Protective awards made to employees after the date of liquidation are now to be regarded as debts provable in the liquidation.
Previously the High Court delivered a controversial ruling in Day v Haine [2007] All ER (D) 298, in which the liquidator had successfully argued that protective awards, which were made by an employment tribunal some four months after the employer went into liquidation, were not preferential debts. In reaching this decision the High Court had felt bound by the wording of the Insolvency Rules 1986, but in a reserved judgment handed down this month the Court of Appeal has reversed this ruling.
To recap, 40 employees were made redundant very shortly after which the employer company went into administration and then liquidation. The trade union commenced proceedings in an employment tribunal claiming a failure to consult prior to the redundancies. The tribunal made protective awards in favour of the employees but the High Court said that these awards were not provable in the liquidation because as at the date of the liquidation the employees had no enforceable right against the company; rather they simply had a right to complain to a tribunal which could in its discretion make an award. The awards were not, said the High Court, liabilities to which the employer had become subject following the date of liquidation by reason of an "obligation incurred before that date" under Rule 13 of the Insolvency Rules 1986.
The employees' representative took the case to the Court of Appeal in April. The Secretary of State for Business Enterprise and Regulatory Reform (BERR) joined in the proceedings, BERR's interest being that it foots the bill when employees cannot recover an award because of the employer's insolvency.
The Court of Appeal disagreed with the High Court. Although the making of a protective award depended on the tribunal exercising its discretion, it was wrong to treat it as no more than discretionary; it was at least a contingent liability and under Rule 13.12(3) it did not matter whether the liability was present or future, fixed or liquidated, certain or contingent. The Court of Appeal rejected any analogy with cases involving discretionary liabilities (for example an award of costs in legal proceedings). This situation was different – the liability for the protective award arose directly from the employer's total breach of the duty to consult. The affected employees had an immediate right to apply to a tribunal for a mandatory declaration that the employer was in breach and the protective award flowed directly from that declaration. On the facts of this case – the Court of Appeal said that it was "difficult to imagine a worse case" - the tribunal had no option but to make an award of the maximum, or its ruling would have been open to challenge as being perverse.
The policy behind the Court of Appeal's reversal is clear – to protect employees and to protect the taxpayer who has to step into the shoes of the insolvent employer. The appeal judges observed that had the case been argued before the High Court not as a technical problem of insolvency law but rather as a case about the implementation of an EU Directive, it might have reached a different conclusion. UK legislation had to be interpreted so as to give proper effect to the Directive on collective redundancies which required the penalty placed on employers for failing to comply with their obligations to be "effective, proportionate and dissuasive" and this could only happen if the penalty actually fell on the employer.
If, said the appeal court, the High Court interpretation were to stand this would be "a perverse incentive to unscrupulous employers operating through the medium of companies not to fulfil their obligations" and employers would be able wholly to escape the liability that Parliament has placed on them.
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