Redundancy/insolvency consultation misses ‘workable solution’

INSOLVENCY trade body R3 has criticised the government’s response to its own call for evidence on consulting on redundancies in insolvencies for failing to provide a ‘workable solution’.

The previous government launched a call for evidence in March on how to address the inherent conflicts that exist within employment legislation and insolvency law after two influential groups of MPs demanded a change to the law following the collapse of delivery firm City Link.

Current legislation on collective redundancies – where an employer proposes to make 20 or more employees redundant – is clear but often difficult, if not impossible, to implement in some insolvencies and has been criticised as “inflexible” by insolvency practitioners. Under the Trade Union and Labour Relations (Consolidation) Act 1992, consultation must start as soon as there is a ‘clear intention’ to make redundancies and begin at least 30 days before the first dismissal takes effect.

“The government’s position remains that there is no conflict between insolvency law and employment law,” the Insolvency Service said in response to its own 12-week call for evidence, but added that the 28 responses from insolvency practitioners, recognised professional bodies and trade unions highlighted the “strong perception” that tensions exist between the two.

Phillip Sykes, president of R3, said the government’s response “does not provide the workable solutions on this issue we were hoping to see at this point” though a way forward may be found by the promised discussions next year.

Sykes was also critical in the government’s glacial progress. “We need to start working on solutions now, not next year. This is an issue that is affecting business and job rescue today,” he said.

“We are not any further on than where we were when the call for evidence went out in March. The ‘emerging issues’ set out in the government’s summary are issues that the insolvency profession has tried to draw attention to for years.”

Profession’s response

Almost all respondents believed meaningful redundancy consultation with a view to reaching an agreement, particularly on ways to avoid or reduce dismissals, could often not happen in an insolvency situation. They also believe that the tension between employment law and insolvency law inhibits consultation when a company is in formal insolvency.

Time, and funding constraints, were most frequently cited as the biggest inhibitors to conducting a ‘meaningful’ consultation.

In its response to the call for evidence, top ten firm Baker Tilly said the vast majority of insolvency practitioners don’t seek to avoid complying with legal requirements to consult on employees, but are “prohibited from doing so” due to time constraints and the need to preserve the value of the business. It added that it is often “difficult for meaningful consultation to be undertaken” because it makes it harder to retain the value of the business, continue to trade and retain key employees.

This view was echoed by insolvency specialist Begbies Traynor. “Meaningful consultation with a view to reaching agreement does not work in practice in an insolvency situation,” the firm said.

“In the majority of cases that our practitioners deal with, the business needs to close immediately or in the very short term and there simply is not enough time in which to consult with the employees,” it added. “Where consultation could materially affect a sale of the business the directors and/or IP are unlikely to want to begin the process because this could have a detrimental impact on the value of the business and therefore the return to creditors.”

Special circumstances

Payouts related to botched employee consultations can prove costly. The government paid out £18.2m protective awards in relation to Deloitte’s administration of Woolworths. Indeed, such awards are common and widespread because of the dichotomy that exists between collective redundancies and fast-paced insolvencies.

While there is some legislative wriggle room in that “special circumstances” that “render it not reasonably practicable for the employer to comply with” the required scope or length of the consultation, this does not apply in the case of insolvencies. In the case of Woolworths, a tribunal found that the mere fact of insolvency was not a special circumstance.

“Insolvency is plainly a special circumstance. The very nature of insolvency is that legal rights have to cut to fit the cloth available,” Grant Thornton said in its response.

“In the context of redundancies it is far more sensible to cut down the entitlement to consultation rather than leave in place an unworkable requirement and then admit claims for non-compliance at the expense of the other creditors and the expense of the public purse.

Grant Thornton also suggested that nothing less than a “statutory exemption for insolvency cases can adequately remedy the situation” but conceded that a change in the law would need some anti-abuse provisions so that administration could not be used as device simply to circumvent the requirements.

“A mere reduction of the requirements in an insolvency would reduce the scale of non-compliance, but would not wholly cure it,” Grant Thornton said.

The government plans to hold further discussions with interested parties, in the light of the responses to this call for evidence.