An employment tribunal has recently confirmed that employees who have been unfairly dismissed from an insolvent employer can bring an action against a connected successor company.

The tribunal held that there was a ‘commonality of ownership’ between the original and successor companies and that it was correct as a matter of public policy that employees should be able to sue the newco born from the ashes of the insolvent company.

The case involved former Conservative health secretary Stephen Dorrell. Project Viva was a company (“the Company”) that specialised in publishing health and motoring magazines. It was owned 35% by Mr Dorrell’s wife, 30% by financier Paul Meier and 35% by Kate Rogers. Kate Rogers’ husband Matti was a publisher who helped set the business up. Matti and Kate Rogers (“the Claimants”) claimed that they were forced out by Dorrell after opposing his proposals to take over the Company. Mr Dorrell asserted that their positions had in fact become redundant.

Following their redundancy, the Claimants launched an unfair dismissal claim against the Company. The Company was subsequently placed into administration and a pre-pack sale of the business and assets was effected to Dorson Transform Limited, an investment vehicle wholly owned by Mr Dorrell. The administration stalled the Claimants’ claim against the Company as a result of the statutory moratorium arising under Paragraph 46(3) of Schedule B1 Insolvency Act 1986.

At a hearing in the West Midlands employment tribunal, the Claimants applied to add Pixel West Limited (another company of Mr Dorrell) as respondents to the unfair dismissal claim. They asserted that the ‘sham redundancy exercise” facilitated the administration and pre-pack sale and paved the way for Dorrell to transfer the business and assets from the Company to a new vehicle owned by Mr Dorrell. Mr Dorrell claimed that the Company was placed into administration by its directors because they had concluded that the Company could no longer meet its obligations and that the administration had safeguarded the interests of creditors and saved nine jobs. Having considered the position, the tribunal judge ruled that ‘there was a commonality of ownership and directorship between the companies so this [action] was hardly out of the blue” and allowed the Rogers’ to bring their unfair dismissal claims against Pixel West Limited.

This is an interesting case which underlines that a newco can be made liable for employment liabilities of the old company and that the Transfer of Undertakings (Protection of Employment) Regulations 2006 (SI 2006/246) (“TUPE”) has teeth. The case is a cautionary tale to a purchaser where there are live employment claims against an insolvent company.

The unfair dismissal hearing will take place in May.