Litster and others v Forth Dry Dock and Engineering Co Ltd and another  1 All ER 1134
LORD TEMPLEMAN: My Lords, by art 3 of EC Council Directive 77/187 dated 14 February 1977 the Council of the European Communities directed that on the transfer of a business from one employer to another, the benefit and burden of a contract of employment between the transferor (the old owner) and a worker in the business should devolve on the transferee (the new owner). The directive thus imposed on the new owner liability for the workers in the business, although the member states were authorised by art 3 to continue the liability of the old owner to the workers in the business 'in addition to the transferee'. The object of the directive was expressed to be-to provide for the protection of employees in the event of a change of employer, in particular, to ensure that their rights are safeguarded.
Article 4(1) of the directive provided:
The transfer of an undertaking, business or part of a business shall not in itself constitute grounds for dismissal by the transferor or the transferee. This provision shall not stand in the way of dismissals that may take place for economic, technical or organisational reasons entailing changes in the workforce.
The result of art 4(1) is that the new owner intending to dismiss the workers cannot achieve his purpose by asking the old owner to dismiss the workers immediately prior to the transfer taking place. The new owner cannot dismiss the workers himself after the transfer has taken place. Any such dismissal, whether by the old owner or the new owner, would be inconsistent with the object of protecting the rights of the workers and is prohibited by art 4(1).
The Transfer of Undertakings (Protection of Employment) Regulations 1981, SI 1981/1794, were approved by a resolution of each House of Parliament in pursuance of para 2(2) of Sch 2 to the European Communities Act 1972 for the express purpose of implementing EC Council Directive 77/187. Regulation 5(1) provides, in conformity with art 3 of the directive:
A relevant transfer shall not operate so as to terminate the contract of employment of any person employed by the transferor in the undertaking or part transferred but any such contract which would otherwise have been terminated by the transfer shall have effect after the transfer as if originally made between the person so employed and the transferee.
Thus on the transfer of a business from one employer to another the benefit and burden of a contract of employment between the old owner and a worker in the business devolves on the new owner.
Regulation 8 provides, in conformity with art 4:
(1) Where either before or after a relevant transfer, any employee of the transferor or transferee is dismissed, that employee shall be treated as unfairly dismissed if the transfer or a reason connected with it is the reason or principal reason for his dismissal.
The result of reg 8(1) is the same as art 4(1), namely that if the new owner wishes to dismiss the workers he cannot achieve his purpose either by procuring the old owner to dismiss the workers prior to the transfer taking place, or by himself dismissing the workers after the date of the transfer.
In the present case, the old owners agreed with the new owners to dismiss the workers. The old owners were the Forth Dry Dock and Engineering Co Ltd (Forth Dry Dock). Forth Dry Dock was the subsidiary and a member of a group of companies headed by a parent company which defaulted in payments under a debenture issued to Lloyd's Bank plc. On 28 September 1983 Lloyd's Bank appointed receivers to all the companies in the group. The business of Forth Dry Dock, namely the business of ship repairers, was carried on under a lease of the Edinburgh dock at Leith, and this business was continued after the appointment of receivers by 25 workers including 12 who are the present appellants. A consultant to the parent company in the group, on financial and personnel matters, a Mr Brooshooft, was minded to purchase the business of Forth Dry Dock from the receivers. He acted in conjunction with a Mr Hughes, the manager of Forth Dry Dock, and a Mr Paterson who had formerly been a manager of another ship-repairing company, Robb Caledon. The workforce of Robb Caledon had been made redundant and were sufficiently chastened by unemployment to be offered lower wages than the wages of the workers of Forth Dry Dock. Mr Brooshooft formed a new company which became Forth Estuary Engineering Ltd (Forth Estuary). Forth Estuary declined to purchase the lease of the Edinburgh dock vested in Forth Dry Dock but took a new lease from the landlords. Forth Estuary declined to purchase the goodwill of Forth Dry Dock and was only prepared to purchase the tangible assets of Forth Dry Dock but of course possession of these assets, plus possession of a lease replacing the lease to Forth Dry Dock, conferred on Forth Estuary the goodwill of Forth Dry Dock. The object of taking a new lease and of declining to take the goodwill expressly, was to make it appear that the directive and the regulations did not apply because the whole of the business of the Forth Dry Dock company had not been transferred or because a third party, the landlords, were involved. These arguments have rightly been rejected at all stages of this litigation. The workers of Forth Dry Dock were given the impression that their employment would be continued by a new owner. On 6 February 1984 the receivers appointed by Lloyds Bank agreed in writing to sell to Forth Estuary 'the business assets' defined as the plant, machinery, equipment, furniture and office equipment detailed in the schedule, 'as the same shall exist at the close of business' on 6 February 1984 in consideration of £33,500 paid by Forth Estuary to the receivers when the agreement was executed in the morning or early afternoon of that day. At 3.30 pm the receivers appointed by Lloyds Bank informed the workforce of Forth Dry Dock in writing that 'no further funds can be made available to pay your wages with effect from the close of business today' and that no payments would be made for accrued holiday pay or damages for failure to give the statutory period of notice. Thereafter Forth Estuary continued the business of Forth Dry Dock, employed the former dockmaster and two other employees of Forth Dry Dock, but replaced the remainder of the workforce with former employees of Robb Caledon at lower wages. Thus Lloyds Bank, acting for the receiver transferred the business at 4.30 pm on 6 February 1984, that being the time of close of business and one hour after the Forth Dry Dock workers had been dismissed....
It is argued that Forth Estuary, which is solvent, is not liable to the workers because they were dismissed one hour before the transfer of the business. Article 3 of the directive and reg 5(1) of the 1981 Regulations were plainly intended to prevent an insolvent old owner from dismissing a workforce at the behest of a solvent new owner so as to deprive the workforce effectively of their rights. Forth Estuary appear to deny that they are liable to the appellants for compensation for unfair dismissal pursuant to reg 8. The Court of Session found in favour of Forth Estuary.
The appellants were dismissed at 3.30 pm on 6 February by Forth Dry Dock and the business was transferred to Forth Estuary at 4.30 pm on the same day. It is argued on behalf of Forth Estuary that despite the directive and the regulations they are not liable to the appellants in respect of their unfair dismissal because reg 5(3) provides:
Any reference in paragraph (1) above to a person employed in an undertaking or part of one transferred by a relevant transfer is a reference to a person so employed immediately before the transfer, including, where the transfer is effected by a series of two or more transactions, a person so employed immediately before any of those transactions.
Thus, it is said, since the workforce of Forth Dry Dock were dismissed at 3.30 pm, they were not employed 'immediately before the transfer' at 4.30 pm and therefore reg 5(1) did not transfer any liability for the workforce from Forth Dry Dock to Forth Estuary. The argument is inconsistent with the directive. In P Bork International A/S (in liq) v Foreningen af Arbejdsledere i Danmark Case 101/87  IRLR 41 at 44 (paras 17-18) the Court of Justice of the European Communities ruled:
"the only workers who may invoke Directive 77/187 are those who have current employment relations or a contract of employment at the date of the transfer. The question whether or not a contract of employment or employment relationship exists at that date must be assessed under national law, subject, however, to the observance of the mandatory rules of the Directive concerning the protection of workers against dismissal by reason of the transfer. It follows that the workers employed by the undertaking whose contract of employment or employment relationship has been terminated with effect on a date before that of the transfer, in breach of Article 4(1) of the Directive, must be considered as still employed by the undertaking on the date of the transfer with the consequence, in particular, that the obligations of an employer towards them are fully transferred from the transferor to the transferee, in accordance with Article 3(1) of the Directive".
In von Colson v Land Nordrhein-Westfalen Case 14/83  ECR 1891 at 1909 (para 26) the European Court, dealing with EC Council Directive 76/207 forbidding discrimination on grounds of sex regarding access to employment, ruled:
"....in applying the national law and in particular the provisions of a national law specifically introduced in order to implement Directive No 76/207, national courts are required to interpret their national law in the light of the wording and the purpose of the directive in order to achieve the result referred to in the third paragraph of Article 189".
Thus the courts of the United Kingdom are under a duty to follow the practice of the European Court by giving a purposive construction to directives and to regulations issued for the purpose of complying with directives. In Pickstone v Freemans plc  2 All ER 803 this House implied words in a regulation designed to give effect to EC Council Directive 75/117 dealing with equal pay for women doing work of equal value. If this House had not been able to make the necessary implication the Equal Pay (Amendment) Regulations 1983, SI 1983/1794, would have failed in their object and the United Kingdom would have been in breach of its treaty obligations to give effect to directives. In the present case, in the light of EC Council Directive 77/187 and in the light of the ruling of the European Court in Bork's case  IRLR 41, it seems to me....that reg 5(3) of the 1981 Regulations was not intended and ought not to be construed so as to limit the operation of reg 5 to persons employed immediately before the transfer in point of time. Regulation 5(3) must be construed on the footing that it applies to a person employed immediately before the transfer or who would have been so employed if he had not been unfairly dismissed before the transfer for a reason connected with the transfer. It would, of course, still be open for a new owner to show that the employee had been dismissed for an 'economic, technical or organisational reason entailing changes in the workforce', but no such reason could be advanced in the present case where there was no complaint against the workers, they were not redundant and there were no relevant reasons entailing changes in the workforce. I would therefore allow the appeal and make the order proposed by my noble and learned friend Lord Oliver.
LORD OLIVER OF AYLMERTON:.....The critical question, it seems to me, is whether, even allowing for the greater latitude in construction permissible in the case of legislation introduced to give effect to this country's Community obligations, it is possible to attribute to reg 8(1), when read in conjunction with reg 5, the same result as that attributed to art 4 in the Bork case  IRLR 41. Purely as a matter of language, it clearly is not. Regulation 8(1) does not follow literally the wording of art 4(1). It provides only that if the reason for the dismissal of the employee is the transfer of the business, he has to be treated 'for the purposes of Part V of the 1978 Act' as unfairly dismissed so as to confer on him the remedies provided by ss 69-79 of the Act (including, where it is considered appropriate, an order for reinstatement or re-engagement). If this provision fell to be construed by reference to the ordinary rules of construction applicable to a purely domestic statute and without reference to treaty obligations, it would, I think, be quite impermissible to regard it as having the same prohibitory effect as that attributed by the European Court to art 4 of the directive. But it has always to be borne in mind that the purpose of the directive and of the regulations was and is to 'safeguard' the rights of employees on a transfer and that there is a mandatory obligation to provide remedies which are effective and not merely symbolic to which the regulations were intended to give effect. The remedies provided by the 1978 Act in the case of an insolvent transferor are largely illusory unless they can be exerted against the transferee as the directive contemplates and I do not find it conceivable that, in framing regulations intending to give effect to the directive, the Secretary of State could have envisaged that its purpose should be capable of being avoided by the transparent device to which resort was had in the instant case. Pickstone v Freemans plc  2 All ER 803 has established that the greater flexibility available to the court in applying a purposive construction to legislation designed to give effect to the United Kingdom's treaty obligations to the Community enables the court, where necessary, to supply by implication words appropriate to comply with those obligations: see particularly the speech of Lord Templeman ( 2 All ER 803 at 813-814). Having regard to the manifest purpose of the regulations, I do not, for my part, feel inhibited from making such an implication in the instant case. The provision in reg 8(1) that a dismissal by reason of transfer is to be treated as an unfair dismissal, is merely a different way of saying that the transfer is not to 'constitute a ground for dismissal' as contemplated by art 4 of the directive and there is no good reason for denying to it the same effect as that attributed to that article. In effect this involves reading reg 5(3) as if there were inserted after the words 'immediately before the transfer' the words 'or would have been so employed if he had not been unfairly dismissed in the circumstances described in reg 8(1)'. For my part, I would make such an implication which is entirely consistent with the general scheme of the regulations and which is necessary if they are effectively to fulfill the purpose for which they were made of giving effect to the provisions of the directive....
In the instant case it is quite clear that the reason for the dismissal of the appellants was the transfer of the business which had just been agreed and was going to take place almost at once. The effect of reg 5, construed as I have suggested that it should be, is that their employment continued with Forth Estuary. I would therefore allow the appeal.