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Administrators beware where more than 20 redundancies are planned

R (on the application of Palmer) v Northern Derbyshire Magistrates’ Court [2021] EWHC 3013

The case of Palmer has confirmed that an insolvency practitioner in the role of an administrator can be prosecuted (and therefore personally liable) for a failure to follow correct redundancy procedures prescribed by s194 TULRCA. 

Where an individual is found to have acted in breach of s194, they may be personally liable to an unlimited fine (or a fine of up to £5,000 if the offence is committed before 12 March 2015).

The facts

The case concerns West Coast Capital (USC) Limited (USC).  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 is the subject of the current 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 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 their failure to follow redundancy procedures set out by s194 TULRCA and, specifically, for their failure to send form HR1 to the RPS in the required timeframe.

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 Application

The current application concerns Mr Palmer’s challenge, by way of judicial review, the decision of the Magistrates’ Court that Mr Palmer could be prosecuted for offences under s194 TULRCA.  Mr 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.

The Arguments

Mr Palmer argued that he did not fall within the categories of people being capable of prosecution under s194 (being a “director, manager, secretary or other similar officer”). 

Furthermore, he 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 s194) 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).

Furthermore, Mr Palmer argued that the result of waiting more than 14 days before terminating the employees’ contracts would be that the company “adopts” the contracts and elevates the employees’ claims to preferential status – thereby allowing their claims to be paid before even the administrators’ costs. 

In such circumstances, Mr Palmer said that insolvency practitioners would be reluctant to take appointments as administrators where there was a risk of redundancies and would instead advise that the company be wound up.  This would, in Mr Palmer’s view, lead to a surge in winding up petitions or refusals by insolvency practitioners to take appointments.

The Decision

The Court held that Mr Palmer (and administrators generally) are capable of being prosecuted under s194.  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”.  

The Court noted the argument that there may be a surge of winding up petitions or refusals by insolvency practitioners to take appointments as administrators, but that this was a matter for Parliament to address and not the Court.

What happens next?

The purpose of the judicial review was to ascertain whether it was in theory possible to prosecute an insolvency practitioner under s194 (and not whether Mr Palmer was guilty in this case).  The case will now proceed in the Magistrates’ Court to determine whether Mr Palmer committed a criminal offence.

If Mr Palmer is found guilty, he may be held liable to personally make payment of a fine of up to £5,000 as this matter involves events pre-dating 12 March 2015 (had the events occurred after 12 March 2015, he would instead be facing an unlimited fine).

Comment

Clearly the above judgment places administrators in a place of conflict: they are under a statutory obligation to act in the best interests of the creditors, whilst ensuring that they do not put themselves at personal risk of criminal prosecution by failing to adhere to the requirements of s194.

To date, there have been no successful prosecutions of administrators under s194.  The outcome of this criminal case is anxiously awaited by many in the industry. 

Whilst we await the final decision in this case, those preparing to take an appointment as an administrator where there is a risk of (or even the possibility of) more than 20 redundancies taking place should:

  • Pre-Appointment:

    • Consider the employee position and whether retention of employees is going to be untenable;
    • Take steps to determine whether the purposes of the administration can be met if employees must be retained for 30 days post-administration; and
    • 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.

We will comment further once the final outcome is known.

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