A Sigh Of Relief For Administrators: No Potential Criminal Liability For Breaching Notification Of Mass Redundancies Requirements

On 1 November 2023, the Supreme Court has overturned the 2021 Divisional Court judgment in R (on the application of Palmer) v Northern Derbyshire Magistrates Court and another to hold that administrators do not fall within the meaning of a "director, manager, secretary or similar officer of the company" under s194(3) the Trade Union and Labour Relations (Consolidation) Act 1992 (TULCRA 1992).

This means administrators are not subject to the threat of criminal sanction if they fail to comply with the statutory notification requirements triggered where an employer is proposing to dismiss as redundant 20 or more employees at one establishment within a period of 90 days or less as contained inTULCRA1992.

Reinstating the previous orthodoxy on legal status, administrators are no longer faced with a dilemma of either acting swiftly in the interests of achieving the statutory purposes of administration or complying with the notice requirements underTULCRA1992.

In more detail...

Collective redundancy consultation obligations

Obligations to inform and consult with staff regarding large-scale redundancies are well known, as is the need to notify the Secretary of State via the Redundancy Payments Service (RPS). Under section 188(1) of the Trade Union and Labour Relations (Consolidation) Act 1992 (TULRCA), if an employer proposes to make 20 or more employees redundant at one establishment in a period of 90 days or less, it must inform and consult with a recognised trade union, or, if there is no union, with employee representatives. There is a potential penalty of a hefty protective award (maximum of 90 days' pay) being made in favour of each employee if employers fail to properly inform and consult staff. The fact that an employer company has gone into administration does not obviate the need for compliance with section 188 TULCRA.

HR1 form and the criminal offence

Under section 193 ofTULCRA, an employer has an obligation to notify the Secretary of State using a HR1 form. This is triggered when the employer first 'proposes to dismiss' as redundant 20 or more employees within any period of 90 days or less. It must be submitted giving notice of termination to employees, and at least 30 days (or 45 days if it is 100 or more redundancies) before the first of those dismissals take effect.

The obligation to notify the Secretary of State is sometimes seen as an administrative task with employers unaware of the potential criminal penalty for failing to do so. However, failure to give the Secretary of State the requisite notice is a criminal offence for the employer under section 194TULCRA.

Individual directors, company secretaries, managers or similar officers of the company (or anyone 'purporting to act' as such) are personally liable for offences committed by the employer if it can be shown that the offence was committed with their 'consent or connivance' or if it was attributable to their neglect.

The penalty is now an unlimited fine, although in Mr Palmer's case it would be a maximum fine of Ł5,000 because the alleged offence was committed before 13 March 2015.

Statutory defence

As is the case in relation to the duty to collectively inform and consult under s 188 TULCRA, there is a potential 'special circumstances' defence to a failure to give the Secretary of State the requisite notice under section 193(7) which essentially mirrors section 188(7). There will be no liability where there are special circumstances which mean it is not reasonably practicable to submit the form on time. However, it is well established in relation to the corresponding section 188(7), and it is reasonable to draw across the same principles here, that this has to be something 'unexpected' or outside of the ordinary run of events, such as the destruction of the plant or sudden withdrawal of supplies by a main supplier. The fact of insolvency in itself will not offer protection, nor will a desire to keep a precarious financial position confidential to avoid further reducing the value of the assets or the business.

The case

In October 2015, criminal charges were brought against both Mr David Forsey, the former chief executive of Sports Direct, and Mr Robert Palmer, the administrator of fashion retailer West Coast Capital (USC) Limited (USC) (a Sports Direct group company). The case concerned a large number of redundancies made in Glasgow when a USC warehouse was closed. The Glasgow employment tribunal has previously awarded the maximum 90-day protective award per employee against USC for a failure to consult with employees and criticised it for "disgraceful and unlawful employment practices" during its pre-pack administration in which some employees were given only 15 minutes' notice of their redundancy.

The case has been long and drawn out with many points being taken by both Mr Palmer and Mr Forsey to challenge proceedings. Particular to Mr Palmer as the administrator was the "officer issue".

The 'officer issue'

Mr Palmer was the administrator. He argued that the Magistrates' Court erred in law in concluding that he, as an administrator of the company, was a "director, manager, secretary or similar officer of the company" under s194(3) TULCRA 1992. On that basis, he could not be liable for the offence.

Mr Palmer argued that he was not an 'officer' of the company. Although an administrator had wide powers of management over a company, they derive their authority from the Insolvency Act 1986 (IA 1986), not the company. Alternatively, if an administrator can be considered an officer of the company for some purposes, an administrator did not fall within s194(3) TULCRA as they were not similar officers of the company corporate, or any person purporting to act in any such capacity as their duties were not similar to those of a director or manager of the company. Administrators have a duty to manage the company in the interests of the general body of creditors rather than acting in the best interests of the company.

Arguments were also made that administrators should not have potential criminal liability as they would be put in a position of conflict, having to choose between breaching their statutory duty to safeguard the company assets and comply with their duties to the court, or (subject to the special circumstances defence) committing a criminal offence. This difficult tension between the conflicting duties of an administrator are discussed further below.

Mr Palmer failed in his arguments before the Divisional Court and so appealed to the Supreme Court.

The judgment of the Supreme Court

The Supreme Court unanimously allowed the appeal:

1. Meaning of a "director, manager, secretary or similar officer of the company" under s194(3) TULCRA 1992.
   1. The relevant provisions of the IA 1986 provide a clear picture that it was not the intention or effect of the legislation, in creating the process of administration, to classify an administrator as an officer of the company in administration.
   2. There is no scope for an extended reading of "other similar officer" within section 194(3) to include an administrator. There is no hint in the language of the section that an expansive interpretation should be given to it. On the contrary, the restriction to an officer who can be said to be "similar" to a director, manager or secretary is inconsistent with an expansive interpretation.
2. Policy considerations
   1. Mr Palmer submitted that the inclusion of administrators within section 194(3) would confront administrators with a dilemma of either acting swiftly in the interests of achieving the statutory purposes of administration or complying with the notice requirements under sections 193 and 194. The Supreme Court acknowledged the difficulties faced by administrators but held that was not a basis for excluding companies in administration from section 193 and 194. Administrators could not be excluded simply on this basis, given that companies in administration were not excluded from sections 193 and 194.
   2. The respondents advanced a different policy argument, submitting that if section 194(3) did not include administrators, a vacuum in responsibility would be left, with no mechanism to deter non-compliance and rendering the criminal sanction meaningless. The Supreme Court also rejected the contention that this alone meant administrators should be included.
      However, the court held that he matter did not turn on such policy considerations. Instead, whether a person is an "officer" of a body corporate in the context of provisions such as section 194 is to be determined by asking whether that person holds an office within the constitutional structure of the body corporate. That is the normal meaning of an officer of a company or other institution, and the normal meaning is emphasised by the prior reference to directors, managers and secretaries in section 194(3), all of whom are officers in the conventional sense, together with the words "other similar" before "officers".

An administrator of a company appointed under the IA 1986 is not therefore an "officer" of the company within the meaning of section 194(4)TULCRA.

A sigh of relief for administrators

Reinstating the previous orthodoxy on status of administrators will be a relief for insolvency practitioners who are no longer faced with a dilemma of either acting swiftly in the interests of achieving the statutory purposes of administration or complying with the notice requirements under TULCRA 1992.

As Mr Palmer highlighted:

Administrators will often need to act swiftly in in deciding whether employees should be retained or made redundant. Continuing to employ the employees during the consultation period (30 or 45 days depending on number or redundancies proposed) would benefit the employees at the expense of the other creditors, even assuming the company was able to pay the employee for this length of time.
• If the employees remain employed for more than 14 days, the administrator would automatically 'adopt' their employment contracts, meaning the employees' claims under their contracts would rank preferentially above the administrators' costs and expenses of the administration and creating another separate liability in the administration.
• Prospective administrators would be likely to simply ask the court to wind up the company instead as the administration would be unlikely to achieve any better outcome for the creditors than a liquidation. This would almost certainly reduce the number of businesses which could be saved as a 'going concern'.

Had the Supreme Court not overturned the Divisional Court's judgment, administrators would have indeed been put in the "invidious situation" where they had to choose between breaching their statutory duties or committing a criminal offence.

But a duty by the company remains

Although administrators do not face personal criminal liability under section 194TULCRA, administrators should not simply ignore the obligations on employers to inform and consult about large-scale redundancies. A company in administration is still subject to the obligations to inform and consult with staff regarding large-scale redundancies under s 188TULCRA. A company who fails to comply, faces a potential hefty penalty of a protective award (maximum of 90 days' uncapped pay per employee) being made for failure to properly inform and consult staff. The fact that an employer company has gone into administration does not obviate the need for compliance with s188 TULCRA.

Often an administrator will be looking for a buyer of a business, which could lead to a TUPE transfer of staff (and so avoid the need for redundancies). However, if the business will close down quickly if unsuccessful, it may be appropriate to submit the HR1 form even before it is clear that a sale will be unsuccessful. There is no guarantee that a buyer will be found or that any sale will go ahead and, therefore, at the outset the point may already have been reached where redundancies have been proposed. Compliance as soon as possible by the administrator may prevent or at least limit any significant protective awards being made against the company.

The significance of a protective awards for secured creditors is that they may be treated as preferential debts (subject to the Ł800 cap per employee) where the protected period includes the four month period before the "relevant date" of the insolvency proceedings (as defined in section 386 IA 1986). As such preferential debts rank ahead of floating charge realisations, an award could have a significant impact where there are large numbers of employees. Amounts due under a protective award may also be treated as "arrears of pay" for the purposes of the Redundancy Payments Office's (RPO) guaranteed debt liability (subject to the cap of eight weeks' wages at Ł643 per week (revised annually in April)).

Wherever possible, an insolvency practitioner should encourage the employer to commence the consultation process before appointment to avoid the risk of a protective award (which will deplete the assets available to unsecured creditors).

Read the original article on GowlingWLG.com

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