Employment Law v Insolvency Law – Who Wins?

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There has always been a conflict between insolvency law and employment law, each with their own rules, and differing priorities.  This is particularly so in respect of Administrations, where whether or not to pre-package a sale continues to divide opinion.

Insolvency Practitioners have always been very wary of dealing with employees within the context of an Administration for a variety of reasons, the most notable of which are:

  1. If an Administrator continues to trade a business for more than 14 days, then they will personally adopt the employees’ contracts of employment, and the liabilities that go with them.

  2. The Transfer of Undertakings (Protection of Employment) Regulations, also called the TUPE regulations, automatically apply to Administrations where there is a sale of the business, whether or not it is a pre-pack, which can be off-putting to purchasers.

  3. Administrators will have to make sure that the requirements of the Trade Union Labour Relations (Consolidation) Act 1992 are met, which includes the requirement to consult with employees if more than 20 employees are likely to be made redundant and for a HR1 form to be filed with the Secretary of State (“SofS”). If employees disclose the matter to competitors and the public as a result of those consultations, which unfortunately is often the case, this can diminish a business’s value and the Administrators ability to sell it, thus reducing the returns to creditors.

The recent decision in R v North Derbyshire Magistrates Courts and others [2021] EWHC 3013 (Admin) focussed on the third issue.

In this case the Administrators were appointed on 13th January 2015. On 14th January 2015 the employees were handed a letter advising that there was a risk of redundancies and there was an intention to consult in so far as was possible in the timeframe. Some 15 minutes later, and almost certainly inappropriately in my view, the employees were handed a second letter advising that the company had been unable to identify any alternative to redundancy and they were dismissed with effect from that same day.

The situation was further impacted by a failure of the Administrator to file an HR1 form with the SoS. The Redundancy Payments Service (‘RPS’) asked the Administrator on 30th January 2015 whether an HR1 had been sent. An HR1 form was subsequently received by the RPS on 4th February 2015 by email. That form was dated 14th January 2015 and was signed by the Administrator. The explanation given for the late filing was that the form had not been fully completed and had been inadvertently held on file.  The fact that this had happened had been overlooked until contact had been made by the RPS.

In this particular case the Court held that the Administrators were criminally liable for failing to submit the HR1.

It was pointed out to the Court that to impose such a liability on Administrators would give them an impossible burden in that they would be forced to trade such companies for a period of 30 days, which would not be possible if there were no funds with which to trade, which is often the case.

The point was also raised that even if there were sufficient funds to pay wages, the Administrator would have to consider continuing to pay those wages when the company was not viable to the detriment of creditors. This put the Administrator in the invidious position of having to choose either between committing a criminal offence in not giving notice to the SoS or breaching his duties to creditors in continuing to make payments out of company assets to the detriment of those creditors.

It was recognised by the Court that this interpretation of the statute would cause practical difficulties for Administrators, which would lead to a surge in liquidations and a wholesale refusal on the part of Insolvency Practitioners to take Administration appointments.

I would imagine that depending on whether you were a creditor, or an employee, you would take an opposing view on the judgment in this case.  My own personal view is that there has to be a balance when dealing with any case.  There are always going to be competing interests and difficult decisions will have to be made. Criticism will always be levied against the Insolvency Practitioner by those on the wrong side of any such decisions, but that is an Insolvency Practitioner’s lot and you just have to get on with it.

It is correct that this decision will make Administrations less attractive and more difficult, and returns to creditors may suffer, but there are some actions that can be taken to counter some of the difficulties.

Directors could, and should, take advice sooner, rather than later.  In this case, why couldn’t the directors have consulted sooner and why wasn’t the HR1 submitted by the directors pre-appointment.

Insolvency Practitioners should encourage the directors to submit the HR1 prior to appointment if there is a possibility of redundancies.

In this particular case the Administrators should not have failed to submit the HR1 immediately on appointment.  It is an important document and should not have been overlooked.  Furthermore, the decision to hand out a consultation document and then 15 minutes later make the employee’s redundant was in my view ill conceived.  Clearly when the consultation document was issued the Administrators knew that there was going to be redundancies and an honest, straight forward approach would have been better. 

In my experience if employees are told that there are issues, you are trying to find a solution to save the underlying business and their jobs, but they need to keep working, more often than not the majority of employees will support any efforts made to save their jobs.

It is true that this approach has led to the matter being made public prematurely in the past but that has sometimes encouraged buyers to come out of the woodwork and generated a sale.

Essentially the sooner you take advice and action, the better the outcome will be and the more options you have, giving you more time to satisfy the often competing interests and regulations that come with insolvent situations.

Purnells have a guide to Creditors Voluntary Liquidation, a large part of which deals with employee claims and is equally applicable to administration.

If your company is potentially facing insolvency, and you have a large number of employees and would like some free and impartial advice, please do not hesitate to contact Chris Parkman on 01326 340579, or email him at chris@purnells.co.uk.