Do employee protective awards made against an employer after it has entered liquidation constitute a debt provable in the liquidation?
In the recent case of Day v Haine and another ([2008] EWCA Civ 626), the Court of Appeal held that protective awards made after the commencement of liquidation for failure to consult on collective redundancies made prior to the liquidation, were provable debts in the liquidation.
The Court further held that, given that there was a complete failure to consult, the employment tribunal had no discretion to refuse to grant the maximum protective award (of 90 days' pay per employee).
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Full Article
Do employee protective awards made against an employer after it has entered liquidation constitute a debt provable in the liquidation?
In the recent case of Day v Haine and another ([2008] EWCA Civ 626), the Court of Appeal held that protective awards made after the commencement of liquidation for failure to consult on collective redundancies made prior to the liquidation, were provable debts in the liquidation.
The Court further held that, given that there was a complete failure to consult, the employment tribunal had no discretion to refuse to grant the maximum protective award (of 90 days' pay per employee).
Facts
Prior to it going into liquidation, Compound Sections Limited (the "Company") made 40 employees redundant. The trade union representative of the employees filed a complaint with an employment tribunal alleging that the company was in breach of section 188 of the Trade Union and Labour Relations (Consolidation) Act 1992 ("TULRCA") for failing to consult with representatives of the affected employees about the redundancies. After the commencement of the liquidation, the employment tribunal made protective awards to each of the affected employees. The liquidator subsequently sought directions as to whether these protective awards constituted debts provable in the liquidation.
The High Court held that the protective awards were not debts provable in the liquidation. It stated that, as at the date of the liquidation, the employees only had the right to apply to an employment tribunal for a protective award and until such time as the employment tribunal had exercised its discretion to make such an award, no debt was due from the Company to the affected employees. The only remedy available to the affected employees was, therefore, against the Secretary of State (the "SoS") under the Employment Rights Act 1996.
Both the trade union representative and the SoS appealed to the CA.
The Court of Appeal decision
The CA held that, as a matter of language, the liability to pay a protective award falls within Rule 13.12(1)(b) of the Insolvency Rules definition as a "liability to which the company may become subject after [the date of liquidation] by reason of an obligation incurred before that date." Rule 12.3(1) states that it is immaterial whether a liability is "present or future, certain or contingent, ascertained or sounding only in damages." As such, that liability is a debt that is provable in a company's liquidation.
The CA also held that where, as in this case, there was a complete failure on the part of the employer to fulfil its consultation obligations under collective redundancies legislation, there is effectively no discretion available to an employment tribunal in determining a claim and the maximum protective award must be made in respect of each of the affected employees.
Comment
From an insolvency practitioner's point of view, the decision in this case raises concerns about the way in which insolvency practitioners make collective redundancies. If no effort at all is made to consult employees in accordance with the obligations under TULRCA and a protective award is made, insolvency practitioners could find themselves being accused of having reduced the amount available to ordinary unsecured creditors by virtue of their having caused the company to incur an additional liability.
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 24/06/2008.
