United Kingdom Employment Appeal Tribunal

APPEARANCES

 

For the Appellant	MR J BROTHERTON Solicitor Instructed by: The AP Partnership Solicitors Borough House Newark Road PETERBOROUGH PE1 5YJ
For the Respondent	MR MARC STEPHEN LIVING (Of Counsel) Instructed by: Messrs Coole & Haddock Solicitors 5 The Steyne WORTHING West Sussex BN11 3DT


 


SUMMARY

Was there a transfer of an undertaking when company A acquired the shares in company B and then ran it so as to facilitate the interrelationship of the two companies to their mutual benefit? The Employment Tribunal held that there was; there was more than a simple share sale. The new controllers had effectively brought the two operations under one umbrella. Accordingly, the employer had changed notwithstanding that there had been no formal transfer of the business. The EAT upheld the appeal on the basis that mere control by the holding company does not amount to a transfer of the business; and that the approach of the Tribunal impermissibly involved lifting the corporate veil in circumstances where the two businesses remained separate as a matter of law, and the relationship of holding and subsidiary company was not a mere sham.


 


THE HONOURABLE MR JUSTICE ELIAS (PRESIDENT)

1. Mr Millam, the claimant before the Employment Tribunal and the Respondent to this appeal, made claims for unfair dismissal, breach of contract, wrongful dismissal, breach of the provisions of the Working Time Regulations and outstanding wages. There is a dispute as to who was the relevant employer at the date of termination of his employment. That was the preliminary question which the Employment Tribunal had to determine. They held that it was McCorquodale Confidential Print Ltd. (McCorquodale). The day following the termination of employment, McCorquodale sold their business to the Appellant. As the Tribunal recognised, the Appellant may as a consequence still have liabilities towards Mr Millam if McCorquodale was the employer at the date of termination, and that is why they have appealed the decision.

Background

2. That dispute arose in the following way. The claimant was employed from 5 December 1994 by Fencourt Printers Limited at premises at Littlehampton in West Sussex. He was a lithograph printer. There was some ambiguity in the contractual documents as to whether his true employer was indeed Fencourt Printers or its holding company, ITT London & Edinburgh, but nothing in the event turns on that.
3. ITT was taken over by Norwich Union in November 1998. Norwich Union then sold Fencourt Printers to McCorquodale on 2 November 1999. McCorquodale is a printing company based in Milton Keynes.
4. It was a share sale agreement. The claimant was told that the identity of his employer was not changing, which of course would be correct for a share sale since the company remains the employer. Confusingly however, he was also told on 16 August 2000 that his employment had been continued "under the TUPE regulations". Furthermore, the employees were told at the time of the sale that it was McCorquodale's intention fully to incorporate the business of Fencourt into its own.
5. After the takeover, the PAYE documents showed that McCorquodale was the company that paid the claimant's wages, and indeed Fencourt had no payroll or wages department of its own. McCorquodale also managed the claimant's contributory pension scheme. There is no evidence as to whether any payment was made by Fencourt for those services.
6. The Tribunal noted that the companies were separately registered. There were also two VAT registrations, one for each company and two sets of accounts. The documentation plainly was premised on the basis that there were two separate businesses being run by two separate companies. The Tribunal noted that there were various combined board meetings of the two companies, although Fencourt also had its own separately quarterly meetings. In effect, McCorquodale were controlling Fencourt's activities.
7. Following the takeover, the sales representative of Fencourt moved to McCorquodale. That company began to handle the sales function for Fencourt. Other staff remained carrying out their functions in West Sussex, however. The evidence before the Tribunal was that at the date of administration- that is the date when Fencourt went into administration- some 50% of its work was being carried on for McCorquodale. In addition, work was transferred from McCorquodale to Fencourt. This was partly to make Fencourt appear a more attractive purchasing opportunity for potential buyers.
8. Both companies went into administration in 2005. There is a separate administration for each.
9. The Appellant to this appeal then acquired McCorquodale on 18 May 2005. This was by way of a transfer of business and not a share sale. In fact the Respondent, Mr Millam, had been dismissed on the 17 May, the day before the transfer. As we have noted, that does not necessarily relieve the Appellants from potential liability for the dismissal.

The parties' submissions

10. The claimant's submission before the Employment Tribunal was that following the takeover by McCorquodale, Fencourt had effectively transferred its business to McCorquodale. The two operations had in practice merged to create one entity.
11. The Respondent (the Appellant here) submitted that this was not so. McCorquodale had simply acquired the shares and become Fencourt's holding company, but legally Fencourt was a separate subsidiary. McCorquodale had not acquired the business of that subsidiary; at all times it remained with Fencourt.
12. The Tribunal recognised that it is well established that the sale of shares does not give rise to a transfer of an undertaking, even although control of an undertaking may thereby change. That seems clear from the definition of the transfer of an undertaking, and in any event, there is also authority to that effect in Brookes v Borough Care Services [1998] IRLR 636. It may be that it is difficult to justify the different treatment of a transfer of business and sale of shares regimes, but that distinction is firmly rooted in the law and the recent amendments to TUPE have not taken the opportunity to bring the two regimes together.
13. Furthermore, the Brookes case shows that even if a share sale is chosen as the means for transferring control specifically in order to avoid the effect of TUPE biting, nonetheless the TUPE regulations are then inapplicable. The party is entitled to try to seek to regulate its affairs so as to prevent certain legal consequences arising that would otherwise arise if it were to arrange them differently. However, the Employment Tribunal, whilst accepting that it was bound by the Brookes decision, also commented that it is not impossible for there to be a share sale and yet for the business of a subsidiary thereafter to be transferred to the parent company.
14. That is obviously correct. There can be transfers between two companies in the same group as the European Court of Justice recognised in Allen v Amalgamated Construction [2000] IRLR 119, a decision referred to by the Tribunal. It is however pertinent to note that the premise behind that decision is that in general the business of the subsidiary and the business of the parent company are distinct. Indeed, in that case the parent company contended that the Acquired Rights Directive would not apply to the transfer between subsidiaries precisely because the two subsidiary companies had the same ownership, management and supervisory staff and because they did not exercise any real autonomy. This argument was rejected by the European Court.
15. The Employment Tribunal set out certain factors which it considered supported the argument of each of the parties. For the claimant, it was emphasised that McCorquodale in practice had power to change the terms and conditions of employment and indeed had sought to do so. In addition, McCorquodale took all the important decisions affecting Fencourt's business, including indeed the decision to put it into administration. It was also able to channel work to and from Fencourt.
16. The factors pointing against the transfer, according to the Tribunal, were that the contractual documentation, although ambiguous, did at various points identify Fencourt as the employer, and there were undoubtedly two separate companies complying separately with the company law regime. In addition, there were separate board meetings, albeit that there were also combined meetings.
17. The Tribunal weighed up these factors and concluded as follows:

"In conclusion, we are not satisfied that the Claimant remained an employee of Fencourt Ltd, discrete from McCorquodale, after McCorquodale's acquisition in 1999. The Share Sale Agreement gave the superficial impression that no TUPE transfer had occurred. The buyer of the shares did far more than a simple shareholder would have done following a simple sale, or in our experience, a parent company of a subsidiary would have done in similar circumstances. In particular, McCorquodale's handling of a significant element of the management of Fencourt set its actions apart from those of a mere shareholder. It made key decisions in relation to Fencourt's workload, it attempted to bring about contractual changes and it ultimately made the decision to put Fencourt into Administration. In all those circumstances, we are satisfied that on 2 November 1999 there was a TUPE transfer of Fencourt Ltd to McCorquodale"

In short, the key factor was that McCorquodale had largely exercised the key management decisions which before the share sale had been exercised by Fencourt itself.

18. Mr Brotherton, representing the Appellant company, submits that the Tribunal fundamentally erred in concluding that there was a TUPE transfer on this limited basis. The share sale was plainly not such a transfer, as the Brookes case makes clear, and thereafter the two separate entities, Fencourt and McCorquodale, continued to operate independently. There was no transfer of assets or staff from one to the other (save for the single sales representative). Although the Tribunal had not in terms stated that it was piercing the corporate veil, that in substance was what it was doing. There was no justification for this. A similar argument was run and rejected by the EAT in the Brookes case.
19. Mr Living, Counsel for the Respondent employee, submits that there was here evidence from which the Tribunal could properly conclude that there had been a transfer of an undertaking. Effectively, there had been such an integration of these two businesses that they were all one. McCorquodale was effectively running these businesses as a single entity, not in its capacity as shareholder of Fencourt. He does not accept that the Tribunal's finding involved piercing the corporate veil at all; the transfer occurred quite independently of the share sale.

Conclusion

20. In our judgment this appeal must succeed. As a matter of law the businesses were located in separate companies and it is common ground that this was not affected by the sale of shares themselves. There was no evidence of any transfer of assets or staff (save for the single sales employee) to the parent company. The crucial evidence relied upon by the Tribunal was that McCorquodale purported to run the two businesses in a closely interlinked way. In our view the effect of the Tribunal's decision is to pierce the corporate veil: in other words, it looked behind the legal form and concluded that the real business was not in the hands of the legal entity in whose name it was ostensibly run, namely Fencourt, but was to be found in the hands of the holding company, McCorquodale, which in practice directed its affairs.
21. However, it is only legitimate to pierce the corporate veil and treat the two businesses as one in very exceptional circumstances, and even then only for certain purposes. The issue arose in the Brookes case, to which we have made reference. In that case some 335 applicants were employed by Borough Care Services, a company limited by guarantee set up by Wigan Metropolitan Borough Council to manage care homes for the elderly. The Council decided to transfer the homes to the voluntary sector. Initially this was going to be by a transfer of the undertaking, but because of potential legal difficulties arising from the operation of TUPE, the proposed transferee, CLS Care Services Ltd, acquired the shares instead. The Employment Tribunal held that there was simply a sale of shares and that TUPE did not apply. The EAT (Mr Justice Kirkwood presiding) agreed. The fact that there was an attempt to evade the operation of TUPE did not affect that conclusion.
22. One of the arguments advanced was that in these circumstances the Court should pierce the corporate veil and find that although in theory the legal entity running the business remained the same, in reality it had changed. The EAT considered a number of authorities including the decision of the Court of Appeal in Adams v Cape Industries plc [1990] 2 WLR 657 and a decision of the EAT in Michael Peters v Farnfield [1995] IRLR 190. The latter case held that it is not legitimate to pierce the corporate veil in employment cases merely because a group of companies is operated as a single economic entity. That may be legitimate for the purposes of economic competition law but not when considering the effect of TUPE and the Acquired Rights Directive.
23. In the Adams case, the Court of Appeal had analysed the circumstances where the corporate veil can be pierced. In essence, it is to use the language of Lord Keith of Kinkel in Woolfson v Strathclyde Regional Council [1978]SLT 159 it is appropriate to pierce the corporate veil only where "special circumstances exist indicating that it is a mere façade concealing the true facts."
24. The discussion of the topic in Gower and Davies' Principles of Modern Company Law (17^th edition, 2003) pp.181-190 is to the same effect. In general it must be shown that the subsidiary company is a sham or a façade, although exceptionally, in the interpretation of particular statutory or contractual provisions, the courts will also take the unusual step of treating parent and subsidiary as a single economic unit. That was not relied upon here, however, and as we have seen it is not in any event appropriate in the employment context.
25. We are satisfied that there is simply no evidence at all to suggest that this arrangement was a sham. Fencourt was not set up in order to avoid liabilities that might otherwise arise, or anything of that nature. Of course, McCorquodale ran Fencourt in a way which integrated it into its current business. It is not unusual for a subsidiary and a holding company to operate so as beneficially to help each other, even if the control of the parent here was more intense than would normally be the case. Moreover, as the Tribunal itself noted, the fact that the pension arrangements and the pay arrangements were under the control of the holding company was of no real significance. That is frequently the case in group companies, but it does not begin to show that a subsidiary does not have a business in its own right.
26. As we have said, we accept that, in principle, there can be a sale of shares which does not have the effect of implementing TUPE and thereafter a transfer of business from the subsidiary up to the holding company, but we would expect in that case to find evidence of assets or employees being transferred to the holding company. There is precious little evidence of that, save in relation to the one sales staff. Plainly, that would not bring about a transfer of the whole of the undertaking. At best, the transfer of a particular department might mean that that function could be seen as a separate economic entity transferring to the holding company together with any employee who is employed in that part of the business. But this claimant was not employed in sales and therefore that would have no effect on him in any event. The feature here said to give rise to the transfer was the close control which left Fencourt with little autonomy. But the transfer of management control does not of itself involve a transfer of the business, and indeed in the Allen case the business of the subsidiaries was considered to be distinct from that of the parent notwithstanding very detailed control by the latter, including the fact that the parent provided the management and supervisory staff.
27. In our judgment the companies were as a matter of law run independently and it is plain that Fencourt retained its own assets and its own employees. The lack of independence, which is typical of a subsidiary, does not demonstrate that the holding company owns the subsidiary's business. As a matter of law, it is the corporate entity that runs the business and absent any sham, the courts are entitled to look no further. Mr Living expressly disavowed that there was any sham here.
28. For these reasons, the appeal succeeds. We find that the company employing Mr Millam at the date of transfer was therefore Fencourt Printers Ltd.