The government’s own call for evidence on consulting on insolvent redundancy cases has been criticised by the insolvency trade body R3. The organisation says the government has failed to find a ‘workable solution’ after the call for evidence was launched following the collapse of the delivery firm City Link.

A joint report produced by two parliamentary committees at the time of the City Link closure concluded that the insolvency system was too heavily skewed in favour of investors over workers. It also said that City Link made a deliberate decision not to inform employees of its likely failure. The result was that 2,700 people lost their jobs over the Christmas period and a further 1,000 contractors were left without employment.

What does the current Redundancy legislation say?

The current legislation on collective redundancies where an employer proposes to make 20 or more employees redundant can be difficult to implement in insolvency situations. The Trade Union and Labour Relations Act 1992, dictates that consultation must start as soon as there is a ‘clear intention’ to make redundancies. This consultation must also start at least 30 days before the first dismissal takes place.

In response to the 12-week call for evidence, the Insolvency Service said that the government believes there is no conflict between employment law and insolvency law in this case, but responses from trade unions, professional bodies and insolvency practitioners strongly suggest that tension does exist.

Responses from the insolvency profession

Almost all of the respondents to the government’s call for evidence said they believed that in practice, a meaningful redundancy consultation with a view to reaching an agreement on ways to reduce dismissals was not possible in a company insolvency situation.

The main reasons for this inability to hold a meaningful consultation were cited as time and funding constraints. It was said that insolvency practitioners do not intentionally seek to avoid complying with the requirements to consult with an insolvent company’s employees, but are ‘prohibited from doing so’ as a result of time constraints and the need to preserve the value of the business. The respondents claimed that the consultation made it more difficult to continue to trade and retain key employees.

Another leading firm of insolvency practitioners said that a meaningful consultation does not work in practice because in the majority of cases, the business needs to close immediately or in the very short term to mitigate its losses. It was also argued that the consultation could materially affect the sale of the business, thereby reducing the creditors’ return.

Government payouts for botched employee consultations

Despite complaints from insolvency practitioners that the current redundancy consultations are unreasonable, the consultations are still supposed to take place, and any failure to do can prove costly. For example, in Deloitte’s administration of the high-street retailer Woolworths, the government paid out £18.2 million in protective awards. In fact insolvent redundancy can be involved in company voluntary arrangements, trading individual voluntary arrangements and creditor voluntary liquidation of a company.

However, there is some wriggle room in the current legislation that means the consultation does not apply in ‘special circumstances’ that render it impractical for the employer to comply with the ‘scope or length of the consultation’.

Given this potential ‘out’ for employers and insolvency practitioners, the insolvency industry believes it is far more sensible to reduce the 30 day period before the first dismissal can take place. Such a move would reduce the scale of non-compliance and create a workable environment where creditors, investors and employees could receive a fair deal.

Given the responses to this call for evidence, the government plans to hold further discussions with interested parties in the new year.