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Connolly v. Sellers Arenascene Ltd [2001], Court of Appeal judgement delivered on 2 February 2001. EAT/755/98 judgement delivered on 14 September 1999 Following on from the article Are you an employee of your own limited company?, this article covers the recent case of Connolly v. Sellers Arenascene Ltd which was decided on the 2 February 2001 in the Court of Appeal. The case was on appeal from the Employment Tribunal where Mr Connolly's claim for unfair dismissal against Sellers Arenascene Ltd (Sellers) was dismissed on the grounds that he did not have 2yrs continuous service prior to the dismissal. The principal issue in this case was whether Mr Connolly's contract of employment had been transferred to Sellers when they bought the company EGP from the Receivers. The difficulty arose when, despite the fact that the tribunal agreed that there had been a transfer of employment, a second critical issue came to light. In order to claim unfair dismissal Mr Connolly needed to have 2yrs continuous service prior to the transfer. The tribunal then had to consider whether Mr Connolly had in fact been an employee of the company that he was also a director of. This case is complicated by the number of companies involved but, it is necessary to understand the factual background in order to fully understand the decision made. The Factual Background Mr Connolly formed EGP Ltd, Arenascene Ltd was a 99% subsidiary of EGP, Mr Connolly owned the other share. In 1987, Mr Connolly entered into a service agreement with EGP. He was acting Chairman and Managing Director of EGP and Arenascene as its subsidiary. On 1st November 1990 20% of the shareholding in EGP was sold to Expedier plc with an option to sell the remaining 80%. The option expired without being exercised. The 20% shareholding was then sold to IRH plc in 1991. In 1992, Mr Connolly and his fellow shareholders sold their holding in EGP, which still owned 99% of Arenascene as it's subsidiary, to IRH plc. Also in 1992, Mr Connolly entered into a service agreement with IRH plc to be a Director of IRH and Managing Director of EGP. The contract commenced on 3rd April 1992 fixed to 31st March 1995. The tribunal considered that Mr Connolly was employed by IRH plc from 31st March 1992. On 15th May 1992, however, IRH plc went into receivership and Mr Connolly was dismissed by the Receivers. For several reasons Mr Connolly continued to work until June 1992 when the joint receivers of EGP and Arenascene gave him formal notice of termination of employment. The Receivers had treated him as an employee of those companies prior to termination of his employment. On 20th June 1992 the Receivers sold the business of Arenascene to Expectshow Ltd which subsequently changed it's name to Sellers Arenascene Ltd, the Respondent. The Principle Issue The principal issue before the tribunal was whether Mr Connolly's contract of employment had been transferred to the Respondent. The tribunal concluded that Mr Connolly had been employed by IRH plc (the transferor) at the material time. The tribunal then raised the issue of whether Mr Connolly had been an employee of EGP and Arenascene Ltd prior to April 1992. This issue of continuous employment goes to whether Mr Connolly had the 2 yrs continuous service needed in order to claim unfair dismissal. Mr Connolly appealed to the EAT on the grounds that the decision of the tribunal that he did not have 2yrs continuous service was wrong in fact and law and was perverse. The Respondent cross-appealed on the grounds that if Mr Connolly is found to have 2yrs continuous service then the decision of the tribunal in relation to the transfer was perverse. The argument before the EAT then comes down to whether Mr Connolly, as a Director of the relevant companies, was also an employee at the material time. Mr Connolly's main point is that the tribunal had misdirected itself by relying on the decision in Buchan & Ivey v. Secretary of State for Trade and Industry [1997] EAT when they should have preferred the approach in the case of Secretary of State for Trade and Industry v. Bottrill [1999] EWCA Case No. 980132. The tribunal at that time did not have the benefit of Lord Woolf's judgement in Bottrill so, it is understandable that they did not follow his guidelines. The tribunal stated that the service contract signed by Mr Connolly in 1987 was not a sham and accepted that Mr Connolly 'behaved as an employee'. He had signed a contract making him Managing Director, he was paid a salary that was subject to PAYE and NICs. He also obtained other benefits consistent with employment such as entitlement to holiday, sick pay, a pension and a car. In their finding that there was no contract of employment, however, the tribunal had placed reliance on a number of points one being that Mr Connolly's position as a controlling shareholder precluded him from being an employee, thus following the guidance in Buchan. In the Court of Appeal in Bottrill, the court found that "…it was erroneous to say that a controlling shareholder who had the power to prevent his own dismissal was outside the class of persons given [employment rights]." The EAT were persuaded that the Tribunal had in fact misdirected itself in law by placing to much reliance on the decision in Buchan and Mr Connolly's controlling shareholding. The EAT went on to say that Mr Connolly was not at all times a majority shareholder in EGP his contract of employment was not a sham and he was treated and rewarded as if he was an employee. For that reason he must be afforded the protection under the Employment Rights Act 1996. The EAT also dismissed the Respondent's, Sellers Arenascene Ltd, cross-appeal. In the Court of Appeal on the 2nd February 2001, Sellers Arenascene Ltd (Sellers) appealed against the decision of the EAT. It was stated in the Court that: "A controlling shareholding in a company, although significant, was not a determinative factor when considering whether a shareholder or director of a company was an employee within the meaning of s230 of the Employment Rights Act 1996. It was therefore wrong for an industrial tribunal to regard an applicant's controlling shareholding as decisive in determining that he was not an employee and to give that factor a significance which excluded a proper consideration of other relevant factors." The Court of Appeal therefore dismissed the appeal of Sellers. In Conclusion The conclusion to this case, therefore, is that when deciding whether a person who is a controlling shareholder and director of a company is also an employee the court or tribunal must consider all the relevant factors. This follows the guidance given by Lord Woolf in Bottrill on how to decide on the status of a controlling shareholder. It was stressed, however, that they were not rigid guidelines for the factual inquiry by the tribunal because each case must be decided on the particular circumstances. The questions which the tribunal might wish to consider are these: 1. Is there a genuine contract of employment between the company and the shareholder? 2. How and for what reasons did the contract come into existence (for example, was the contract made at a time when insolvency was foreseeable)? 3. What did each party actually do in pursuance of the contract? 4. If it is decided that the contract is not a sham then: Does the employment contract actually give rise to an employer/employee relationship? 5. In establishing this point, the usual factors which can be regarded as relevant might be: 6. the degree of control exercised over the shareholder employee; 7. whether there are directors other than or in addition to the shareholder employee; and 8. whether the constitution of the company gives that shareholder rights such that he is in reality answerable only to himself and incapable of being dismissed. 9. If he is a director, is he able under the Articles of Association to vote on such matters in which he is personally interested, such as the termination of his contract of employment; and 10. what was the actually conduct of the parties pursuant to the terms of the contract. Author's note Despite the decision in both Bottrill and Connolly, I would advise caution where you are a 'sole director sole shareholder' of your own limited company. In that instance where there is no 'genuine' contract of employment and you can prevent your own dismissal it is still unlikely that you will be found to be an employee. |
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