Redundancies in Insolvent Businesses: A Warning for Employers

When a company is facing financial difficulties, the Directors of that company should be aware to the procedures that must be followed in relation to redundancies in order to avoid prosecution.

The Trade Union and Labour Relations (Consolidation) Act 1992 (often called "TULCRA") imposes a duty on employers to report 20 or more proposed redundancies to the Secretary of State within a prescribed period. Whilst the judgment in a recent case against three former City Link Directors cannot be relied on as a precedent by Directors seeking to avoid a successful prosecution for failing to do so (under s193 of TULCRA), it nonetheless serves as a useful reminder of the tests the Court will apply in determining when that duty is triggered when a company is facing financial difficulties.             

City Link had been trading at a loss. On 13 October 2014, KPMG were appointed to advise on the available options. One of which was a potential trade sale, which did not materialise, and another a turnaround plan developed by City Link, the success of which was dependent on an injection of funds by principal shareholder, Better Capital.

The City Link board made weekly presentations to Better Capital on the proposed restructure plans, and the Directors were confident that the plan would be accepted, and the funding provided, after the final presentation on 19 December 2014.

On 22 December 2014, at 8am, however, City Link received the call from Better Capital confirming that the plan had been rejected, and that the funding needed for the restructure would not be provided.

On receipt of this information, the Directors knew that the company would become insolvent by mid-January, and so at 10am on 22 December 2014, they made the decision to place the company into administration.  The administrator made the decision to make the workforce redundant on 24 December 2016, and notified the Secretary of State of this on 26 December 2016. The first of over 2,700 redundancies then took effect less than 45 days later.

The Department of Business Innovation and Skills ("BIS") prosecuted three former Directors of City Link Ltd, alleging that they failed to notify the Secretary of State of proposed redundancies at the earliest opportunity, as was required by them under s193(1) of TULCRA.

The main issue to consider was whether there was any evidence that "special circumstances" existed preventing full compliance with this duty, thus replacing the duty to give 45 days' notice with a qualified duty to take all such steps to comply with the duty as reasonably practicable in the circumstances (pursuant to s193(7) of TULCRA).

However, the Court would only be required to address the issue of whether the directors could rely on that defence if the Secretary of State could establish that the duty to notify the Secretary of State had arisen in the first place.

The Issues

The first issue to consider was whether the decision which was taken by the Directors on 22 December 2014 to place the company into administration amounted to a "proposal" to dismiss staff as redundant.

This test was previously interpreted by the Court in UK Coal Mining Ltd v NUM 2008 to mean "any plan where dismissals will inevitably, or almost inevitably, result… provided the plan is fixed as a clear, albeit provisional, intention".

If that test was satisfied here, the second issue was whether City Link had complied with the qualified duty under s193(7), relying on the "special circumstances" defence, and the third issue would then be whether the prosecution could prove, in respect of each defendant, that the offence was committed with his consent, or that he connived at the offence, or at the offence was committed by his neglect. If convicted, each of the Directors would be guilty of a criminal offence and liable to a fine, the limit of which is at the Judge's discretion (as of 12 March 2015, it is no longer limited to £5,000).

The Decision

The Judge was persuaded by the Directors' evidence on the first issue (as to whether or not the duty to notify the Secretary of State had arisen), which was that they had genuinely believed that a sale of the business was possible at the relevant time.

The Judge also took into account the evidence of the administrator of City Link relating to a plan that, if a buyer could not be found by 31 December 2014, then there would have to be substantial redundancies. The administrator also explained that there was an offer from a potential buyer, but that it had been rejected by the administrator, mindful of his duty to creditors, as it was too low.

The Judge did not feel the need to go further to address the second or third issues, as he held that the decision taken on 22 December 2014 did not trigger the duty under s193, as it could not be said - at the time - that dismissals would inevitably or almost inevitably result from the decision. Instead, the Court found that the proposal to make staff redundant was made by the administrator on 24 December 2014, and he had notified to the Secretary of State at the earliest opportunity on 26 December 2014.

This case serves as a warning of the strict procedures that must be followed when contemplating administration and redundancies. Directors who fail to follow the correct procedures imposed on them by the Act could face criminal prosecution.

It will be interesting to see what result the Court reaches in a similar case which is currently listed for March 2016 (the USC case). In that case, the Court will determine prosecutions against a Director and insolvency practitioner in connection with the failure to notify the Secretary of State of proposed redundancies when the fashion retailer USC entered into administration. In particular, it will be useful to see if the Court addresses the second and third issues which were only touched on in the City Link verdict.

If you would like advice on matters relating to insolvency and redundancies, please contact Charles Pallot or Alan Bennett.

This article was jointly written by Charles Pallot and Laura Wonnacott.

Send us a message