According to a recent decision by the High Court in R (on the application of Palmer) v Northern Derbyshire Magistrates Court, an Administrator is an officer of a company in administration for the purpose of collective redundancy rules.
This means an Administrator can be prosecuted personally for failing to notify the Insolvency Service of collective redundancies being made by the company in administration.
Where an employer proposes to dismiss 20 or more employees at one establishment within a period of 90 days, it has an obligation to notify the Secretary of State of that proposal in writing before giving notices of termination and at least 30 or 45 days (depending on the number of proposed redundancies) before the first dismissal takes effect (section 193 Trade Union and Labour Relations (Consolidation) Act 1992 (TULRCA)).
The notification is made on a "HR1" form, which has to be submitted to the Insolvency Service.
Failure to comply is a criminal offence (section 194 TULRCA). Where the employer is a company, a director, manager, secretary or "other similar officer" of the company can be guilty of the criminal offence if it has been committed with the consent or connivance of that individual, or if the offence is attributable to their neglect.
Mr Palmer was one of the joint Administrators of West Coast Capital (USC) Limited (USC), a wholly owned subsidiary of Sports Direct.com Limited. Mr Palmer's responsibility was "preferential claims" and "employees".
On 6 January 2015, USC filed a notice of intention to appoint administrators. From that date steps were taken to cease operations at USC's warehouse, including the removal all stock and other equipment. The dismissal of the 84 warehouse employees was an inevitable consequence of the warehouse closure.
USC went into administration on 13 January 2015. On the same day there was a pre-pack sale of the USC business except for its warehouse. The next day, the warehouse employees were made redundant.
Two weeks later, the Insolvency Service contacted the joint Administrators to ask whether the HR1 form had been sent. The form was emailed to the Insolvency Service on 4 February 2015. It was signed by Mr Palmer and dated 14 January 2015. Mr Palmer said the form had been signed and largely completed on 14 January 2015, but sending the form had been overlooked.
Criminal charges were issued against Mr Palmer (and Mr Forsey, the director of USC) in July 2015 regarding the failure by USC to comply with section 193 TULRCA. The charges against Mr Palmer related to the period after USC went into administration up until the receipt of the HR1. (The charges against Mr Forsey related to the period from early January 2015 until USC when into administration.)
The High Court rejected Mr Palmer's judicial review application and decided it was correct that an administrator can be prosecuted for an offence under section 194 TULRCA.
It stated that Parliament must have intended that anyone with responsibility for the day to day management and control of the corporate entity should be capable of being personally liable for the employer's failure to file the HR1. An Administrator, by virtue of their office, manages a company and has the power to dismiss the company's employees. Once an Administrator assumes office, there is no-one else that could give the statutory notice (the HR1 form) on behalf of the company without the Administrator's direction. An Administrator is both an officer of the court and an officer of the company.
This decision puts Administrators in a difficult position.
The Court acknowledged that Administrators have duties to creditors and that an obligation to give the Insolvency Service at least 30 days' advance notice of proposed redundancies before the dismissals take place could put Administrators in a position of conflict, particularly where a business is fundamentally untenable.
In light of this decision, as one of their first tasks upon appointment Administrators will need to reach a view about whether the plan for the company would lead to redundancies of 20 or more employees. If an Administrator inherits a situation where the directors already propose to make redundancies, they will need to make their own decision about whether to implement that plan. If an Administrator decides to go ahead with a collective redundancy proposal they will need to submit the HR1 form without delay, if the directors have not already done so.
The criminal proceedings against Mr Palmer had been adjourned pending the outcome of this judicial review application. Those proceedings will now go ahead. To date, it is understood that there have been no successful prosecutions of company directors or officers for this offence.