The Rules: Government position on insolvency and employment law conflicts 'demonstrably wrong

OVER the Christmas period last year, the collapse of City Link into administration hit the headlines with the resulting loss of more than 2,000 jobs. In the run-up to this Christmas, it hit the headlines again after three former directors were acquitted of criminal offences over the collapse of the delivery firm.

The three directors – David Smith, 50, Robert Peto, 48, and Thomas Wright, 32 – had denied failing to give 45 days’ notice of dismissals. In this case, the court accepted on the evidence that a board decision to put City Link into administration did not mean redundancies were inevitable so did not trigger the obligation to notify.

The evidence showed that at the date of that decision by the board, some or all of the company might have been saved. Judge David Goodman dismissed the charge against all three men after hearing that a £17m offer to rescue the firm was rejected after its slide into administration.

Although that prosecution failed, there appears to be an appetite on the part of the government to seek to ensure that collective redundancy consultation obligations are adhered to whatever the circumstances of the redundancies. There is a high chance that further prosecutions of individuals (or at least the threat of prosecution) will become more common as demonstrated by the charges against Dave Forsey over the USC collapse – that case is set for March 2016.

Underlying tensions

Clearly, underlying tensions exist between adhering to employment law on collective redundancy when a company is facing imminent collapse. The government has yet to attempt to cut the Gordian Knot which binds the two together. Yet it is sharpening the knife. 

Three months after City Link collapsed, the coalition government issued a call for evidence to understand in more detail the employee consultation process when a company is facing insolvency. In November, the current government issued its response, which had attracted 28 replies from organisations including law firms, trade unions, insolvency practitioners and professional bodies.

Underlying tensions arise from the requirement in employment legislation for employers to inform and consult with their employees (or their representatives) for at least 30 days (for 20-99 redundancies) or 45 days (for 100 or more redundancies) where redundancies are proposed during a 90-day period. Where an employer is insolvent, insolvency practitioners are likely to be balancing competing creditor demands and preserving value for stakeholders. This can mean that it may not be practical or appropriate to delay terminating contracts of employment for this long, especially where this may result in the adoption of employees’ contracts of employment.

Various inhibitors, cited by insolvency practitioners, to starting consultation with staff or notifying the secretary of state of a proposed consultation included:

• Inconsistencies in the legal framework, including a conflict of interests between consulting employees and protecting creditor interests by retaining confidentiality and protecting commercially sensitive information. There was a concern that starting a consultation process would disclose a company’s financial difficulties, allowing value to leak from the business to the detriment of creditors and potentially employees as well;
• Lack of funds through the consultation period – it was suggested that the government should provide funding for this time;
• Lack of time, as appointing representatives (if none have been previously elected) is onerous and time consuming. In administration cases, the insolvency practitioner has to adopt employees’ contracts after 14 days. Delaying dismissals to comply with the strict letter of the law on consultation would, under insolvency law, result in the administrator adopting all employment contracts and liabilities attached to those contracts.

The failure to inform and consult with employee representatives entitles each affected employee to a protective award of up to 90 days’ gross pay. If the business cannot pay, this burden falls on unsecured creditors and tax payers to discharge. More than half of the respondents suggested that this was an ineffective sanction in an insolvency process.

The government’s position on these, and other concerns, is that there is no conflict between insolvency law and employment law – a position which seems demonstrably wrong if only from the point of view of conflicting time limits. It does acknowledge that tensions exist which “may impede effective consultation from taking place where redundancies are proposed in an insolvency situation”. However, it still advocates that meaningful consultation is carried out and that the secretary of state is notified of proposed redundancies.

What was clear to the government was that the responses showed there is a case for looking at further options to clarify what is required from employers and their representatives in an insolvency situation.

What impact do these developments have on sales of businesses in a distressed/pre-pack scenario and what steps should insolvency practitioners be taking?

The government has not yet identified solutions to issues raised by respondents and it is unlikely that the information and consultation obligations will be radically altered in insolvency situations. 

The relationship between the obligations under employment and insolvency law are a mess and pretending otherwise will continue to lead to practical problems, loss of jobs and diminished returns for creditors in some insolvencies. Although there are no easy solutions, the government is at least acknowledging that there is a tension and has stated that it will carry out further work to see how best to address the issues raised in the call for evidence.

Neil Smyth is in the restructuring and corporate recovery team and Kathryn Clapp is in the employment, pensions & mobility group at Taylor Wessing