Insolvency Legislation Vs Employment Rights

Politicians have last week called for employees to be given better rights under the Insolvency Act, following the recent Administration of City Link.

MP’s are concerned that employees are not given proper consultation prior to a company entering an insolvency process. In the case of City Link, 2,700 people lost their jobs two days after the Company entered administration.

The Administration of the fashion chain USC has attracted similar scrutiny, where the use of a pre-pack administration has been questioned. In tandem with this, former employees are taking legal action over the restructuring of the business. 200 workers at USC's Ayrshire-based warehouse lost their jobs, of which 80 permanent staff were informed 15 minutes after entering consultation. Lawyers are advising 60 of them, where an employment tribunal could potentially entitle them to eight weeks pay in compensation.

But how can the dichotomy between employment legislation and the culture of business rescue be resolved?

The Law as it stands

Current legislation on collective redundancies,  where an employer proposes to make 20 or more employees redundant at one establishment, is clear but often difficult, if not impossible, to implement in some insolvencies.

Under the Trade Union and Labour Relations (Consolidation) Act 1992, consultation must start as soon as there is a clear intention to make redundancies, and begin at least 45 days before the first dismissal takes effect in the case of 100 or more dismissals. If this process is not adhered to, then a firm may be fined £5,000. In addition, employees may apply to an Employment Tribunal to receive a protective award for lack of consultation, which is met by the tax payer. MP’s argue that the level and nature of these monetary penalties do not provide enough of an incentive for proper consultation.

The Conflict

Notwithstanding the current penalties,  it is often a difficult task in many administrations to adhere to the legislation where there is little, if any, money left to pay employees whilst a full consultation is carried out.

Furthermore, and in the case of USC, where a pre-pack administration is implemented, consultation would seem to negate the prospects of rescue.  A pre-packaged administration sale is a sale which has been agreed prior to the Company entering Administration. A sale contract will have been negotiated and agreed prior to the filing of the Administration application. A conflict arises here whereby should employees be made aware of the impending administration, the unrest this will inevitably cause may compromise a sale and ultimately, the rescue of the business.  

In the case of City Link, the decision was taken to trade the business in administration, in order to preserve its value whilst a sale was pursued. Unfortunately, a sale was not deemed possible in this particular instance, and 2,700 employees lost their jobs without receiving consultation per the legislation.  

This again highlights the conflict that exists between employment legislation and the rescue culture.

Indeed, an Insolvency Practitioner’s overarching duty is to creditors as a whole, rather than any one group, such as employees, which invariably creates conflict. There is a tangible divergence between the legal duty to maximise asset realisations for creditors and the legal duty to consult employees.

Opinion

In practice, there are certain circumstances in an insolvency process which may require difficult decisions to be made quickly. Whilst it is clearly important that as much consultation with employees as is possible is carried out, so that all potential options are explored, intuitively, this seems to conflict with the reality of a fast-paced insolvency situation. 

Politicians are keen to amend the system in favour of employees in insolvency situations. They should be mindful, however, to ensure that such legislative reform does not negate the appetite of stakeholders and Insolvency Practitioners alike, for business rescue.

Should you wish to discuss any of the issues highlighted in this article, please contact a member of our experienced team on 020 7186 1144.

Author
Steve Sartin
Tel: +44 (0) 20 7186 1174
Email: ssartin@moorfieldscr.com

About Moorfields

Moorfields is one of the UK's leading independent firms of restructuring and insolvency specialists. Our highly skilled teams include restructuring professionals and licensed insolvency practitioners who provide leadership, experience and high quality advice to companies and their stakeholders in financially distressed situations

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