The Courts have recently confirmed that administrators of an insolvent company can be prosecuted in their personal capacity for failing to notify the Secretary of State of proposed collective redundancies.
This is in addition to the potential civil penalties on the company itself as previously discussed here.
The criminal offence of failing to file Form HR1
The notification requirements are set out in the Trade Union and Labour Relation (Consolidation) Act 1992 (TULRCA).
Where an employer (or appointed administrator) intends to make at least 20 employees redundant from one establishment within any 90-day period, they must first notify the Secretary of State using form HR1. Notification must be given:
- before giving any employees notice of termination; and
- at least 30 days prior to the first dismissal, increasing to 45 days for 100+ planned redundancies.
Failing to notify can lead to criminal liability, an unlimited fine and potential disqualification under the Company Directors Disqualification Act 1986.
This offence has a broad application and can cover any administrator, director, manager, secretary or other similar officer of the company who is shown to have consented to, got involved in or negligently failed to prevent, a failure to notify.
In very limited circumstances, a ‘special circumstances’ defence may be relied on to argue that there were unexpected circumstances that meant it was not reasonably practicable to notify the Secretary of State in time. If successful, this defence may prevent liability or help to reduce the severity of any punishments. However, the extent to which this defences applies is very fact-dependent and immediate legal advice is highly recommended before seeking to rely on it.
We have previously discussed this defence in the context of failing to follow the statutory collective consultation process, and in particular that insolvency alone will not satisfy it, in this article.
R (Palmer, Forsey) v Northern Derbyshire Magistrates' Court
West Coast Capital (USC) Limited (“USC”) was an English incorporated company wholly owned by Sports Direct.com, of which Mr Forsey was a director. Despite having operations and a warehouse in Glasgow, USC was managed from its registered office in Derbyshire.
Following the receipt of a statutory demand from a supplier, Mr Forsey signed and filed a notice to appoint three administrators. From 6 January 2015, USC took steps to ensure all stock and equipment was removed from the Glasgow warehouse and ceased all activity.
On 13 January 2015, USC entered into administration and Mr Palmer was appointed as joint administrator together with two others. On the same day USC entered a ‘pre-pack’ sale and every part of USC, with the exception of the Glasgow warehouse, was sold to another company owned by Sports Direct Group.
On 14 January 2015, the employees of the Glasgow warehouse were given a letter stating their jobs were at risk and inviting them to a meeting to discuss redundancy alternatives. However, 15 minutes later, the staff received another letter informing them that there were no alternatives and they were dismissed with immediate effect. Both letters were signed by Mr Palmer.
On 30 January 2015, the Redundancy Payments Service (RPS) contacted the administrators to ask whether form HR1 had been filed. Mr Palmer had signed and dated it on 14 January 2015 but the part-completed form wasn’t received by RPS until 4 February 2015.
In July 2015, the Secretary of State brought criminal prosecutions against Mr Palmer, as an administrator, and Mr Forsey, as an officer, for failing to give the required notice. Since then, both parties have been subject to various criminal proceedings that have been delayed awaiting this key judicial review.
The Court held that:
- the offence was committed at the time the relevant person was obliged to, but did not, notify the Secretary of State of their intention to make the redundancies. For an administrator, liability could arise any time after appointment;
- the offence does not require any intention to not notify the Secretary of State; and
- administrators could be guilty of the offence, as they are be deemed to be equivalent to officers of the company for the purposes of TULRCA, despite the fact that there was potentially a conflict of interest between an administrator’s separate duties to creditors, the Secretary of State and the law.
During the process of trying to salvage a company by closing specific areas and making mass redundancies, it is easy for administrators to fail to complete the HR1 Form, complete it correctly or submit it on time. The Secretary of State has shown little leniency with these failures and this case shows that they will bring about criminal prosecutions.
For administrators, no stage of appointment is too early to seek legal advice. An administrator’s potential liability commences from the moment they are appointed. Before accepting their appointment, they should confirm that the company is not already in breach of the collective redundancy rules and what to do if they are. Consideration should also be sought as to whether administration is the right decision, or whether immediate winding up is appropriate, especially considering that redundancies must be postponed for at least 30 days from the HR1 being filed.
When a business is experiencing serious financial difficulties and it is clear that 20 or more jobs may be at risk as a result, the business (and any appointed or prospective insolvency office holders such as administrators) should take up urgent legal advice about the notification rules, and what steps they could and should take to help minimise the risk of prosecution.