The Employment Appeal Tribunal ("EAT"), in the case of AEI Cables v GMB, has reduced the level of a protective award payable to employees dismissed as redundant, in circumstances where the redundancies had to be made immediately to avoid the company trading whilst insolvent.

AEI Cables is a manufacturer of copper wiring and cable. In 2010/2011, for various reasons, it faced serious financial difficulties. In May 2011, AEI was warned by its accountants that unless it cut costs quickly, it risked trading whilst insolvent. A week later, the bank refused to extend its overdraft. After taking further advice, it was decided that one part of the business would be closed, with the result that 124 employees would be made redundant (with 189 remaining in another division). A proposal was then made for a Creditors Voluntary Arrangement ("CVA"), which was formulated on the basis of the redundancies having been made. Two days later, the 124 employees were dismissed with immediate effect. The CVA was then ratified and AEI continued to trade.

The redundant employees brought claims for protective awards for AEI's failure to inform and consult on the redundancies for a minimum period of 90 days, pursuant to the Trade Union and Labour Relations (Consolidation) Act 1992. The Tribunal found there had been a complete failure to inform and consult, and awarded the maximum award of 90 days' pay per affected employee.

On appeal, the EAT reduced the award to 60 days' pay per employee. It confirmed that, in assessing the appropriate level of award, it was necessary to consider why the employer acted as it did, and whether there were any mitigating circumstances. A protective award is penal in nature, rather than compensatory, and is designed to encourage employers to comply with their legal obligations. Whilst the starting point was a 90 day award, Tribunals were bound to take account of mitigating factors, and so the reason for any failure was highly relevant to the appropriate level of award. As AEI could not continue to trade lawfully, it was wrong for the Tribunal to conclude that 90 days' consultation could have been carried out.

Nevertheless, the EAT held that a good employer, in those circumstances, would have "pulled out the stops" and done everything it could to consult. A limited degree of consultation could have taken place over the couple of days that were available, but AEI didn't do anything at all. Therefore, to meet the gravity of the failure, but at the same time taking into account the circumstances relating to the insolvency, the EAT concluded that awards of 60 days' pay per employee were appropriate.

Points for employers and insolvency practitioners

  • This decision is helpful for employers having to make redundancies in the face of serious financial difficulties, and for insolvency practitioners assisting businesses in distress.
  • Whilst there is a "special circumstance" exclusion to the duty to inform and consult on redundancies, it has long been held that actual or potential insolvency is not such a special circumstance. However, this case confirms that whilst actual or potential insolvency will not remove the duty to inform and consult, it can be a mitigating factor when it comes to considering the appropriate level of award.
  • The case is also a useful reminder that any steps made towards complying with the duty to inform and consult will be helpful in mitigating any award payable. In this case, AEI took no steps, but had the award reduced from the maximum level simply because full compliance would never have been possible in the circumstances of their potential insolvency. Had they made some efforts towards compliance, it is possible the award would have been reduced even further.