As we reported in April, the Insolvency Service has issued a call for evidence inviting comments on the issues with, and improvements that could be made to, the collective redundancy consultation requirements for employers facing insolvency. The Government has been seeking views on how well the requirements work both before an insolvency practitioner has been appointed to the failing company and after a formal appointment has been made. 

This is an area of the law which we, like many of our clients, feel is desperately in need of reform. With this in mind, CMS has consulted with a number of our clients and produced a response to the call for evidence which we hope will add to the debate on how best to strike a balance between the legitimate needs of employees and the realities of insolvency.

Does the current collective redundancy consultation regime work where the employer is facing insolvency?

In insolvency, there are usually two things in short supply that prevent effective consultation: time and resource. In insolvency situations, there are unlikely to be sufficient funds to allow a business to trade long enough to carry out the degree of consultation required. Moreover, meaningful consultation with a view to reaching agreement on reducing or avoiding redundancies is invariably impossible: the company is insolvent and unless a buyer can be found, redundancies will be inevitable. The overwhelming message we have received from clients is that the current requirement to “consult” in the literal sense of the word simply does not work in practice.

The tension between employment law and insolvency law can also cause directors problems even before an insolvency practitioner has been appointed. For example, under insolvency law, directors looking to avoid liability for wrongful trading must take every step in order to minimise losses to creditors where there is no realistic possibility of avoiding insolvent liquidation. In many cases it will be necessary to cease trading. On the other hand, under employment law, directors are required to consult for up to 45 days where collective redundancies are expected. Directors can find themselves stuck between a rock and a hard place.

Although all respondents unanimously agreed that reform is required, there were differing views on how this could be achieved. However, what is clear that any one-size-fits-all approach will never work for all cases. In some insolvency situations, the insolvency practitioner will be able to trade the business for many months before a sale of the business and assets is completed. In such cases it may well be feasible for full consultation to take place (even if the objective of the consultation is in reality information sharing or mitigation of job losses rather than avoiding them altogether). In many other cases, an immediate sale of the business or even a complete shutdown will be required, whether to preserve value or due to a lack of funding. In those cases it will invariably be impossible to fully comply with the current requirements.

There was also a perception among respondents that Employment Tribunals do not always give adequate credit for the attempts at consultation made by directors of insolvent companies and insolvency practitioners, even when recognising that nothing more could realistically have been done.

Suggestions for reform varied. Although a regime based on “minimum steps” was canvassed, there was concern that it may be too prescriptive and lack flexibility. There was greater support for widening the scope of the defence for failing to comply with the collective redundancy consultation requirements. There was support for making insolvency “a special circumstance” in collective redundancy situations, thereby formally acknowledging that it is often not reasonably practicable for the employer to comply with the requirements. However there are concerns over how this would be achieved under European law. There was general recognition that any reforms should not be open to abuse or result in a dumbing down of standards.

Overall there was strong consensus that there is a pressing case for reform to ensure the law is both fair and capable of being complied with and that it recognises the unique challenges for compliance that insolvency brings.

What happens next?

Once the Government has received responses it will analyse and consider whether any policy changes are necessary. We look forward to reading the Government’s conclusions and will of course keep our clients updated with any developments.