong in law, and accordingly the cross appeal is dismissed.