Appeal No. UKEAT/0855/04 RN

EMPLOYMENT APPEAL TRIBUNAL
58 VICTORIA EMBANKMENT, LONDON EC4Y 0DS

	At the Tribunal
	On 18 April 2005

Before
THE HONOURABLE MR JUSTICE BURTON (PRESIDENT)
MR F MOTTURE
MR P M SMITH

MOUNTAIN SPRING WATER CO LTD	APPELLANT

MS I COLESBY	RESPONDENT

Transcript of Proceedings

JUDGMENT

	APPEARANCES

For the Appellant	MR J BROOMFIELD
(Representative)	
For the Respondent	NEITHER PRESENT NOR REPRESENTED	

SUMMARY

Unfair Dismissal and Contract of Employment

Dispute between shareholders.  ET erred in construing Table A, Article 84 and ought to have concluded that executive director’s employment terminated upon his removal as director. But in any event, ET required (see Cobley [2003] ICR 1050) to go on and consider fairness of the dismissal (and Polkey issues) by reference to substantial other reason, by reason of breakdown of trust and confidence and in the context of the shareholder dispute. Wrongful dismissal award set aside and unfair dismissal award remitted.

THE HONOURABLE MR JUSTICE BURTON (PRESIDENT)

1.	This has been the hearing of an appeal by the Respondent Company, the Mountain Spring Water Company Limited, represented by its director, Mr Broomfield, who has done so, as he did before a differently constituted Tribunal at the preliminary hearing, with good sense and courtesy, against the Decision of the Employment Tribunal (“the Third Decision”) at London Central, after a hearing on 13, 14 and 15 April 2004 in a judgment sent to the parties on 28 July 2004. There had been some previous background to this case, so far as the tribunals are concerned, because there had been in December 2002 a preliminary decision as to when the employment of the Applicant, Ms Colesby, had terminated (“the First Decision”). There was then a subsequent hearing before the Employment Tribunal at London Central which, in a Decision (“the Second Decision”) sent to the parties on 18 March 2003, concluded that Ms Colesby was not an employee of the Respondent Company.  

2.	On an appeal against the second Decision to this Appeal Tribunal, differently constituted, it was concluded that in the light of the earlier Decision (the First Decision), it was not open to the tribunal in the Second Decision to have concluded that the Applicant was not employed by the Respondent, and so the case was sent back to the Tribunal to be reheard, on the basis that she was an employee, and at the April hearing to which we have referred, the Tribunal unanimously found in the Third Decision that the Applicant was unfairly dismissed. It made a basic award of £1,080.00 and a compensatory award of £45,430.60.  It also found that the Respondent had summarily dismissed the Applicant in breach of contract and awarded damages in the sum of £821.31. It further declared that the Applicant’s complaint under s23 of the 1996 Act, that is by way of unauthorised deduction from wages, was well founded, and it awarded the payment of the sum of £42,461.18 by the Respondent to the Applicant. This latter award was somewhat unusual, because it appeared that the facts were that when the Applicant had herself run the company, at a time when Mr Broomfield had been excluded from the management of the Respondent Company, she had decided not to pay herself the salary but to leave it in the company by way of loans, but that decision was nowhere recorded in writing. It was therefore open to her to allege, and successfully so, that those sums were in fact unauthorised deductions, notwithstanding that they had been deducted at a time when she was in charge of the company, and the Respondent’s appeal in this regard was dismissed at the preliminary hearing before this Appeal Tribunal, differently constituted, by a judgment I gave on 24 January 2005.
3.	While dismissing the appeal in respect for the claim for unauthorised deductions, permission to proceed was given with the appeal which is now before us, against the finding of unfair dismissal. The Respondent Company is, as Mr Broomfield has confirmed to us today, in financial difficulties, and, in fact, it has not paid the £42,461.18 that thus remains unchallengeably awarded to the Respondent, nor has it paid the compensation due by return of on an award made at one of the earlier hearings in respect of holiday pay, in the sum of £2,800. Notwithstanding the fact that those sums are unpaid, this appeal is pursued, not least because if this award stands, the indebtedness of the Respondent Company to the Applicant will be doubled.  

4.	The argument before the Employment Tribunal appears to have revolved around Article 84 of Table A of the 1985 Regulations which, by virtue of the Companies Act 1985, is, in the absence of any other provision, incorporated into the Articles of Association of the Respondent Company. Article 84 reads as follows:

“Subject to the provisions of the Act, the directors may appoint one or more of their number to the office of managing director or to any other executive office under the company and may enter into an agreement with any director for his employment by the company or for the provision by him of any services outside the scope of the ordinary duties of a director. Any such appointment, service or arrangement may be made upon such terms as the directors determine and they may remunerate any such director for his services as they think fit.  Any appointment of a director to an executive office shall terminate if he ceases to be a director but without prejudice to any claim to damages for breach of the contract of service between the director and the company.”

5.	Mr Broomfield who did not represent the company below – it was represented by a consultant, Mr Clarke – relied at the preliminary hearing upon the case of Cobley, which was relied upon by Mr Clarke at the Employment Tribunal hearing, namely a judgment of Judge Clark, on behalf of the Employment Appeal Tribunal, delivered on 9 July 2002, the circumstances of which case are not dissimilar from those in this case. In fact, unknown to Mr Clarke and seemingly also unknown to Mr Tsamados, the solicitor who represented the Applicant before the Tribunal and, it would seem to the Tribunal itself, Cobley had been taken to the Court of Appeal, where Judge Clark’s decision was upheld by the Court of Appeal, but in slightly different and more expanded terms, namely Cobley v Forward Technology Industries Plc [2003] IRLR 705, a judgment handed down by the Court of Appeal on 14 May 2003, well before the hearing before this Tribunal; and we have drawn this Court of Appeal judgment to the attention of Mr Broomfield today, and he has adopted it on this as part of his argument. As we have indicated, it does not change the result in Cobley, but as one expects from the words of Mummery LJ who gave the lead judgment in that case, considerable assistance is given in terms of the thought processes required in this problem before us. There is, in our judgment, a flaw which underlies the Employment Tribunal’s decision, without the benefit of full legal argument, namely that it concentrated almost exclusively on the question of the construction of Article 84.  

6.	We shall not set out the detailed facts of this case in the course of this judgment. In general terms, for long periods of time before the eventual termination of the Applicant’s employment in July 2001, Mr Broomfield had been, it would appear clearly, wrongfully excluded from the management and, indeed, the shareholding of the Respondent company; and it needed the assistance of proceedings in the Chancery Division of the High Court to enable Mr Broomfield to be restored to his rightful position as the owner of at least 37.5% of the shares of the Respondent company. A key role was played as from April 2001 by a Mr Weheliye, whose appointment post-dated the successful resolution of the High Court proceedings in Mr Broomfield’s favour; he was appointed not by Mr Broomfield but by the Applicant, who still, at that stage, de facto ran the Respondent Company, and a Mr Jones. Mr Weheliye continued in his position as Company Secretary in the weeks leading up to what turned out to be the crunch in July 2001, and it was to Mr Weheliye as Company Secretary that Mr Broomfield, now exercising his rights as shareholder, served notice that he wished to have the company consider a resolution for the removal of the Applicant from the office of director of the company. Mr Weheliye appears to have formed the view that, in the light of the High Court proceedings, only Mr Broomfield’s shareholding was validly recognisable by the company and, in due course, that resolution was passed, and the Applicant was removed from the office of director.  

7.	The argument before Mr Paul Stewart, the Chairman of the Employment Tribunal, sitting with members was, as we have indicated, directed towards the issue raised by Mr Broomfield, namely that the result of Article 84 was that any employment of the Applicant ended automatically, in the light of the passage of that resolution in the context of Article 84, to which we have referred. It was necessary for the Tribunal to address that question, not least because there was a claim for breach of contract by the Applicant before the Tribunal. However, there was also a claim for unfair dismissal, and it was in the context of the claim for unfair dismissal that the very substantial award was made in favour of the Applicant, to which we have referred. It is plain that Mr Stewart addressed Cobley (although only Judge Clark’s judgment) and he also well understood the defence of the Respondent Company to the unfair dismissal claim which was, at all times, put upon the basis of substantial other reason.  

8.	The conclusion by the Tribunal was that it disagreed with the Respondent’s interpretation of Article 84, and it came to the conclusion that the effect of Article 84 was not as submitted to the Tribunal that the employment of the Applicant automatically came to an end upon her removal as a director. The Tribunal thus concluded not only that there was a breach of contract, as recorded very briefly in paragraph 38 of its judgment, but also that there was unfair dismissal, because the Tribunal found a substantial other reason not to be established, since it was not the case that the Respondent Company was automatically entitled to regard the Applicant’s employment as terminated summarily because of Article 84. The Tribunal, on the face of it, therefore found that because that reason was not established, as it saw it, there was no reason upon which the Respondent was entitled to rely, and, consequently, it did not need to consider the issue of fairness. In paragraph 37 of the judgment, it continued, as follows:

“If, contrary to our finding, the Respondent has shown a reason falling within the category of ‘some other substantial reason of a kind such as to justify the dismissal of an employee holding the position which the Applicant held’ we consider that the Respondent did not act fairly having regard to equity and the substantial merits of the case. We are not persuaded that, had Mr Weheliye both informed himself properly as regards the membership of the company and acted reasonably thereafter, that a meeting of the members comprising but one member controlling 37.5% of the shareholding would have been convened for the purpose of removing the Applicant from office. Nor are we persuaded that such a meeting of those who might have been properly determined by mediation or legal action or otherwise to be members, would have resulted in the resolution.”

9.	The complaint by the Respondent by way of appeal was (1) that the interpretation of Article 84 adopted by the Tribunal was wrong and (2) that, in any event, the conclusion that there was unfair dismissal was wrong and (3) that the Tribunal, even if did, contrary to the Respondent’s submission, adequately or at all address the issue of fairness, did not address the issue of a Polkey deduction, on the basis that there might have been a fair dismissal in any event; but it appeared, in paragraph 37, either not to have considered Polkey at all, or certainly not to have considered the necessary questions which arise under Polkey by way of what percentage chance there would be of a fair dismissal resulting, if a different method had been adopted.  

10.	We are entirely satisfied that this appeal should be allowed, and we propose to indicate the way which, in our judgment, it is in fact proper to have addressed the legal questions arising, with a view to assisting the Tribunal to hear the matter on remission. The first question is the interpretation of Article 84. We do not agree with the Tribunal’s interpretation of Article 84. It appears clear to us that Article 84 as it is to be construed includes two limbs. First of all, the director may be appointed to the office of managing director or to any other executive office under the company. Secondly, the company may enter into an agreement with any director for his employment by the company or for the provision by him of any services outside the scope of the ordinary duties of a director. The former kind of exercise of powers by the Board would lead to a situation in which the director’s removal did lead to the automatic termination of his or her employment and the second method would not. That appears to us to be entirely sensible. There will be situations in which, for example, a solicitor will be appointed as a non-executive director but, in addition, will be under a contract to supply services as a solicitor, outside the scope of his duties as a director. Similar situations will arise, no doubt, in relation to those who give tax advice or marketing advice, but that, in our judgment, was plainly not what occurred here, at least for the period of Mr Broomfield’s exclusion from the company. It would appear from the Applicant’s own evidence that she effectively ran this company, that she was, even if she did not have the title of managing director, plainly an executive director, and we conclude that in those circumstances, she was appointed by the Board to “any other executive office under the company” and that her appointment was as executive director. In those circumstances, it is the former method rather than the latter to which we refer above that applies, and we are satisfied that Article 84 had the effect of terminating her employment as an executive director at the same time as it terminated her appointment as such under the Article.  

11.	However, the determination of that issue would only have been conclusive, in our judgment, of the issue of summary dismissal in breach of contract, going to the recovery or not of the sum of £821.31. Even if the Tribunal was right, and certainly if they are not right, there needs to be consideration of the issue of fairness. It is trite law that the question of unfair dismissal does not depend upon whether the contract could or could not be, was or was not, terminated lawfully, so far as the law of contract is concerned. An employee can lawfully be given two months’ notice of his contract of employment, but may still have a claim for unfair dismissal. So, here, if the position were that this executive director’s contract was lawfully terminated without notice, as far as contract is concerned, the issue of fairness would still arise and the issue of fairness depends upon the usual provisions of s98 of the Employment Rights Act 1996, to which we turn.  

12.	This is where the judgment of Mummery LJ is so helpful in clarifying the position. In Cobley, the director who was removed had been employed as chief executive for very many years. There was there no doubt about the construction of the Articles, because, in fact, the matter depended upon an express contract, that the employment of the Applicant terminated automatically upon his removal as director: but nevertheless, even in that situation, which we are satisfied is the same as this case – once we have resolved the issue in favour of the Respondent, whereas the Tribunal would have resolved it against the Respondent - the Tribunal then needs to go on to consider the question of unfair dismissal. Mummery LJ said the following in his judgment at paragraph 20:

“20.	I agree with [Counsel for the Applicant], that this does not mean that the reason for the shareholders’ resolution removing the director is irrelevant to identifying the reason for his dismissal from employment in proceedings for unfair dismissal or for wrongful dismissal. If, as in this case, removal from the board automatically terminates the contract of employment, it will be difficult to dissociate the reason for the removal resolution from the termination of the employment. One leads to the other. I was not impressed [Counsel for the Respondent’s] concern about the possible difficulties in investigating and identifying the reason for the removal of a director at an EGM attended by the many shareholders.  
21.	In my judgment, however, the employment tribunal did not fall into the error of simply finding that the triggering of the automatic termination provision in the service agreement was the reason for Mr Cobley’s dismissal. They also looked at the set of facts, or set of beliefs, which caused [the Respondent] to dismiss Mr Cobley. The new board and the new shareholders wanted a fresh board of directors. All the old board, who were non-executive directors, had resigned, leaving only Mr Cobley in office. The new shareholders resolved to remove him. The legal consequence was that his contract of service terminated. As a matter of fact it would be reasonable for the new shareholders to form and act on the view that the [Respondent] should not have a chief executive who had been voted off the board. The proposition that a change in the ownership of the shares in a company or in the control of it does not have a necessary effect on employment of relationships between the company and its staff is, in general, correct, but it is always necessary to consider the facts of the particular dismissal.  Section 98(1) (b) focuses on the sufficiency of the reason to justify the dismissal of an employee ‘holding the position which the employee held’. Mr Cobley held the most important executive position in [the Respondent]. In deciding whether there was a substantial reason to dismiss him from that position on a successful take over different considerations would apply to him than to the case of a secretary or a storeman”
and then, at paragraphs 28 and 29, Mummery LJ concluded as follows, in relation to the fairness of the dismissal:
“28.	I agree with [Counsel for the Applicant] that the fact that an employee believes, or even knows, that he is to be treated unfairly cannot have the effect of transforming unfair treatment into fair treatment. But that is not the point at issue here. The tribunal treated as relevant to the fairness of Mr Cobley’s dismissal the fact that he would have been aware, as an experienced businessman, that he risked being removed from the board if he lost the takeover battle. He was likely to have to go. They were the commercial realities relevant to his position as chief executive with a seat on the board and they were relevant to the issue of the fairness of the dismissal of someone in his position in those circumstances.

29.	The fact of Mr Cobley’s long service as chief executive with an unblemished record was beside the point when he was being dismissed for ‘some other substantial reason’ found by the tribunal: as explained above, this was not a case of dismissal for a conduct reason. If anything, his long service was likely to operate against him, as a reasonable employer was likely to take the view that it was not practicable or reasonable in the circumstances to consider alternative employment within the company for a person previously employed as chief executive for almost 20 years”.
		
13.	This Tribunal appears to have concluded that the substantial other reason being put forward was simply decidable by reference to the construction or otherwise of Article 84. But it appears to us that what was plainly being said as a substantial other reason was that the Respondent Company was entitled to ‘unload’, if we can use that expression, the Applicant as having been opposed, or party to those who were opposed, to a return to the company of Mr Broomfield, and therefore inappropriate to remain once Mr Broomfield was back in the saddle.  

14.	Although the words were not used and no doubt should have been, the reality of this is that the substantial other reason being put forward was the breakdown of trust and confidence between the Respondent company, as now constituted with the re-establishment of Mr Broomfield’s shareholding, and the Applicant, who had run the company in his absence, and had been party to the opposition to the Chancery proceedings. It is right, by reference to Turner v Vestric Ltd [1980] ICR 528 that the question as to whether the breakdown was irremediable would need to be looked at. But if there be an irremediable breakdown of trust and confidence, then that is capable, as was found in Turner, of forming a substantial reason of a kind such as to justify the dismissal of the employee. This Tribunal, in those circumstances, erred, in our judgment, in concluding that there was not or, at any rate, was not capable of being, a substantial other reason for dismissal, because of its construction of Article 84. In our judgment, even if the Tribunal was right, and we were wrong about the construction of Article 84, that would not determine the question, because it is plain that the Respondent Company was acting on the basis of a belief that it was entitled under Article 84. The consequence of its being right would be that it would nevertheless still have to justify, as Mummery LJ makes clear in Cobley, the contractually justified dismissal as being also a fair one; it would have to show that there was a substantial other reason and that it acted fairly. In those circumstances, paragraph 37 was quite inadequate in an addressing of the question of fairness, because it began on the basis, which we conclude to have been erroneous, that there was no substantial other reason established. 

15.	But even if paragraph 37 would be supportable on the basis that it was, at least on the face of it, an alternative view, if the tribunal had been wrong about its decision that there was no substantial other reason, the terms of that paragraph 37 are entirely inadequate. 

16.	First, the Tribunal would have been blinkered by its understanding that the only substantial other reason reliable upon was a correct interpretation of Article 84, when, in fact, what it ought to be addressing was a case of breakdown of trust and confidence as the justification of substantial other reason. In terms of Mummery LJ’s judgment, the reasonable position of an ousted shareholder returning to the fold could be said to be a fortiori to that of a new shareholder seeking to wield a new broom in relation to the continued employment of the ancien régime.  

17.	In any event, paragraph 37 addresses, even on its expressly alternative basis, none of the questions relevant to fairness. It deals only very briefly with the position of Mr Weheliye, and not with the justifications which, in fact, the Respondent was putting forward for the need to remove contractually, properly or otherwise the Applicant from her position of running the company. We are satisfied that this decision cannot stand and that, when reconsidering the issues, it must look again at the question of fairness, and it must also consider the question, which it did not address at all, of Polkey, and whether there was at least a percentage chance, if not a certainty, that, even if the manner of dismissal was unfair in this case, there could have been a fair manner of dismissal by some alternative route.  

18.	In those circumstances, we set aside the decision that there was wrongful and unfair dismissal, and we remit the issue of unfair dismissal to be reconsidered by the Employment Tribunal. In a case such as this, where it would appear that there was a substantial flaw in the approach of the Employment Tribunal, we would ordinarily have considered whether it was more appropriate, particularly given that this was not a lengthy hearing below, to have remitted this to a Tribunal differently constituted. Mr Broomfield, however, in what we have described as his very careful submissions, made it entirely plain that he would prefer the matter to go back to the same Tribunal in which he has, and continues to have, every confidence and on the basis that it would save time and therefore cost if the tribunal, which already has cognisance of the facts of the case now reconsidered its decision. It may well be that the Tribunal, on such remission, will need extra evidence, because we are not clear whether it will have enough to decide the issues of whether there was a breakdown of trust and confidence, and whether, in the circumstances which we have described, it was fair for the Respondent to remove the Applicant, but that would be a matter for the Tribunal to decide. In the light, however, of the positive submission by the Respondent company of a preference for the matter to go back to the same tribunal, we so order; and we trust that the Tribunal, assuming that it is able to be reconstituted as before, will in early course consider this judgment and give appropriate directions as to whether further evidence will or will not be required. Clearly, what will be required on any basis will be further submissions. In those circumstances, this Appeal is allowed and the issue of unfair dismissal is remitted to the same Tribunal.