In March 2015 the coalition government issued a call for evidence to understand in more detail the employee consultation process when a company is facing insolvency. Last month the government issued its Response. This attracted 28 responses from organisations including law firms, trade unions, insolvency practitioners and professional bodies.

The questions posed highlighted the underlying tensions which arise for insolvency practitioners and directors from the requirement under s188 Trade Union and Labour Relations (Consolidation) Act (TULRCA) 1992 for employers to inform and consult with their employees (or their representatives) for at least 30 days (for 20–99 redundancies) or 45 days (for 100 or more redundancies) where redundancies are proposed during a 90 day period. Where an employer is insolvent, insolvency practitioners are likely to be balancing competing creditor demands and preserving value for stakeholders so that a delay to terminating contracts of employment for these time periods is often not appropriate or practical. In administration cases the insolvency practitioner has to adopt employees’ contracts after 14 days. Delaying dismissals to comply with the strict letter of the law on consultation would, under insolvency law, result in the administrator adopting all employment contracts and liabilities attached to those contracts.

Potential respondents to the government’s call for evidence were asked a series of questions on this issue and the majority who did respond cited an inability to comply with both insolvency and employment law. Various inhibitors to either starting consultation with staff or notifying the Secretary of State of a proposed consultation were raised such as:

  • the lack of time they had to appoint representatives (if none have been previously elected) which conflicts with the need to act quickly to avoid adopting employment contracts.
  • inconsistencies in the legal framework included a conflict of interests between consulting employees and protecting creditor interests by retaining confidentiality and protecting commercially sensitive information. There was a concern that starting a consultation process would disclose a company’s financial difficulties allowing value to leak from the business to the detriment of creditors and potentially employees as well.
  • the lack of funds through the consultation period and it was suggested that the government provide funding for this time.

If employers fail to inform and consult with employee representatives affected employees are entitled to a protective award of up to 90 days’ gross pay. If the business cannot pay, this burden then falls on unsecured creditors and tax payers to discharge. Over half the respondents suggested that this was an ineffective sanction in an insolvency process.

The government’s position on these, and other concerns, is that there is no conflict between insolvency law and employment law. However this is difficult to justify if only from the point of view of conflicting time limits. BIS does acknowledge that tensions exist which “may impede effective consultation from taking place where redundancies are proposed in an insolvency situation”. However it still advocates that meaningful consultation is carried out and that the Secretary of State is notified of proposed redundancies.

What has recently further complicated the position has been what appears to be the first prosecution by the government’s Department for Business Innovation & Skills (BIS) against individual City Link directors for their alleged failure to comply with their obligations underTULRCA by failing to notify BIS of proposed collective redundancies using the HR1 form. This followed the collapse of City Link into administration over the Christmas period last year with the resulting loss of over 2000 jobs. More information on this case can be found on our recent article: City Link – directors not guilty.

Given the current climate directors and insolvency practitioners should consider:

  • taking legal advice at an early stage;
  • being conservative in their approach to the trigger points in employment legislation and comply with notification and consultation requirements as soon as redundancies are proposed;
  • maintain a clear paper trail in the decisions that are taken at each stage; and
  • be aware that they are under scrutiny from BIS over the decisions that they take.