Keeping it legal: insolvency and redundancy

Katie Maguire and Melissa Chuttur explain how companies can remain on the right side of the law when they enter administration

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Insolvency and redundancy are both difficult scenarios for business owners and insolvency administrators to manoeuvre. Unfortunately, both often present themselves at the same time. Once appointed, administrators only have 14 days to assess whether employees should be retained or made redundant, after which time they will be deemed to take responsibility for the employment rights of the employees.

As a result, many administrators will be faced with the dilemma of having to comply with their obligations under the Trade Union and Labour Relations (Consolidation) Act 1992 (TULRCA) or risk personal criminal liability for achieving the statutory purpose of administration, which may require the immediate dismissal of staff to achieve the best financial outcome for the organisation’s creditors. 

What does the law say?

Redundancy consultation requirements set out in TULRCA state that insolvency practitioners are agents of the insolvent employer and are obliged to inform and collectively consult where they propose to make mass redundancies. They must follow minimum collective consultation rules of 30 and 45 days respectively if they are making between 20 and 99 or 100-plus redundancies at one establishment within a 90-day period or less.

Additional obligations include consulting with relevant trade unions of the affected employees or electing an employee representative if there is no union, failing which a protective award of up to 90 days of uncapped pay may be payable for each affected employee. 

Administrators have a separate duty to notify the Department for Business, Energy and Industrial Strategy, by way of an HR1 form, if they are proposing collective redundancies, failing which, they may be faced with personal criminal liability. The HR1 form must be filed at least 45 days before the first dismissal takes place, or 30 days if fewer than 100 employees are to be dismissed. This obligation can be difficult to satisfy as administrators are often only introduced to a troubled company shortly before their appointment and have to take swift actions within 14 days.

In cases of compulsory insolvency, contracts of employment are automatically terminated. That automatic termination means that an administrator has failed to comply with their obligations under TULRCA. This failure to comply can expose the insolvent employer to significantly increased liabilities.

However, the law does recognise that in certain situations it may not be practicable for an employer to have gone through a redundancy consultation process. In the event of a tribunal claim, there is a defence available under TULRCA for special circumstances. It allows businesses that genuinely couldn’t comply with their obligations to show why that was so, and demonstrate that they did take all reasonable steps they could. A tribunal will consider three questions:

  • Were there any special circumstances?
  • If yes, did those mean it wasn’t reasonably practicable to comply and consult with employees? 
  • Were all other actions considered to avoid this outcome? 

Tribunals, however, do not automatically accept insolvency itself as a special circumstance. This will only be accepted as a defence if it was a sudden and unexpected event. In cases of foreseeable financial difficulty, a tribunal is unlikely to accept this as a defence.

Interestingly, in the recent case of R (on the application of Palmer) v Northern Derbyshire Magistrates Court and another the Supreme Court unanimously found that an administrator was not an ‘officer’ of a company within the meaning of “any director, manager, secretary or similar officer of the body corporate” for the purposes of section 194(3) of TULRCA. This is a huge development and meant that the administrator could not be personally prosecuted for an offence under section 194(3) for a failure to give notice of proposed collective redundancies. 

Consequences and implications

While this recent decision will be welcomed by administrators, they should nonetheless err on the side of caution, and not apply a blanket disregard of their obligations under TULRCA. This decision solely focused on their obligation to notify the secretary of state of proposed collective redundancies and did not cover the additional obligations under TULRCA. A careful balancing exercise of the risks and separate interests involved must therefore be carried out to minimise any financial liabilities on the company in administration.    

Katie Maguire is a partner and Melissa Chuttur a solicitor, both at Devonshires