According to recent press reports, Dave Forsey, Chief Executive of Sports Direct, is the latest (and most high-profile) executive to be hit by court proceedings concerning alleged failure to comply with redundancy notification procedures - in his case in his former position at fashion retailer, USC. As these and other reports confirm, there is clear evidence that the Insolvency Service is increasingly proactive in pursuing organisations, their senior personnel and insolvency practitioners who fail to file the requisite redundancy notification form (HR1) on time.  It would also appear that there is very little scope (if any) to claim special circumstances.

BIS issued a call for evidence on “collective redundancy consultation for employers facing insolvency” in March 2015 and is due to report this autumn. Against that background, and a consensus that there is a real conflict between employment law and the rescue culture on this issue, the increasingly hard line taken by BIS is cause for concern, both for IPs and directors of distressed businesses.

The law

It is a statutory requirement that, in addition to obligations to inform and consult with affected staff over redundancies, where a sufficient number of employees are affected employers also notify the Secretary of State. This obligation arises where 20 or more redundancies are proposed at any establishment within a 90 day period. It involves submission of a standard form, HR1, the timing of which varies according to the number of redundancies: where 20-99 redundancies are proposed, at least 30 days must elapse between form submission and the first dismissal or, for larger-scale redundancies involving potentially 100 or more employees, a period of 45 days applies.

Failure to comply with these requirements is a criminal offence, attracting an unlimited fine. 

A trap for the unwary

In any well-planned and anticipated redundancy exercise, compliance with this notification requirement will form an integral part of an organisation’s strategy.  However, compliance will often be much more challenging where redundancies arise in a distressed context:

  • An investor, creditor or prospective purchaser of a struggling business may pull the plug unexpectedly, leading to inevitable staff reductions or insolvency.
  • Where there are efforts to rescue the business or preserve “going concern” value by way of a pre-packaged administration sale, consultation could lead to the market becoming aware of the company’s difficulties and thus prejudice the outcome.
  • After appointment, it is unlikely to be in the interests of creditors that the company should continue to trade for the consultation period in order to comply with the statutory requirement, even if it has sufficient funds to do so.

The law provides for no exceptions to either the obligation to submit the HR1 form nor the required timeframe to reflect these particular difficulties.

Recent events suggest that directors and IPs can now expect to receive letters from BIS calling them to interview much more frequently than was previously the case. What is more, since the offence is of a criminal nature, any such interview will necessarily be conducted under caution. BIS are particularly interested to know about the events in the days running up to the redundancies and why a form HR1 was not filed sooner and their approach appears to be one of strict liability, leaving limited scope for justification.

Issues to bear in mind

Inevitably, each situation in which the statutory requirements are not met will vary and warrant particular scrutiny on the facts. However, the hardened approach by BIS emphasises the crucial importance of considering and acting on this issue as soon as possible.

Specifically, directors and IPs should be aware of the risks and the potential for individual liability should be on everyone’s agenda.  Directors and IPs should:

  • consider whether to file a form HR1 earlier: it is acknowledged that in most cases involving a “pre-pack” (for example), giving early notice will be impractical, but the risk of BIS investigation should always be noted;
  • keep a careful record of the reasons for deferring the filing of form HR1: records should show that the position remains under constant review and how the decision to defer will benefit other stakeholders (including, ideally, employees themselves);
  • be demonstrably proactive at the earliest opportunity (for example, immediately following an appointment as administrators), even if a technical breach of the rules is unavoidable.

The government’s position should become clearer over the coming months, when BIS reports on its call for evidence. In the meantime, R3 (the Association of Business Recovery Professionals) has responded to the call for evidence and is engaging with BIS to encourage it to consider the importance of the rescue culture and the concerns of the insolvency profession in its investigations and prosecutions.