Further Questions Raised about Redundancy in Insolvency Cases

The Government is sticking stringently to its position that there is no conflict between insolvency law and employment law. However, as we reported just last month, insolvency insiders, such as the trade body R3, still believe the current regulations lack a workable solution.

Insolvency experts are adamant that, despite Government rebuttals, the way redundancies are handled in insolvency cases is a mess. They feel that continuing to pretend otherwise will only lead to further practical problems.

Underlying tensions

The current legislation on collective redundancies in insolvency situations is clear. Under the Trade Union and Labour Relations Act (1992), consultations, where 20 or more employees are to be made redundant, must start as soon as there is ‘clear intention’ to do so. Furthermore, they must begin at least 30 days before the first dismissal takes place. However, the recent administration of the delivery firm City Link has brought the feasibility of these rules into question.

The administration and subsequent collapse of City Link hit the headlines last year. In the run-up to the Christmas period, some 2,000 jobs were lost, causing a massive amount of distress. Employment law dictates that where 100 or more redundancies are to be made, employees must be consulted 45 days before the first dismissal.

In this case, the three directors failed to give the employees the necessary notice. In the court case leading up to Christmas this year, the directors were acquitted of criminal offences relating to the collapse of the firm, including failing to give 45 days’ notice of dismissals.

The court found that the decision to put the firm into administration did not mean redundancies were inevitable; as a result, the obligation to notify employees was not triggered. When the delivery firm collapsed, there was still a chance that some or all of the company could be saved. Yet, despite the failed prosecution, the Government still seems committed to ensuring the consultation obligations are adhered to, regardless of the particular circumstances of the case.

Why are redundancy consultations not always possible?

In company insolvency situations, insolvency practitioners are tasked with balancing creditor demands while preserving the company’s value for the benefit of shareholders. Given these dual responsibilities, it is not always feasible to delay the termination of employment contracts for 30 or 45 days.

Insolvency practitioners have cited a number of reasons why redundancy consultations may not be possible:

  • Lack of funds – With such a lengthy consultation period, the level of funds available to the insolvency practitioners for the benefit of creditors would be seriously diminished. It has been suggested that the Government should provide funding during this time.
  • Inconsistencies in the legal framework – Insolvency practitioners have identified a potential conflict of interest when consulting employees and protecting the creditors’ interests. Starting the consultation process and disclosing sensitive information about the company’s financial difficulties could cause the value to leak from the business to the detriment of the creditors. Insufficient time – Appointing employee representatives takes time.
  • Delaying dismissals to comply with the letter of law could mean the administrator has to take on the employment contracts and the associated liabilities.

The Government’s position

Employees who are made redundant in company insolvency situations may be entitled to redundancy pay. There are also penalties of up to 90 days’ gross pay that could be applied if companies fail to consult employee representatives. If the insolvent business cannot afford to make the redundancy payments, this burden falls on unsecured creditors and taxpayers. More than half of the insolvency practitioners consulted felt this sanction was ineffective in insolvency situations.

However, the Government still believes there is no conflict between insolvency and employment law. While it does agree that some tensions could exist, it still advocates that meaningful consultations take place, even in insolvency cases. The Secretary of State should also be informed of the proposed redundancies.

Until the Government acknowledges these practical problems, there will continue to be diminished returns for creditors and unnecessary expenditure that reduces the value for shareholders. If your company is in need of insolvency advice call 08000 746 757, or email info@companydebt.com, or for live support click on the box on the lower right-hand side of your screen.

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