Three former directors of City Link, the parcel delivery company which infamously went into administration on Christmas Eve in 2014, have been acquitted of criminal offences relating to their failure to give the Secretary of State adequate notice of planned redundancies.
Sections 193 and 194 of the Trade Union and Labour Relations (Consolidation) Act 1992 require employers to carry out a collective consultation with employees and give advance notice to the Department for Business Innovation and Skills (BIS) in form HR1 when proposing to make 20 or more employees redundant within a period of 90 days or less. Failure to do this is a criminal offence, which is liable to summary conviction or an unlimited fine. Directors are personally liable if the offence was committed with their consent, connivance or because of their neglect.
In the first prosecution of its type, BIS alleged that City Link's former managing director, finance director and non-executive director were aware on 22 December 2014 that mass redundancies were inevitable (around 3000 ultimately followed), but this was not notified to the Secretary of State until 26 December 2014.
Deputy District Judge David Goodman held that, as at 22 December 2014, he was satisfied that all three company directors genuinely believed that the company could be rescued by a sale in administration, and accordingly there was no proposal to make redundancies at that stage. He said "A director cannot 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 be reasonably envisaged."
Trade Union pressure, the unfortunate timing of the redundancies on Christmas Eve, and the £5m cost to the tax payer in statutory redundancy payments will have, no doubt, played heavily in BIS' decision to prosecute the former directors of City Link. The subsequent prosecution of the chief executive of Sports Direct, which followed only weeks after City Link, has however raised concerns about a hardening approach by BIS. Time will tell whether BIS will maintain this approach going forward given the recent acquittals and Goodman's warning against crystal ball gazing.
What are the implications for D&O insurers?
There appears to be an increased desire by BIS to hold company officers and directors to account under the employment legislation and these prosecutions highlight the importance of following correct procedures in redundancy situations. The implications for directors and their D&O insurers should a company fail to do so, will be significant.
Whilst a D&O policy will not usually cover criminal liabilities such as fines and penalties imposed for non-compliance, directors who become embroiled in redundancy investigations and criminal proceedings brought by BIS will incur significant defence costs and these will usually fall within the defence costs section of the D&O policy.
Insurers will want to satisfy themselves that the risk was fairly presented to insurers prior to policy inception and an insured's answers to any questions regarding the solvency of the business may be relevant. Going forward, D&O insurers should ensure that insureds with workforces of 20 or more are asked questions about the likely threat of redundancy and the procedures the company has in place to ensure compliance with the employment legislation in the event of large-scale redundancies or insolvency.