AdSlot1

Government must address insolvency and employment law conflicts

INSOLVENCY PRACTITIONERS have once again been caught betwixt and between the inherent conflicts that exist within employment legislation and insolvency law, after administrators from Duff & Phelps and the Gallagher Partnership found themselves being scrutinised over their handling of the administration of USC.

Administrators for West Coast Capital (USC) have come under the gaze of the Insolvency Service, which is investigating whether the use of a pre-pack deal was appropriate for the collapsed fashion chain. At the same time former employees are taking legal action over the controversial restructuring of the business, which saw 28 USC stores owned by the Sports Direct entity immediately taken on by Sports Direct division Republic, which owned another tranche of USC-branded stores.

Some 200 workers at its USC’s Ayrshire-based warehouse lost their jobs, of which its 80 permanent staff were told of the programme 15 minutes after entering consultation. Lawyers are advising 60 of them, where an employment tribunal could entitle them to eight weeks pay in compensation, if the process is found to have been handled incorrectly.

While pre-pack deals – whereby a company is sold immediately after the appointment of administrators remain a controversial form of administration – remain controversial, not least when sold to connected parties, the USC employment tribunal will inevitably highlight the complete disconnect between insolvency and employment law.

Too inflexible 

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. “It is quite often nigh on impossible to comply with consultation requirements,” says Tony Murphy, director at insolvency firm Harrisons, who adds that the law is “too inflexible”.

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. This, say IPs, is an almost impossible task in many administrations when the business is “shot to pieces” and there is little, if any, money left to pay employees while a full consultation is carried out.

“How can a consultation be meaningful in those circumstances,” says Giles Frampton, president of R3, the insolvency trade body. “That is not to say, you shouldn’t try.”

At the same time, an IP’s overarching duty is to creditors, rather than any one group of employees, which invariably creates conflict. “From the IP’s point of view there is a conflict between their legal duty to maximise the asset payable to creditors and their legal duty to consult employees,” explains Robin Henry, a partner with Collyer Bristow’s financial disputes team.

But according to the Insolvency Service, the duty to maximise returns to creditors “does not negate” the duty to abide by employment law requiring them to consult with employees before making collective redundancies.

“In practice, there are circumstances in an insolvency which may require difficult decisions to be made quickly, but it is still important that as much meaningful consultation with employees as is possible is done so that all potential options are explored,” a Insolvency Service spokesperson says.

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,” Hannah Swindle, principal associate at law firm Wragge & Co, wrote in a blog. “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.”

Criminal sanctions

There has always been a conflict between employment law obligations and practical realities in an insolvency situation, but following the insolvency of Comet, the stakes for IPs are now even higher for those who get it wrong, with the possibility of criminal sanctions. 

Last year, an employment tribunal found the employees at Comet, the electrical retailer that collapsed in 2012, had not been consulted on the potential for redundancies as legally required, with the court awarding a protective 70-to-90 day payout – leaving a potential £26m compensation package to be borne by the taxpayer. Deloitte has disputed that figure and estimates that the maximum possible protective award that could be applied in this case is less than half this amount.

Lawyers for workers who lost their jobs when Comet collapsed have asked a government investigation to consider whether Deloitte, the administrators involved, should face criminal charges for failing to provide advance notification of redundancies to the secretary of state for business about redundancies on a HR1 form.

“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,” Swindle writes.

Indeed, the cost to the public purse from botched consultations is often sizeable. According to figures from the Insolvency Service, Deloitte alone has been involved in more 20 administrations where it failed to correctly make workers redundant, potentially costing taxpayers as much as £50m in in compensatory payments. The Insolvency Service has confirmed that government paid out £18.2m in protective awards in relation to Deloitte’s administration of Woolworths and that £6.9m has been paid out in relation to a 20 smaller cases.

Special circumstances

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.

So far government has shown little appetite to amend the law and Frampton at R3, who has previously called on “government to sort this out as a matter of urgency”, says it may be beholden on IPs and their regulators to devise some form of guidance around managing collective redundancies during an administration.

“That needs to be informed by institutes, R3 and other stakeholders, employment tribunal; and unions” Frampton says.

Other protections are available to IPs, writes Swindle [see box]. “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.”

Henry at Collyer Bristow is unconvinced a code of conduct will carry much weight and be rendered ineffective. “It only makes sense for there to be a legal exemption in an insolvency situation. A code of practice is all very well, but what force would it have? Employment tribunals don’t care about your code of conduct, only the law makes sense.”

Promisingly, the government’s position appears to be thawing. Bob Pinder, regional director at ICAEW who is appearing at a select committee hearing on the insolvency sector, says the “current government wants to do something”. An Insolvency Service spokeperson says it wants to “improve the effectiveness of consultations in insolvency situations” and is currently conducting meetings with a number of key stakeholders to assess the issues surrounding effective consultation in insolvency situations, and how any issues might be addressed.

“Where administrators face challenges is on the extent of such consultation and how it is carried out, especially in cases involving business rescue, where speed and confidentiality are of the essence,” the Insolvency Service says.

Last week, the insolvency profession won a landmark victory last week after the government backed down over controversial plans to scrap insolvency litigation’s exemption from a 2012 crackdown on the way no-win-no-fee legal cases are funded.

When a BIS commons select committee meets later this week (Wednesday 4 March) to hold a one-off oral evidence session on the regulation and policies of the Insolvency sector it could do much worse than to take a long, hard look at the conflict between employment and insolvency rules.

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. 
• 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. 
• Involve the use of trade union representatives and elected employee representatives. 
• Provide the required statutory information to representatives. 
• 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.
• Keep employee representatives and employees updated as much as possible about numbers and the timing of redundancies.  
• 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. 
Source: Wragge & Co

Related reading

/IMG/757/318757/tescor32r3
/IMG/966/313966/used-car
/IMG/001/242001/closed-sign-red
/IMG/255/120255/insolvency-service-website