UK: Directors In The Twilight Zone: Administ(rate) With Caution

The recent criminal charges being brought against the former directors of City Link Limited (in administration) are a timely reminder for insolvency practitioners and directors to be mindful of their employment law obligations when initiating and carrying out collective redundancies.

Background

The case against the directors is being brought by the Department for Business, Innovation and Skills ("BIS") on behalf of the Insolvency Service. The directors stand accused of being in breach of their obligations under section 193 of the Trade Union and Labour Relations (Consolidation) Act 1992 (the "Act"). Section 193 requires that where collective redundancies are being proposed (i.e. dismissals of 20 or more employees within a period of 90 days or less), employers are required to notify the Secretary of State of the proposed redundancies within a certain period before the first of those dismissals takes effect. An employer seeking to dismiss 20 or more employees at one establishment must notify the Secretary of State at least 30 days before an employee's dismissal takes effect. A longer, 45 day notice period is required for proposed dismissals of 100 or more employees.

Insolvency practitioners should be mindful that the requirements for employers under section 193 also extend to insolvency practitioners in their role, as agents of the insolvent employer. The consequences of breaching section 193 are set out in section 194 of the Act and include, on summary conviction, liability for unlimited fines.

The case against the directors of City Link follows similar cases against the administrators of electrical goods retailer Comet, and a company associated with Sports Direct. These cases demonstrate the seriousness of the offence and the willingness of the Insolvency Service to pursue those who breach section 193.

Application to Compulsory Liquidators

Separately, section 188 of the Act requires employers proposing collective redundancies to consult with the "appropriate representatives" of any employees who may be affected by the proposed dismissals or measures in connection with them. Similar to section 193 the timing of the required consultation depends on the number of employees who are proposed to be dismissed. It is noteworthy that a recent ECJ decision¹ appears to extend the requirements to collectively consult under section 188 to compulsory liquidators. In a compulsory liquidation, contracts of employment are automatically terminated on the court order being made and prior to the ECJ decision it was not considered necessary for compulsory liquidators to consult. By analogy, the requirement for compulsory liquidators to consult under section 188 may also mean that the requirement to give notice to the Secretary of State under section 193 may also extend to compulsory liquidators, and is something of which compulsory liquidators should be mindful.

Defences

Section 193(7) provides a defence for failure to give notice to the Secretary of State if there are "special circumstances" rendering it not reasonably practicable to do so. In relation to section 188 of the Act, which provides a similar defence, caselaw has established that insolvency does not of itself constitute a "special circumstance". Special circumstances however may arise during an insolvency situation which would render it "not reasonably practicable" to consult with employees' representatives. An example of such a circumstance would be where there is a sudden unforeseen event necessitating the closure of the business, as distinct from closure following a gradual run-down of the company². Dismissing employees to make a business more attractive to potential purchasers does not however constitute such a circumstance³. It is possible that similar arguments could be taken into account by the criminal courts in relation to section 193(7).

Comment

The trial against the directors of City Link is expected to be heard on the 5 and 6 November and the outcome will be eagerly anticipated. The fact that criminal fines under section 194 of the Act are now unlimited, certainly highlights the severe consequences for failing to adequately provide notice to the Secretary of State. Directors and insolvency practitioners should be aware that their D&O liability insurance will not offer coverage for criminal acts and so they may find themselves financially liable. While the requirement to notify the Secretary of State is nothing new, insolvency practitioners, particularly administrators as well as directors of companies on the brink of insolvency, will be particularly cautious given the recent efforts being made by the Insolvency Service to prosecute pursuant to section 194. Administrators and directors seeking to preserve the value of a company will want to act quickly and discreetly. The requirement to provide notice is somewhat onerous and could ultimately be detrimental to their efforts to achieve a timely sale of the company's assets for good value. Best advice would be that where full compliance is not reasonably practicable, the employer should still take all steps towards compliance as are reasonably practicable in the circumstances of the case, to maximise the likelihood of the section 193(7) defence being available.

Footnotes

¹Claes and others v Landsbanki Luxembourg SA (in liquidation) C-235/10

²Clarks of Hove v Bakers Union [1978] I.R.L.R. 366

³ GMB v Rankin & Harrison [1992] IRLR 514

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