Appeal No. UKEAT/0241/08/MAA

EMPLOYMENT APPEAL TRIBUNAL
58 VICTORIA EMBANKMENT, LONDON EC4Y 0DS

	At the Tribunal
	On 18 August 2008

Before
HIS HONOUR JUDGE McMULLEN QC
(SITTING ALONE)

MR J J DA SILVA JUNIOR	APPELLANT

COMPOSITE MOULDINGS & DESIGN LIMITED	RESPONDENT

Transcript of Proceedings

JUDGMENT

	APPEARANCES

For the Appellant	MS S DAVENPORT
(Solicitor)
Messrs Hatch Brenner Solicitors
4 Theatre Street
Norwich  NR2 1QY	
For the Respondent	MR D MALONEY
(Employment Law Consultant)
NorthgateArinso Employer Services
Unit 10 Newhallhey Business Centre
Newhallhey Road
Rawtenstall
Rossendale	

SUMMARY
JURISDICTIONAL POINTS:  Continuity of employment

Company A dismissed the employee and went into creditors’ voluntary liquidation.  Six weeks later, when the employee was absent due to a temporary cessation of work pursuant to the Employment Rights Act 1996 s212(3)(b), and so that time counted towards one year’s continuous employment under s108, Company B hired him.  Both companies were held in majority shareholding by the same person who dismissed and hired the employee.  The Employment Judge erred in holding at a PHR that at the time of the re-hiring Company A did not exist.  Both were associated employers over which the majority shareholder had control pursuant to s231(b), notwithstanding the role of the liquidator in A. 

HIS HONOUR JUDGE MCMULLEN QC
1.	This case is about the statutory construct of continuous employment for the purposes of bringing a claim of unfair dismissal set in the context of an insolvent business.  I will refer to the parties as the Claimant and the Respondent.

Introduction
2.	It is an appeal by the Claimant in those proceedings against a reserved judgment of Employment Judge Crome sitting alone at Norwich registered with reasons on, I think, 17 March 2008.  The Claimant was, as here, represented by Ms Sally Davenport, Solicitor, and the Respondent by its leading light, Mr David Greenwood, who today has instructed Mr Desmond Maloney, employment law consultant.

3.	The Claimant contended that he had sufficient continuous service to mount a claim of unfair dismissal against the Respondent, Composite, and the Respondent contended that his service began some 14 months later, for it began with a period of employment by another company which was in liquidation.

4.	The Employment Judge held that continuity of service was insufficient.  The Claimant appealed.  I sent this case on the sift to a full hearing.

The law
5.	The Employment Rights Act 1996 section 108(1) entitles a person to claim unfair dismissal provided they have continuous employment of one year.  The provisions for counting time are set out in Part XIV, chapter 1.  In short, this divides time which counts from time which does not.  The weeks which count include those during the whole or any part of which the employee is “absent from work on account of a temporary cessation of work”.  See section 212(3)(b).  

6.	The presumption which applies to continuity of employment is as follows: 
 “A person’s employment during any period shall, unless the contrary is shown, be presumed to have been continuous.”
See section 210(5)

7.	That, however, is subject to section 218 which provides, in relevant part:

 “(1) Subject to the provisions of this section, this Chapter relates only to employment by the one employer. 
  (6) If an employee of an employer is taken into the employment of another employer who, at the time when the employee enters the second employer’s employment, is an associated employer of the first employer— 
(a) the employee’s period of employment at that time counts as a period of employment with the second employer, and 
(b) the change of employer does not break the continuity of the period of employment..”

8.	The definition of “associated employers” is provided in section 231, which is as follows:

“For the purposes of this Act any two employers shall be treated as associated if—
(a) one is a company of which the other (directly or indirectly) has control, or 
(b) both are companies of which a third person (directly or indirectly) has control; 
and “associated employer” shall be construed accordingly.”

9.	Regulation 8 of TUPE [2006] makes provision in relation to insolvency.

The facts
10.	The Claimant started working for Andream Limited on 11 November 2005.  Mr Greenwood was the majority shareholder in that business, holding 75 per cent of the shareholding.

11.	On 20 November 2006, a new business was incorporated, which is the Respondent.  The business of Andream was in difficulty and, on 1 December 2006, the Claimant and all of the members of staff were dismissed by Mr Greenwood who told them the company was going into liquidation.  I am told, without objection, that the Claimant was told by his colleagues that he need not worry since this had happened before.  There was evidence before the Employment Judge that the Respondent, Composite, is the third incarnation of Mr Greenwood’s business; the second being Andream, and there was one before.

12.	In respect of all three businesses, the same machinery was used, at the same premises, albeit operating on a smaller scale, and using the same employees (see paragraph 6 of the Reasons).  On that date, I am told, the liquidator was lined up and a meeting was set up for 20 December 2006 when the liquidator was appointed following meetings of the shareholders and then of the creditors.

13.	In early January 2007, Mr Greenwood acquired some of the assets of Andream from the liquidator and began trading as the Respondent on about 10 January 2007.  He contacted the Claimant and other employees and offered work. On 14 January 2007 the Claimant began working for the Respondent.  On 17 August 2007 he was dismissed.

14.	From the papers available to me, at this stage, there appears to be no defence by the Respondent to the Claimant’s claim that he was automatically unfairly dismissed, since no procedure corresponding to the statutory dismissal regime had been conducted.  And there appears, for the purposes of ordinary unfair dismissal on the Claimant’s case, to have been no consultation with him about the reason for his redundancy.  Those, however, are matters which, I have decided, will go to a hearing.

Discussion
15.	I will deal with the arguments and the application of the law at the same time.  The primary contention by the Claimant is that the Employment Judge erred in his construction of the relevant provisions of the Employment Rights Act.  The Employment Judge said this:

“12.  Whilst I have no difficulty with finding, on the facts of the case, that the dismissal on 1 December 2006 was on account of a temporary cessation of work, namely the interruption caused by the liquidation, and whilst I am satisfied that at that date the Respondent in the present case was an associated company of the company Andream Limited within the meaning of section 218(6) having regard to section 231 of the Employment Rights Act 1996 defining ‘associated employees’, I am bound by the wording of 218(6) to enquire whether, at the time when the employee entered into the second employer’s employment, the second employer was an associated employer of the first employer.  This cannot be the case because the first employer had by that time gone into liquidation and existed no more.”

16.	It is said that for the judge to hold that the company existed no more is an error of law.  There has been no argument to gainsay that error, for the company continues to exist.

17.	Section 87 of the Insolvency Act 1986 provides as follows:
“87. Effect on business and status of company
(1) In case of a voluntary winding up, the company shall from the commencement of the winding up cease to carry on its business, except so far as may be required for its beneficial winding up. 
(2) However, the corporate state and corporate powers of the company, notwithstanding anything to the contrary in its articles, continue until the company is dissolved.” 

Thus, at the time, while it is correct to say that the company was in the hands of the liquidator it was not, in fact, liquidated and wound up and, I am told, still exists.  That is an error by the judge.  What actually occurred, as set out by the liquidator in a letter 4 January 2007, was that he was appointed, following meetings with members and creditors held on 20 December 2006 when a sworn statement of affairs was made and the company then entered into creditors’ voluntary liquidation.  That is provided for in section 90 of the Insolvency Act 1986:

“A winding up in the case of which a directors’ statutory declaration under section 89 has been made is a ‘members’ voluntary winding up’; and a winding up in the case of which such a declaration has not been made is a ‘creditors’ voluntary winding up”.

18.	The Claimant contends that, as Andream was in the hands of Mr Greenwood since he was the majority shareholder, and since the Respondent was exclusively his (he appeared to be 100 per cent shareholder) at the relevant time, that is 15 January 2007, he was in control.

19.	There is no dispute that the period from the Claimant’s dismissal to 14 January 2007 was a temporary cessation of work.  That means there was no contract of employment in force but, for the purposes of the statutory construct of continuity, the period from 1 December 2006 until 14 January 2007 will count in computing whether or not the Claimant had one year’s service for the purposes of section 108 and giving him access to unfair dismissal.  The focus, therefore, is what happened on the next day, 15 January 2007.

20.	The sole argument addressed on behalf of the Respondent today is that control of Andream, for the purposes of section 231, was in the hands of the liquidator and not of the majority shareholder.  Reliance is placed upon a judgment of the EAT Tice v Cartwright [1999] ICR 769, where HHJ Smith and members said the following:

“…the word ‘control’ in section 231 of the Employment Rights Act 1996 is dealing with practical rather than theoretical matters.  No doubt the question of voting control is central in the context of company law.  However, we consider that in the employment protection field it is legitimate to give the words a purposive interpretation consistent with the intention of Parliament as described by Popplewell J in Harford v Swiftrim Ltd [1987] ICR. 439.

In reaching this conclusion, we have carefully taken into account the criticisms by Mustill LJ, but we believe that we find comfort from the approach taken to such criticism by the appeal tribunal in Harford based on substantial experience of both the judges and the members of the appeal tribunal there referred to, upon which we cannot improve.  In the special circumstances of this case, where only the same two persons owned both the partnership and the company, we cannot envisage such difficulties arising.

We note further that Zarb v British & Brazilian Produce Co. (Sales) Ltd [1978] ILRL 78 appears to have been specifically approved in the Secretary of State for Employment v Newbold [1981] IRLR 305, in circumstances where there is a question of joint control of more than one person (see particularly paragraphs 13 and 14 of the judgment at page 306).  We also derive support from the reasoning of the appeal tribunal in Poparm Ltd v Weekes [1984] IRLR 388, particularly at paragraph 18 of the judgment, at pp. 390-391.  Accordingly, we consider it appropriate in the circumstances, of this particular case to follow the approach laid down by the appeal tribunal in Zarb and approved in Harford v Swiftrim Ltd [1987[ ICR 439.  We note that in Payne v Secretary of State for Employment [1989] IRLR 352 the Court of Appeal left open the question as to whether there may be unusual circumstances where de facto control might on occasion be the relevant test.

Accordingly, we find that the chairman was right in holding that the partnership had control of the company so that they were associated employers.  In reaching this conclusion, we further adopt the reasoning of the appeal tribunal in the Zarb case with regard to the burden of proof, as dealt with at paragraph 12 of the judgment in the Zarb case, as again approved by the appeal tribunal in Harford.  We hold that by the opening words of paragraph 18 of the chairman’s decision, he made it clear that he was inferring from the existence of the common shareholdings that the partnership controlled the company. In our judgment, in the absence of evidence to the contrary, that was a conclusion of fact he was entitled to reach.

On the facts in this case, it appears to us unanimously that the evidence that the two brothers in partnership in fact controlled the second Respondent company in which they shared a 50 per cent shareholding at the relevant time i.e. at the time when the Applicant entered into the partnership’s employment, was on the face of it cogent in the extreme and there was no evidence presented by the employers to the contrary.  Accordingly, having decided that the correct legal test is that of de facto control, at least in the particular circumstances of this case, we consider that the appeal stands to be dismissed.”

In that case, the issue was whether or not a garage owned by a company (the shareholding of which was in the hands of two brothers as to 50 per cent each) was an associated employer of a partnership owning a second garage by which the Claimant became employed, the partners of which were the two brothers.

21.	The Employment Tribunal held, applying section 231(a), that there was sufficient control and that was upheld by the EAT.  It is apparent from section 231(b) that both must be companies and, therefore, if one is a partnership and the other a company that provision cannot apply.  In Tice the components were a company and a partnership and it was held that the partnership, directly or indirectly, had control of the company where the Claimant employee was first employed and, thus, there was sufficient practical control rather than theoretical.  The EAT, in that case, had not been shown the judgment of Wood J, President and Members, in Macer v Aberfast [1990] IRLR 137, a case based on TUPE [1981] and the provisions relating to change of employer (which we find in the Employment Rights Act now but which first occurred in the Employment Protection (Consolidation) Act 1978).

22.	The EAT, having considered TUPE said this:

“29. In our judgment the legislation clearly shows an intention that transfer of businesses and changes in employer within a group, although at common law terminating a contract by repudiation should not be allowed to prejudice the rights of employees under the 1978 Act.  Those rights are based on continuity of employment. Importance throughout is given to length of service and continuity of service, eg, provisions as to notice (s.49); basic awards (s.73); importance of length of service in connection with selections for redundancy and redundancy payments (s.81).
30. The law of contract being what it is, complete protection and security of employment cannot be given, nor perhaps should it be, but in our judgment the clear intention of the legislature is to encourage and reward long service and to seek to protect the employee from insolvency or death of the employer or from insecurity due to a change of ownership of the business or undertaking, or the change of employer, not least where the employer is associated with a group of companies.  Any attempt to avoid the rights and obligations under the legislation, for instance by an individual forming a company and transferring the business to that company is to be discouraged. 
31. Continuity of service as the basis of jurisdiction is an essential and fundamental notion in the protection of employees’ right and remedies.  The computation works backwards from the date of dismissal. 
32. Thus, in approaching the proper construction to be given to the words of the 1978 Act, a court should lean in favour of that interpretation which best gives effect to the preservation of continuity of service and hence on the preservation of rights of the employee, and to obviate and discourage a tactical manoeuvre which seeks to avoid the clear intention of Parliament.” 

In other words, it was the purpose of Parliament in both of those statutory measures to provide for continuity of employment for employees where there is a change of employer and to avoid the effect of manipulation of the employment relationship, depriving employees of their rights by the setting up by the same owners of a new business, shorn of continuity of service.

23.	I prefer the arguments of the Claimant.  The statute has to be read for what it is.  I accept that, while Andream continued to exist (its shareholders were still in place) Mr Greenwood was the majority shareholder.  True it is that he had driven the move to enter into members’ voluntary winding up by calling in the liquidator and he had bought some of the assets off the liquidator.

24.	The fact that, during the period of the liquidation, the company spoke through the liquidator does not seem to me to take away the issue of control, as set out in section 231.  The third person relevant here is Mr Greenwood; he controlled, through his shareholding in both the companies (if not directly then indirectly) and that is the correct construction.  If a purposive approach is to be taken, as I hold it is, the purpose is found in Macer, which is to preserve employment.  And, I notice, if practical control was the reason for rescuing the Claimant’s case in Tice then I accept Ms Davenport’s argument that one is to look at the principal decisions made.

25.	Andream, through Mr Greenwood, dismissed the Claimant on 1 December 2006.  He did it because the business was heading for trouble; he decided to call in the liquidator.  He made the principal decision in the Claimant’s case since it was adjudged that there was a temporary cessation of work, certainly until 20 December 2006 and, on the finding by the judge, until 14 January 2007.

26.	The next principal decision relevant to the Claimant was offer and acceptance of a contract of employment.  Mr Greenwood resurfaced, now in control of the Respondent.  His hiring again of the employees, including the Claimant, was done as a result of contract and not by operation of law.  He decided to offer the Claimant work and the Claimant decided to accept it.  So that is the mechanism for his reinstatement into the business.

27.	Mr Maloney contends that that approach would be inconsistent with the regime now set up in TUPE [2006], which I have cited, so that someone taking over a business from a liquidator would not inherit continuity of employment of the employees.  The difficulty with that argument was that it had not been raised by the Respondent at the Employment Tribunal.  There is a comprehensive canon of jurisprudence in this court which does not allow new points to be argued on appeal unless there are exceptional reasons; see my judgement in Secretary of State v Rance [2007] IRLR 665.

28.	An argument which would require consideration by the Employment Tribunal is usually one which will not be allowed to be mounted on appeal.  Ms Davenport frankly told me she was not able to deal with any argument on TUPE because she did not know it was to be raised.  I will not allow the point to be argued because it would require new findings by the judge; the judge was not focused upon TUPE and only considered the purchase by Mr Greenwood of certain assets from the liquidator.  Whether there was a relevant transfer by reason of the fact that Mr Greenwood hired the previous workforce using the same machinery at the same premises on a smaller scale is a matter which would have to be determined by the employment judge.  However, I will use the argument about TUPE just as an illustration, as suggested by Mr Maloney.  In my judgment, different circumstances apply under the Employment Rights Act for preserving the statutory construct of continuity to those which apply to preserve contracts of employment and the terms and conditions in it; see regulation 4.  I see no inconsistency in that but, as I say, I have not had argument at all from Ms Davenport to that effect and I place no reliance upon it.

29.	The appeal is allowed.  This case now has to be heard at the Employment Tribunal.  In the light of my very preliminary view of the substance of this case, I remind the parties that ACAS conciliation is now open to them.  Both sides are represented by experienced representatives and they would do well to focus on conciliation.