Administration and redundancies: stuck between a rock and a hard place?

Administration and redundancies: stuck between a rock and a hard place?

Published:

Author: Kenny Scott

Applies to: UK wide

How can insolvency practitioners balance the competing pressures of an administration and the requirement to collectively consult about redundancies?

The law

When any business is facing redundancies, there is a duty to collectively consult staff about redundancies if, over a 90 day period, twenty or more redundancies are proposed.

In that situation the consultation must start at least 30 days before the first dismissal takes effect. Where 100 or more redundancies are proposed, that period is extended to 45 days.

Consultation should be with a view to reaching agreement about ways of avoiding the dismissals, reducing their number or mitigating the effect of the redundancies.

Where these requirements have been breached, employees can bring claims in the employment tribunal for protective awards. The maximum award is 90 days' actual pay per affected employee. This figure is not capped in the way that statutory redundancy payments are, and protective awards are punitive rather than compensatory in nature, so the loss suffered by the redundant employees is irrelevant.

Reasons not to consult?

When a business is in administration and redundancies are being carried out by an insolvency practitioner, there is often a tension between the interests of the employees being consulted and what the administrator is trying to achieve. One concern is around possible breaches of confidentiality; if sensitive information given to staff during the consultation is leaked there is a risk that the prospects of a sale of all or part of the business or, the value of that sale will be reduced.

Administrators are also often faced with pressures of time and a lack of funds to keep paying the employees. If employees are kept on beyond 14 days then the administrators are generally deemed to have 'adopted' the employment contracts meaning that claims for unpaid wages then rank ahead of the administrator's fees and expenses.

A requirement to elect staff representatives (if there are no trade union or existing representatives) to consult with, may also be perceived as an administrative burden which is not a priority for administrators.

The 'special circumstances' defence

There is a possible defence to a claim for failure to consult, where the employer can show that special circumstances existed which meant it was not reasonably practicable to consult and such steps which were reasonably practicable in the circumstances were taken.

Generally, to rely on the defence an employer, or insolvency practitioner (as the case may be) will need to show that something sudden, unexpected or out of the ordinary occurred, whether a financial or physical crisis, to render the continuation of the business unviable.

Every situation will be different but examples of when the tribunals have accepted that special circumstances existed include:

  • a bank withdrawing credit facilities when a sale fell through.
  • the government refusing to provide a further loan.

This defence is interpreted restrictively by employment tribunals, and it is not the case that an insolvency situation is automatically regarded as a special circumstance. The fact that consultation may be futile or unlikely to achieve much is also not a special circumstance.

The exact circumstances of a particular insolvency may allow this defence to be established but only in exceptional circumstances.

Tips for administrators

Insolvency practitioners should try and keep a contemporaneous note recording their decision making process in light of the prevailing circumstances and revisit that decision as circumstances change. This could help reduce the value of any successful failure to consult claims.

It is also important that insolvency practitioners try and do something towards consultation with the affected workforce rather than absolutely nothing at all. Even if legislative timescales cannot be observed being able to show that there was at least some attempt at consultation will greatly assist in mitigation arguments before the tribunal. Bear in mind also that the 30 and 45 day periods are not minimum periods of active consultation; rather they are the minimum time period between day 1 of consultation and the first dismissal taking effect.

Consequences of failing to consult collectively

There are a number of possible implications, including:

  • Criminal liability - failure to lodge Form HR1 with the relevant government department (BEIS) can amount to a criminal offence (for which the insolvency practitioner may be personally liable) and result in significant fines.
  • Compensation - the maximum penalty for failure to appropriately consult about collective redundancies is 90 days' gross pay per employee which can be a significant amount when there are numerous employees affected, to the detriment of the creditors the administrator seeks to assist by diluting their potential return.
  • Preferential debts - a protective award will be a preferential debt if it relates to the four month period immediately before insolvency proceedings commenced (capped at £800 per employee).
  • Reputational damage - the Department for Business (as it then was) previously wrote to all insolvency practitioners reminding them of their responsibilities in redundancy situations. In 2011 a joint memo was signed between Job Centre Plus, R3 (the insolvency trade body) and the Insolvency Service in which R3 encouraged its members to involve Job Centre Plus as soon as they think redundancies are to be made.

Assessing the risks

  1. Employment status - only employees may bring claims for failure to consult so if the workforce also consists of workers, agency workers, zero hours staff, consultants or casual workers who don't meet the definition of 'employee' the risk is further reduced.
  2. Adoption - even where consultation results in retaining employees beyond day 14 and the adoption of employment contracts, this does not give rise to personal liabilities for administrators unlike administrative receivers. The super-priority attaching to wages and salary under adopted contracts only applies from day 15.
  3. In multi-site redundancy situations, if each location amounts to an 'establishment' with less than 20 employees then the duty to collectively consult is not triggered at all. In other words, employee numbers don't need to be aggregated across sites.
  4. Moratorium on claims - there is a stay (sist in Scotland) on claims during administration (commencing on day 1 of the administration) which requires administrator or court consent to proceed. This can be an effective tool in pushing back the point at which claims have to be actively managed and addressed but ultimately should almost always be given for unfair dismissal and redundancy claims according to the Employment Appeal Tribunal.
  5. National Insurance Fund - employees can recover certain amounts due from the National Insurance Fund including a statutory redundancy payment and part of any protective award.

Conclusion

Insolvency practitioners should not fall into the false belief that they automatically have some special exemption or defence from the requirement to consult with employees and their representatives. Carrying out some consultation and noting the commercial factors preventing fuller consultation as and when they arise, can reduce the value of possible claims. It may also be possible for the insolvency practitioner to encourage the employer to start the consultation process before appointment.

Disclaimer

This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.