The Supreme Court has provided welcome clarity for insolvency practitioners in confirming that administrators of a company appointed pursuant to the Insolvency Act 1986 ("IA 1986") will not be criminally liable for a failure by the company to comply with redundancy notification requirements.

Following a prior decision of The Northern Derbyshire Magistrates Court, where it was held that an administrator was an "officer" for the purposes of s.194(3) of the Trade Union and Labour Relations (Consolidation) Act 1992 ("TULRCA"), insolvency practitioners may have been found personally liable if they, or the company, had failed to give prior notice to the Secretary of State of proposed redundancies.

West Coast Capital (USC) Limited ("USC") and the requirement to notify the Secretary of State of proposed redundancies

Administrators were appointed in respect of USC on 13 January 2015. USC was a subsidiary of Sports Direct and certain of its business and assets were purchased by Republic, by way of a pre-pack administration.

The day after the administrators' appointment, the administrators had informed a number of employees that they were dismissed as redundant by way of a letter signed by one of the administrators, Mr Palmer. Notice of the redundancies was not provided to the Secretary of State until the relevant form, also signed by Mr Palmer, was emailed to the Secretary of State some three weeks later.

TULRCA requires employers to notify the Secretary of State if they propose to dismiss a certain number of employees as redundant. In particular, s.193(2) TULRCA provides that where an employer proposes to make 20 or more employees redundant within 90 days, it must notify the Secretary of State of those dismissals at least 30 days before they take effect.

Failure to give notice in accordance with s.193(2) TULRCA is an offence liable on summary conviction. Furthermore, where an offence has been committed with the consent or connivance of, or can be attributed to neglect on the part of, any director, manager, secretary or other similar officer of the company, that individual will also be guilty of an offence.

Criminal proceedings were commenced against Mr Palmer by the Secretary of State, alleging that he had committed an offence in accordance with s.194(3) of TULRCA in failing to notify the Secretary of State of the redundancies at least 30 days before they took effect. The North Derbyshire Magistrates Court found that Mr Palmer was personally liable for a failure to notify. The Divisional Court subsequently dismissed Mr Palmer's claim for judicial review.

The Supreme Court has since confirmed that an administrator of a company is not an "officer" for the purposes of s.194(4) TULRCA and therefore cannot be personally liable for a failure by the company to comply with redundancy notification requirements.

What does this mean in practice?

The decision provides much welcomed clarity for insolvency practitioners.

When an administrator is appointed to a company, they will determine the appropriate purpose of the administration with reference to the statutory purposes set out in paragraph 3 of Schedule B1 to the IA 1986. Such purposes include rescuing the company as a going concern, achieving a better result for creditors than in a winding up and realising property in order to make a distribution to secured or preferential creditors.

In order to achieve the relevant purpose, an administrator may conclude that the business must immediately cease trading and that the company's employees are no longer required. In these circumstances, it is often necessary for the administrator to dismiss employees as redundant shortly following their appointment, in order to avoid incurring unnecessary costs in the administration.

Prior to the Supreme Court's decision, administrators were placed in a difficult position with regards to potential redundancies. If the company had not already made the necessary arrangements to notify the Secretary of State, administrators would have been required to do so. The requirement to adhere to the notice period would have placed administrators in a position of conflict in balancing their duty to act in the best interest of creditors, and therefore not incurring unnecessary costs, against the risk of them being found criminally liable for failure to comply with TULRCA.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.