Changes Called For in Insolvent Company Redundancies

A ‘call for evidence’ inviting views from the industry and the public on the challenges faced by businesses when consulting employees about redundancies in insolvency is now closed. The consultation ran from 23 March to 12 June 2015, and the results will now be analysed before the feedback is published.

The consultation invited stakeholder comments on collective redundancy for employers facing insolvency, focusing on:

  • Their understanding of the current requirements, their purpose and benefits
  • Factors that facilitate or inhibit effective consultation
  • The role of directors and insolvency practitioners
  • Ensuring timely notification and effective communication

Under the current regulations, employers proposing to make more than 20 employees redundant within any 90 day period must consult them and inform the Secretary of State for Business, Innovation and Skills about their proposals. A company becomes insolvent when it can no longer pay its bills or it liabilities outweigh its assets. A formal insolvency procedure must take place like a company voluntary arrangement, administration, creditor voluntary liquidation or even compulsory liquidation, before a claim may be made.

Consultation can help to reduce the impact of collective redundancies or avoid any unnecessary redundancies altogether. On the other hand, inadequate consultation can lead to a protective award being made against the employer. However, if the company is insolvent, some or all of the protective award can be claimed from the National Insurance Fund. The result is that collective redundancies can cost the taxpayer tens of millions of pounds.

What changes can be made?

The insolvency trade body R3, believes government action is essential to reform the current collective redundancy process in insolvencies. It is calling for a number of new measures, including clearer guidance from government and the reform of the current protective award compensation regime, which sees the tax payer foot the bill.

The current rules dictate there should be 45 days of redundancy consultation, with alternatives to redundancy to be discussed. However, insolvent companies simply do not have the funds to comply with these regulations, and there are very few viable alternatives for companies in trouble. This makes it extremely difficult for insolvency practitioners to comply with the law.

Andrew Tate, the vice-president of R3, said: “The government’s ‘call for evidence’ is very welcome. This is a perfect chance to embrace the calls for reform and sort out the very real problems that exist when trying to consult on redundancy when companies fail.

“Clear guidance is needed from government. Insolvency practitioners will try and save jobs and businesses, but the rules on what they should do when they can’t are problematic and unworkable. The government needs to work with a range of stakeholders, from the unions to the insolvency profession, to achieve meaningful reform.”

A Memorandum of Understanding

Given the problems with the existing consultation requirements, a Memorandum of Understanding was drawn up between the Insolvency Service, Jobcentre Plus and the trade body R3. The aim of the memorandum, drawn up in 2009, was to ensure any employees made redundant as a result of insolvency are given the timely advice they need.

Insolvency practitioners should provide as much advice as they can while working with the insolvent company. They should also work closely with the Jobcentre Plus to make sure help is available. However, given just how quickly insolvency situations can progress and given the limited time and money available, it can be impossible to provide a full-45 day consultation.

Protective awards

There are also problems with the way the current protective awards scheme operates. The current legislation is intended to be a punishment for companies that fail to deliver the proper consultation, but in the case of an insolvent company, there is no incentive for the directors to avoid the penalty as they know they will no longer be liable when the penalty is awarded.

Even when the company directors know redundancies are inevitable, they can choose not to go ahead with the consultations and wait for the insolvency practitioner, employees and taxpayer to clean up their mess at a later date.

If your company is facing insolvency and you are unsure what to do regarding employees, call 08000 746 757 to speak to someone who can help.

Written by: Mike Smith

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