Towards the end of last year we reported that several directors faced court proceedings relating to alleged failures to comply with the notification procedures where employers are "proposing to dismiss as redundant" 20 or more employees at one establishment within a 90-day period. Failure to submit form HR1 is a criminal offence and makes the employer and/or its directors liable to a fine of up to £5,000. The decision of the Magistrates' Court acquitting the directors in one of these cases, BIS v Smith, Peto and Wright, has now been published.
The company had been trading at a loss and although its advisors had approached a number of prospective purchasers, no sale resulted, so the directors then concentrated on developing a turnaround plan, based on restructuring the business. The Board had been making almost weekly presentations to its principal shareholder in an attempt to get more funding for this.
After their final presentation on 19 December 2014, the directors were still confident that the turnaround plan would be accepted and the necessary funding (about £25 million) would be provided. But the shareholder told the company in a phone call first thing on 22 December that the plan had been rejected and the necessary funding would not be made available. An immediate board meeting was called, and by 10am on 22 December the directors had decided that the only option was for the company to go into administration. The administrator gave notice of more than 2,700 redundancies on 26 December.
The central issue in the trial was whether the need to notify the government arose when the decision was taken on 22 December to put the company into administration. The prosecution argued that this decision made large-scale redundancies inevitable, or almost inevitable, and that amounted to a "proposal to dismiss". However, the Judge decided that, on the facts, none of the directors regarded the closure of the business, as opposed to the company, as inevitable, so there was no proposal to dismiss.
All the directors gave evidence that they genuinely believed a sale in administration (with jobs saved) was not only possible but quite probable. The business was far more likely to be attractive to a potential buyer when in administration, because of the options open to an administrator that are not available to the directors of a company before it goes into administration. The way the Judge put it was that a director could not be expected to "put a crystal ball on his or her desk, at a time of huge shock and turmoil, and predict the likely consequences of an action, unless a consequence is either the only foreseeable one, or is the only consequence that can reasonably be envisaged in the circumstances".
The Judge did add a clear warning that his finding was based on the evidence in this case, not on a general principle in relation to administration generally, and employers should certainly not regard going into administration as a way of avoiding responsibility to make notifications.