Higher stakes for insolvency practitioners when making mass redundancies

14 minute read
09 October 2014

There has always been a conflict between employment law obligations and practical realities in an insolvency situation. These are often highlighted when mass redundancies need to be made. However, following the insolvency of Comet and recent tribunal litigation, the potential repercussions are now even more serious for insolvency practitioners who get it wrong, with the possibility of criminal sanctions.

Comet case highlights issue

It is well understood that insufficient compliance with collective redundancy obligations is likely to result in financial penalties in the form of a protective award made against the insolvent company. This is often picked up, at least in part, by the taxpayer through the Redundancy Payments Office (RPO). However, Insolvency Practitioners (IPs) could now risk criminal sanctions and also potentially disciplinary penalties from their professional body when making mass redundancies in insolvency situations if they fail to comply stringently with statutory obligations.

The recent tribunal litigation involving the administration and subsequent liquidation of the electrical goods retailer Comet has resulted in solicitors for the employees asking for a government investigation. It has been reported that this is to consider whether the administrators should face 'criminal charges' in relation to their failure to notify the Secretary of State (for Business, Innovation and Skills (BIS)) about redundancies on their HR1 form submitted on 5 November 2012. Notification was made by way of a second HR1 form on 22 November 2012.

Business Secretary Vince Cable has also now announced that the administrators of Comet have been referred to the Institute of Chartered Accountants in England and Wales (ICAEW) over a potential conflict of interest.

This highlights the need for IPs to consider carefully how they approach mass redundancies with a view to reducing exposure for themselves, the insolvent company and public purse.

Collective redundancy obligations under Trade Union and Labour Relations (Consolidation) Act 1992

Where an employer is 'proposing to dismiss' 20 or more employees as redundant within a period of 90 days or less, collective redundancy obligations are triggered. Consultation must start as soon as there is a 'clear intention' to make redundancies, even if this is provisional, but it must be more than just a possibility. In summary, if 20-99 redundancies are proposed, the employer is required to start consultation at least 30 days before the first of the dismissals takes effect, or 45 days if the number is 100 or more.

It is common practice that IPs, as an agent of the insolvent employer, will usually make redundancies on appointment to a failing business in order to save costs.

Often an IP will have insufficient funds to be able to continue to pay employees while a full consultation process is carried out. Otherwise, where alternatives to redundancy simply do not exist, they may try to conserve funds for the failing company's creditors by reducing the overall wage bill.

Impact on the Redundancy Payments Office (RPO)

When a dismissal is made after the date of an insolvency event, such as administration, protective awards are unsecured claims in the insolvency. However, employees can make a claim to the RPO for recovery of their protective awards up to the statutory limits (currently £464 per week for a maximum of eight weeks).

The maximum that can be claimed per individual is £3,712. When there are significant numbers of employees affected, this sum soon mounts up and a significant liability can be incurred by public funds. In the case of Comet, nearly 7,000 staff were made redundant so potential liability for public funds could reach over £20 million.

Is there any defence against a breach of these obligations?

Employers (and so IPs acting as their agents) do have some defence against a breach if there are 'special circumstances' wherein it is not reasonably practicable for the employer to consult in time. This is of limited practical use.

It is well established that insolvency is not of itself a special circumstance, although 'special unforeseen circumstances’ which would make it necessary to close the company immediately may arise during an insolvency situation. Recent cases have also confirmed that insolvency can be a mitigating factor when calculating the size of award payable.

However, employers must comply so far as is 'reasonably practicable', which means making every effort to do what they can. This is not always possible - making redundancies and consultation with employees form only part of the many decisions and issues an IP has to deal with in an insolvency event. But the Tribunal decisions, the publicity being generated by large-scale redundancies and pressure from the Insolvency Service due to the potential cost to public funds mean that IPs are being encouraged to consult as much as possible when making redundancies.

It also appears that the standard required to be reached is high. Intuitively, this seems to conflict with the reality of a fast-paced insolvency situation. The administrators in the case of Comet had told staff that their jobs were at risk, talked with the unions and organised job fairs. The Tribunal Judge agreed the consultation was 'extensive' but was critical that more wasn't done. IPs are expected to go beyond just paying lip service to the obligations, and make efforts to genuinely 'engage' with staff, even if no alternatives to redundancy are ultimately available.

There is usually pressure on IPs to try to avoid news of redundancies as long as possible, to maintain stability in the workforce and the business. This is especially the case if a buyer is being sought or a controlled wind down is being put in place. Any reduction in the value of the company affects a potential return to creditors.

But it now seems that this approach may just not be possible and employees will need to be kept informed from a much earlier stage. It may also mean that on appointment, IPs will need to realistically assess the likelihood of finding a buyer for the business (which would save jobs) and if it looks as though finding a buyer may be difficult, start redundancy consultation much earlier.

What action an IP takes will depend on the facts in each situation. In the case of Comet, consultation began on 19 November 2012. The Tribunal suggested consultation should have started on 3 November 2012, the day after appointment.

The approach of trying to do as much (genuine) consultation as possible is supported by recent case decisions. Previously, when making an award, it was understood that Tribunals were expected to start at the maximum (90 days' pay) and employers would have to try to justify why a reduction should be made. The Employment Appeals Tribunal has confirmed that Tribunals should only start at the maximum where there has been no consultation at all.

Notification to the Secretary of State - criminal penalties

Employers are also obliged to notify the Secretary of State for BIS on form HR1, either at least 30 days before the first of the dismissals takes effect where there are 20-99 redundancies, or 45 days for 100 or more redundancies. Failure to notify the Secretary of State is a criminal offence, and the employer will be liable on summary conviction to a fine not exceeding level 5 on the standard scale (£5,000). Fines may also be uncapped in future but this is not yet in force.

It has been reported that solicitors for ex-employees of Comet are pushing for the administrators to face alleged criminal penalties for submitting a 'misleading' HR1 to BIS, as on 5 November 2012 they confirmed 'no redundancies were proposed at present'. It is unclear whether this would be a criminal offence or if so, where the employer is insolvent, how this would work. Any penalty should be against the employer, which would usually be the insolvent company.

Therefore, although there are calls for the administrators of Comet to face the music, practically it seems unlikely that levying an additional fine on an already insolvent company would benefit anyone.

Conflict of interest

Vince Cable has confirmed that the administrators of Comet have been referred to ICAEW as a result of the protective awards made in this case which are to be picked up by the tax payer. Allegations have been made that the administrators had a conflict of interest as they advised the company prior to the formal administration. Potential sanctions would include a warning, reprimand, fines or licence withdrawal.

When companies face financial difficulties, irrespective of whether those difficulties can be overcome or result in an insolvency, a well advised board of directors will engage the services of experienced insolvency practitioners. Their role is to advise the board in relation to ongoing trading, solvency and cashflow management, as well as various options for the board to consider and the financial impact of those options and decisions on creditors as a whole. Often, this will be coupled with legal advice on their duties to creditors when facing a possible insolvency.

While they may take advice, the directors remain in control in relation to the company until the point at which an officeholder is appointed. Insolvency practitioners will work with the board and rely on information it makes available concerning the ongoing business of the company and all operational matters and potential future trading. Of course, the board does not have to act on all or any of the advice, and the directors have to carefully balance incurring further liabilities (i.e. redundancy payments) if they are not of the reasonable belief that the company is able to avoid insolvency.

While insolvency practitioners are able to gather knowledge of the business when acting as an adviser, this does not mean that once appointed they are bound by the board's view; Administrators' decisions are made in a very different context, with the finality of an insolvency, fluid circumstances as a result and with a view to preserving as much value in the insolvent business for creditors as possible. Therefore, the actions of the Business Secretary seem at odds with business reality having regard to very many real issues facing an insolvent company.

Vince Cable is also currently taking a bill through Parliament to try to tighten up insolvency regulation.

What can IPs do?

Although there are calls for a change in the law in this area to protect insolvency practitioners and better reflect business reality, no changes are currently planned. Therefore, IPs must try to protect their position as much as possible:

  • IPs must file a HR1 form with BIS to notify them of redundancy proposals at the appropriate time. This will depend on the specific circumstances, but may mean notifying at an earlier stage than may previously have been the case. On appointment the IP must analyse whether there are any serious expressions of interest from potential purchasers. If not, or if a plan is already in place for the employing company to make store or site closures for example, then it will need to consider whether a HR1 should be filed.
  • Consider whether there is time for meaningful consultation while still complying with the IPs legal duty to preserve assets. If an immediate closure can be avoided, try to build in time to do as much consultation as possible. The Tribunal in Comet recognised that the full minimum consultation period was not possible due to a lack of funds to pay wages. It is better to conduct a 'full and frank' consultation with employee representatives, even if the period of consultation is shorter than that required under law.
  • Involve the use of trade union representatives and elected employee representatives. In the case of Comet, some of the employee representatives were selected by management and not elected by the workforce.
  • Provide the required statutory information to representatives. This is likely to include information to help employees understand the financial position of the company.
  • Consult on all of the required grounds. Where the company is closing, it seems pointless to consult on ways of avoiding the dismissals, reducing the number of employees to be dismissed or mitigating the consequences of the dismissals. However, the Tribunal in Comet confirmed this was required.
  • Keep employee representatives and employees updated as much as possible about numbers and the timing of redundancies. It may be possible to provide written Q&A documents, containing information about questions raised in consultation and the company's responses.
  • If selection for redundancies has to be made, make sure that information about the method of selection is shared with representatives.
  • As much as possible, consultation must be genuine and 'meaningful' rather than simply going through the motions. In other words, this involves engagement in a dialogue with the representatives, in a serious attempt to reach agreement. It is recognised that agreement may not be possible.

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