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Insolvency law v Employment law – who wins and who pays?

By 8th July 2015No Comments


Insolvency Practitioners face problems trying to comply with employment law on many cases due to the strict interpretation of the rules on consultation before making redundancies.

This has led to several high profile Employment Tribunal cases where Protective Awards (an award of up to 90 days’ gross pay per affected employee for an employer’s failure to collectively inform and consult its employees) have been made.  For example, an employment tribunal awarded former Comet employees up to 25 million in a compensation payout.  Is this due to Insolvency Practitioners (IP) failing to do their job correctly (as former government ministers suggested), or could it be down to the incompatibility of two sets of laws designed to protect different categories of stakeholders?

As Licensed Insolvency Practitioners, we are put in an impossible situation at the start of a new case with more than 20 employees.  An employer has a duty to consult on all potential redundancies for up to 90 days before the redundancies are made.  But if an IP is appointed, this is usually because there are insufficient funds to continue trading, or at best only limited funds.  Therefore, redundancies have to be made with little or no notice, which automatically breaches the current rules on consultation.  Meanwhile, the IP is doing what they can to maximise realisations and minimise costs, for the benefit of creditors as a whole.

At present, although there are exemptions from the consultation requirements in ‘special circumstances’, an employer’s insolvency is not considered a special circumstance.  Hence Protective Awards of 90 days pay per employee being made on many large insolvency cases.

This is good news for employees.  It means that in addition to being paid any arrears of wages, holiday pay, and redundancy pay from the National Insurance Fund, they will also be paid part of the Protective Award from the same source.  Unfortunately, that is bad news for tax payers as they pick up the bill for the failure to comply with a law that it is often impossible to obey. At least one firm of solicitors launched a marketing campaign to help employees claim Protective Awards against Phones4U when it went into Administration.  Their fee?  20% of the award received, which effectively would have been paid from public funds.

Why is this an issue now?

The Government has issued a Call for Evidence on the matter, to understand the issues faced by managers of businesses on the verge of insolvency, and for IPs appointed to insolvent businesses.

It is hoped that this will lead to a revision of the current law to accommodate the difficulties IPs face.  Rosalind Hilton sits on the General Technical Committee of the insolvency trade body R3, which has issued its response to the Call for Evidence.  It notes that:

“The key point to note is that where there are breeches of the consultation requirements in insolvency situations, this is generally a result of the circumstances and exigencies of the individual case, and not a deliberate and unheeding neglect of the law. Even in cases where full compliance is not possible, practitioners will try to mitigate the effects of redundancies by providing as much information and support to employees as possible”

The Call for Evidence closed on 12 June 2015, so watch this space our report summarising the findings.

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