Supreme Court offers reassurance to administrators where large-scale redundancies are necessary

R (on the application of Palmer) (Appellant) v Northern Derbyshire Magistrates’ Court and another (Respondents) [2023] UKSC 38

On appeal from: [2021] EWHC 3013

The appeal to the Supreme Court by Mr Palmer has established that insolvency practitioners in the role of an administrator cannot be prosecuted (and therefore be personally liable) under s194 of the Trade Union and Labour Relations (Consolidation) Act 1992 (TULRCA) for a failure to give notice of proposed collective redundancies to the Secretary of State under s193. The Supreme Court unanimously decided that an administrator of a company is not an “officer” of that company within the meaning of the phrase in s194 TULRCA “any director, manager, secretary or similar officer of the body corporate”.

This decision offers highly anticipated reassurance after the Magistrates’ 2021 ruling that an administrator would be capable of prosecution if found to have acted in breach of s193 TULRCA, with personal liability to an unlimited fine (or a fine of up to £5,000 if the offence was committed before 12 March 2015). An application to the Divisional Court for judicial review of this decision was refused.  

Given that large-scale redundancy processes are sometimes necessary in corporate insolvencies in order for the administrators to fulfil their statutory duties to the creditors of those companies, the decisions by the Magistrates and Divisional Court gave rise to an untenable position of conflict for administrators. The ruling by the Supreme Court therefore offers clarity and considerable relief to the industry.

The facts

The case concerns West Coast Capital (USC) Limited (USC), one of the Sports Direct group companies.  After USC became the subject of a statutory demand which it was unable to pay, the director placed USC into administration.

A notice of appointment of administrators was filed on 13 January 2015, appointing Mr Palmer as one of the joint administrators (two further administrators were also appointed, but the division of responsibilities was such that only Mr Palmer was the subject of the proceedings).

On the same day, a pre-pack sale of the business took place which expressly excluded an unprofitable warehouse in Dundonald, Scotland.  The following day, the 84 employees of the warehouse were handed a letter signed by Mr Palmer, notifying them that they were at risk of redundancy and there would be a meeting that day, during which they would be consulted.  Around 15 minutes later, they were handed a second letter advising them that following the consultation “[USC] was unfortunately unable to identify any alternative to [their] redundancy”. The employees were advised that they were dismissed with effect from that day.

On 30 January 2015, the Redundancy Payments Service (RPS) of the Insolvency Service contacted the administrators to enquire as to whether the necessary form HR1 had been sent to them.  The form HR1 was then provided by the joint administrators to the RPS by email on 4 February 2015, together with the explanation that this had been “largely completed” on 14 January 2015, but due to an oversight it had not been sent in.

In July 2015, the Secretary of State brought proceedings against Mr Palmer (and the director) for the offence under s194 TULRCA of failure to give notice to the Secretary of State in accordance with s193 on form HR1.

The Law

Under s193(2) of TULRCA:

An employer proposing to dismiss as redundant 20 or more employees at one establishment within [a period of 90 days or less] shall notify the Secretary of State of his proposal:

(a) before giving notice to terminate an employee’s contract of employment in respect of any of those dismissals; and

(b) at least 30 days before the first of those dismissals takes effect.
Section 194 of TULRCA goes on to state:

(1) An employer who fails to give notice to the Secretary of State in accordance with s193 commits an offence and is liable on summary conviction to a fine…
…
(3) Where an offence under this section is committed by a body corporate 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 other similar officer of the body corporate, or any person purporting to act in any such capacity, he as well as the body corporate is guilty of the offence and liable to be proceeded against and punished accordingly.

The Magistrates Court 2021 Ruling

Palmer argued that he was not a “director, manager, secretary or other similar officer” of the company and therefore fell outside the remit of s194. Neither TULRCA nor the Insolvency Act 1986 gives a definition of “officer” for the purposes of s.194(3) and to date, there have been no successful prosecutions of administrators under s194.  He also argued a point of concern for the insolvency industry: namely, that 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.  Essentially, he said that insolvency practitioners would have an obligation to retain employees for a minimum of 30 days (under s193) to avoid criminal prosecution whilst also ensuring that they are acting in the best interests of the creditors (which may well require the termination the employment of unnecessary employees immediately).

It is of no surprise, therefore, that when the Magistrates Court held in 2021 that Mr Palmer (and administrators generally) are capable of being prosecuted under s194, it was met with concern by the industry.  The Court held that from the date that he or she is appointed, no one other than the administrator is in a position to send notice to the RPS (in the required form HR1).  The Court did not consider that it was necessary to decide whether the administrator constituted a “manager” for the purposes of s194 because in practical terms he (or she) is “undoubtedly carrying out a managerial function in place of the directors”.  

After Mr Palmer’s application for judicial review was rejected by the Divisional Court, who upheld the decision below, he then successfully sought permission to appeal to the Supreme Court.

The Appeal

The case proceeded to the Supreme Court to determine whether Mr Palmer was capable of being prosecuted as an officer of the company for committing a criminal offence. The Supreme Court unanimously allowed the appeal and quashed the decision of the District Judge in the Northern Derbyshire Magistrates Court, holding that an administrator is not an “officer” of a company for the purposes of TULRCA.

Lord Richards reasoned that none of the 170 references to “officer” within the IA 1986 suggests that an administrator is an officer of a company; importantly, some of the references clearly show that an administrator is not considered to be an officer of the company. Furthermore, the IA 1986 provides a clear picture that it was not the intention nor the effect of the legislation to classify an administrator as an officer of the company. Lord Richards also concluded in his judgment that there was no scope for an expansive reading such as to bring an administrator within the scope of the offence by inclusion within “other similar officer” for the purposes of s.194(3). In his judgment, Lord Richards considered that the true meaning of “other similar officer” is “an office within the constitutional structure of the body corporate”.  An unregistered company may be limited in the types of officer in place, other body corporates may have a different structure, for example foreign companies.  

Comment

The Magistrates Court’s ruling, as upheld by the Divisional Court, left administrators in a place of conflict; they are under a statutory obligation to act in the best interests of the creditors of the relevant company, whilst ensuring that they do not put themselves at personal risk of criminal prosecution by failing to adhere to the requirements of s194.

Under the Insolvency Act 1986, administrators have only 14 days to terminate the employees’ contracts, otherwise the company “adopts” the contracts and elevates the employees’ claims to preferential status- thereby allowing their claims to be paid even before the administrators’ costs. This is incompatible with the need to retain employees for 30 days post-administration in order to adhere to the requirements of s.193. In such circumstances, one could foresee insolvency practitioners being reluctant to take appointments as administrators where there was a risk of redundancies and would instead advise that the company be wound up, with the accompanying loss of chance to rescue businesses as going concerns.  

Consequently, the industry will no doubt welcome this decisive and clear ruling from the most senior court in England and Wales, resting assured that the Courts will continue to draw the critical distinction between the role of an insolvency practitioner and that of an officer of a company.

Despite the reassurance provided by the final decision in this case, those preparing to take an appointment as an administrator should remain cautious in their handling of employee redundancies. It is important to act in compliance with the TULRCA requirements to the extent that it is possible, particularly since a fine may still be levied on the employer company, albeit in administration.  Insolvency practitioners should:

• Pre-Appointment:
• Consider the employee position and whether retention of employees will be untenable;
• Review steps taken by the directors to date with regards to redundancies and ascertain if the correct documentation has been filed within the required timescales.
• Post Appointment:
• Undertake a full assessment of the employee position; and
• Immediately file form HR1 if 20 or more redundancies are deemed to be necessary.

Further implications

What the law gives with one hand, it can take away with the other.  There have been a number of occasions where administrators and liquidators have relied on being officers of a company to take advantage of the protection offered by section 1157 of the Companies Act 2006 and its predecessor.  That section provides that if an officer of a company who is defending proceedings for negligence, breach of duty or breach of trust appears to the court to have acted honestly and reasonably and ought reasonably to be excused, in all the circumstances of the case, the court may relieve him from liability in whole or in part.  Protection under that section can also be sought in advance of proceedings being brought against the officer of a company.  In the cases of Re Home Treat Ltd [1991] BCC 165 and Re Powertrain Ltd [2015] EWHC 3998 (Ch) administrators and liquidators respectively benefitted from relief under section 1157 and its predecessor in obtaining directions to take certain steps in the insolvencies and obtaining relief as officers of the company at the same time.  In Palmer, Lord Richards considered that those cases had been wrongly decided, because in neither case was there any consideration of the clear distinction drawn in the Insolvency Act between administrators and liquidators on the one hand, and officers of the company, on the other hand.  Accordingly, that avenue for relief is no longer available to administrators and liquidators.