Administrators and redundancy – is it about to get messy?

Blog | Corporate Restructuring & Insolvency
Published: 7th March 2022
Area: Litigation & Dispute Resolution

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The long running case of R (on the application of Palmer) v Northern Derbyshire Magistrates’ Court [2021] EWHC 3013 has sent ripples of concern through the insolvency industry, when it confirmed that (in theory at least) administrators can be prosecuted for a failure to follow redundancy procedures prescribed by sec. 194 Trade Union and Labour Relation (Consolidation) Act 199 (TULCRA). Insolvency practitioners across the country are now anxiously awaiting the outcome of the court proceedings which could place them in an insidious conflict between their duty to act in the best interests of creditors and ensuring they do not put themselves at risk of criminal prosecution.

The background to the case

West Coast Capital (USC) Limited (USC) was placed into administration by its director on 13 January 2015, when Mr Palmer was appointed as one of the administrators (two others were also appointed, but the division of responsibilities meant that only Mr Palmer was subject to proceedings).

On the same date, a pre-pack sale of the business occurred, which expressly excluded a warehouse. The following day, the employees of the warehouse (84) were notified by Mr Palmer that they were at risk of redundancy and that a consultation meeting would be held later that day. Around a quarter of an hour later, they were handed a letter advising them that following the consultation USC could not identify any alternative to redundancy and they were dismissed.

On 30 January 2015, the Redundancy Payments Service asked the administrators whether a form HR1 had been lodged. The form HR1 was lodged by the administrators on 4 February 2015, who explained that it was filed late due to an oversight. In July 2015, the Secretary of State (SoS) issued proceedings against Mr Palmer (and the director) for failure to follow redundancy procedures under sec. 194 TULRCA and, specifically failure to lodge form HR1 with the Redundancy Payments Service in the required timeframe.

Under sec. 193(2) of TULRCA an employer proposing to make 20 or more employees at one establishment redundant within a period of 90 days or less must notify the SoS of their proposal before giving notice to terminate a relevant employee’s contract of employment, and do so at least 30 days before the first of those dismissals takes effect.

Sec. 194 of TULRCA states that an employer who fails to do so commits an offence and is liable on summary conviction to a fine. Where such an offence is committed by a corporate body and is proved to have been committed with the consent or connivance of, or to be attributable to neglect on the part of, any director, manager, secretary or another similar officer of the body corporate, or any person purporting to act in any such capacity, they as well as the body corporate is guilty of the offence and liable.

The outcome

The Magistrates’ Court found that Mr Palmer (as administrator) could be prosecuted for offences under sec. 194 TULRCA. Mr Palmer sought a judicial review of that decision to ascertain whether it was in theory possible to prosecute an administrator under sec. 194, and this case is the outcome of that judicial review.

Mr Palmer argued that:

  • He was not a “director, manager, secretary or another similar officer” of the company and therefore fell outside the remit of sec. 194

  • An obligation on an administrator to give 30 days’ notice of the proposed redundancies could have serious ramifications for the administration process and place the administrator in an untenable position of conflict. It would mean they have an obligation to retain employees for a minimum of 30 days to avoid criminal prosecution whilst also being under a duty to act in the best interests of the creditors - which may require the immediate termination of employment.

  • Waiting more than 14 days before terminating the employment contracts would mean that the company adopts the contracts and elevates employee claims to preferential status.

What now for administrators?

The court on judicial review held that administrators are capable of being prosecuted under sec. 194. From the date they are appointed, only they are in a position to notify the Redundancy Payment Service as they are carrying out a managerial function in place of the directors. The issue of whether this makes administrations untenable is a matter for Parliament. The case will now proceed in the Magistrates’ Court to determine whether Mr Palmer committed a criminal offence.

The decision places administrators in an insidious conflict between their duty to act in the best interests of the creditors and ensuring they do not put themselves at risk of criminal prosecution. To date, there have been no successful prosecutions of administrators under sec. 194. The Magistrate decision is now anxiously awaited.

Pending the outcome of the Magistrates case, our advice to administrators where there is even a possibility of more than 20 redundancies taking is to carefully consider (pre-appointment) whether retention of employees is tenable or not and, if it is, determine whether the purpose of the administration can be achieved if employees must be retained for 30 days post-administration, and/or if redundancies are likely, review the steps taken by the directors to ascertain if the correct documents have been lodged within the required timescales. Subsequent to an appointment we’d suggest you assess the employee position and immediately file the relevant form HR1 with the Redundancy Payment Service if 20 or more redundancies are likely.

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