Criminal prosecutions for administrators are rare, and rarer still are prosecutions under employment legislation. However, a recent decision has confirmed that an administrator can be prosecuted and personally liable for a failure to notify the Secretary of State of proposed collective redundancies under the Trade Union and Labour Relations (Consolidation) Act 1992 (TULRCA).
An insolvency practitioner, Robert Palmer, is being prosecuted in the Magistrates' Court for the criminal offence of a failure to submit the prescribed form notifying the Secretary of State about collective redundancies. This allegedly occurred while he was carrying out his office in respect of a company in administration, USC.
The duty to submit the form (HR1) is triggered where an employer is proposing to dismiss as redundant 20 or more employees at one establishment within a period of 90 days or less. Any failure to do so is a criminal offence (subject to a rarely successful defence of 'special circumstances').
In addition, individuals who are 'a director, manager, secretary or other similar officer' of the company can be personally prosecuted for the criminal offence if the offence by the corporate entity has been committed with their consent, or connivance or attributable to neglect on their part.
Mr Palmer argued that administrators are not covered by the offence under TULRCA. Administrators are neither officers of the company nor 'similar' to the identified officers (director, manager or company secretary). Administrators are not subject to the same duties as other officers and must act in the best interests of external parties (the creditors).
The Court rejected this argument. An administrator assumes a managerial role in succession to the directors and has all the same powers, including an express power to dismiss the company's employees. Administrators are not excluded from criminal liability just because their duties are not identical to a director and are not owed to the same persons. The Court did not give permission to appeal, but given the importance of the issue, Mr Palmer may well apply for permission to appeal to the Court of Appeal on the issue of administrator's liability. If there is no appeal, or if any further appeal is unsuccessful, the criminal prosecution against Mr Palmer will proceed.
However, as it stands, this case is an important confirmation of risk for insolvency practitioners (IPs) and raises the stakes when deciding on appointment how to manage the employees and whether (or when) they may need to make redundancies. Previously, IPs involved in a potential redundancy situation may have not considered whether they may have personal criminal liability in addition to the company and directors. Therefore, this decision has significant ramifications.
In more detail.
Collective redundancy consultation obligations
Obligations to inform and consult with staff regarding large-scale redundancies are well known, as is the need to notify the Secretary of State via the Redundancy Payments Service (RPS). Under section 188(1) of the Trade Union and Labour Relations (Consolidation) Act 1992 (TULRCA), if an employer proposes to make 20 or more employees redundant at one establishment in a period of 90 days or less, it must inform and consult with a recognised trade union, or, if there is no union, with employee representatives. There is a potential penalty of a hefty protective award (maximum of 90 days' pay) being made in favour of each employee if employers fail to properly inform and consult staff, and there have been numerous tribunal claims in high-profile insolvencies that have been well reported.
HR1 form and the criminal offence
Under section 193 of TULRCA, an employer has an obligation to notify the Secretary of State using a HR1 form. This is triggered when the employer first 'proposes to dismiss' as redundant 20 or more employees within any period of 90 days or less. It must be submitted giving notice of termination to employees, and at least 30 days (or 45 days if it is 100 or more redundancies) before the first of those dismissals take effect.
The obligation to notify the Secretary of State is sometimes seen as an administrative task with employers unaware of the potential criminal penalty for failing to do so. However, failure to give the Secretary of State the requisite notice is a criminal offence for the employer under section 194 TULRCA.
Individual directors, company secretaries, managers or similar officers of the company (or anyone 'purporting to act' as such) are personally liable for offences committed by the employer if it can be shown that the offence was committed with their 'consent or connivance' or if it was attributable to their neglect.
The penalty is now an unlimited fine, although in Mr Palmer's case it would be a maximum fine of £5,000 because the alleged offence was committed before 13 March 2015.
As is the case in relation to the duty to collectively inform and consult under section 188 TULCRA, there is a potential 'special circumstances' defence to a failure to give the Secretary of State the requisite notice under section 193(7) which essentially mirrors section 188(7). There will be no liability where there are special circumstances which mean it is not reasonably practicable to submit the form on time. However, it is well established in relation to the corresponding section 188(7), and it is reasonable to draw across the same principles here, that this has to be something 'unexpected' or outside of the ordinary run of events, such as the destruction of the plant or sudden withdrawal of supplies by a main supplier. The fact of insolvency in itself will not offer protection, nor will a desire to keep a precarious financial position be confidential to avoid further reducing the value of the assets or the business.
In October 2015, criminal charges were brought against both Mr David Forsey, the former chief executive of Sports Direct, and Mr Robert Palmer, the administrator of fashion retailer West Coast Capital Limited (USC) (a Sports Direct group company). The case concerned a large number of redundancies made in Glasgow when a USC warehouse was closed. The Glasgow employment tribunal has previously awarded the maximum 90-day protective award per employee against USC for a failure to consult with employees and criticised it for 'disgraceful and unlawful employment practices' during its pre-pack administration in which some employees were given only 15 minutes' notice of their redundancy.
The case has been long and drawn out with many points being taken by both Mr Palmer and Mr Forsey to challenge proceedings. The latest arguments were raised by way of judicial review to the Divisional Court.
The 'officer issue'
Mr Palmer was the administrator. He argued that the Magistrates' Court erred in law in concluding that he, as an administrator of the company, was a 'director, manager, secretary or similar officer of the company' under s194(3) TULCRA 1992. On that basis he could not be liable for the offence.
Mr Palmer, argued that he was not an 'officer' of the company. Although an administrator had wide powers of management over a company, they derive their authority from the Insolvency Act 1986, not the company. Alternatively, if an administrator can be considered an officer of the company for some purposes, an administrator did not fall within s194(3) TULCRA as they were not similar officers of the company corporate, or any person purporting to act in any such capacity as their duties were not similar to those of a director or manager of the company. Administrators have a duty to manage the company in the interests of the general body of creditors rather than acting in the best interests of the company.
Arguments were also made that administrators should not have potential criminal liability as they would be put in a position of conflict, having to choose between breaching their statutory duty to safeguard the company assets and comply with their duties to the Court, or (subject to the special circumstances defence) committing a criminal offence. This difficult tension between the conflicting duties of an administrator are discussed further below.
The Court decided that administrators can be personally liable for the offence in the same way as other agents of the company, such as directors. This applies whether the administrator is appointed by the Court or out of court. However, administrators will only be personally liable if the offence was committed with their 'consent or connivance' or if it was attributable to their neglect.
In coming to their decision, the Court considered the aims of the Collective Redundancy Directive, which is where this national legislation is derived from. The aims of the information and consultation obligations under the Directive are to find ways of avoiding or reducing the proposed redundancies, and mitigating their impact. The Court considered that notifying employee representatives and the authorities of these proposed redundancies was fundamental to achieving these aims.
It was relevant that at the point the administrator is appointed, the administrator is the only person who can give the notice required or instruct someone to give the notice on behalf of the employer. From appointment, administrators have day to day conduct of a company's affairs. If they are not liable, there would be nothing to deter non-compliance.
'If administrators are not caught by s194(3) it would.. leave a vacuum in responsibility that would fail to protect the interests of workers and. the interests of their representatives and the Secretary of State.'
The Court focused on the functions undertaken by the individual and decided that an administrator would be an officer of the company for the purposes of sections 193 and 194 TULRCA (as well as being an officer of the court). An administrator assumes managerial capacity from the directors, has the power to dismiss employees and although the duties are not identical to a director or owed to the same persons, the administrator should be seen as bearing responsibility for notifying the Secretary of State.
The Court also made comments on the elements that would be required to prove the criminal offence. The Court said the offence was committed when the relevant person should have, but did not, notify the Secretary of State. In other words, before any of the dismissals take effect.
However, for agents of the company to have personal liability, it must be proved that they consented, connived or were guilty of neglect, so their state of mind at the time is important. This contrasts with the criminal liability of the employer company, which occurs simply as a result of the acts of its agents.
While the Court's comments are not binding, they are likely to be very persuasive in future cases.
What is yet to be decided
This judicial review did not consider the personal liability of Mr Palmer or Mr Forsey. Their prosecution in the Magistrates' Court will deal with that and is likely to focus on whether the criminal offence was committed with their 'consent or connivance' or if it was attributable to their neglect.
Therefore, the state of mind of an individual and their acts and omissions will be relevant to prove the criminal offence.
In the related employment tribunal case brought by the dismissed USC employees for a failure to inform and consult, the tribunal has already made a protective award for breach of the information and consultation obligations under section 188 and so it would seem that the potential defence of 'special circumstances' under section 193 would not be available.
In other cases, a director or administrator may not be liable if they can show there were 'special circumstances' meaning that it was not possible to submit the HR1. However, as set out above, what would constitute 'special circumstances' is extremely limited indeed.
Practical conflicts for administrators?
The obligation to notify the Secretary of State of proposed redundancies and give the requisite notice before the first dismissals take effect could clearly have serious ramifications. It may place an administrator in a position of conflict between committing a criminal offence and complying with the administrator's statutory duties, something that was highlighted by Mr Palmer.
Administrators act for the benefit of all of the creditors (rather than the shareholders of a company). They have a statutory duty to try and rescue the company as a going concern. If the business cannot be rescued as a going concern, it may be in the best interests of the creditors to cease trading immediately and realise the assets. In some cases this may necessitate immediate redundancies.
- This would put administrators in the 'invidious situation' where they had to choose between breaching their statutory duties or committing a criminal offence.
- Continuing to employ the employees during the consultation period (30 or 45 days depending on number or redundancies proposed) would benefit the employees at the expense of the other creditors, even assuming the company was able to pay the employee for this length of time.
- If the employees remain employed for more than 14 days, the administrator would automatically 'adopt' their employment contracts, meaning the employees' claims under their contracts would rank preferentially above the administrators' costs and expenses of the administration and creating another separate liability in the administration.
- Prospective administrators would be likely to simply ask the court to wind up the company instead as the administration would be unlikely to achieve any better outcome for the creditors than a liquidation. This will almost certainly reduce the number of businesses that could be saved as a 'going concern'.
Mr Palmer argued that if administrators could be criminally liable, the conclusion of that would inevitably lead to a reluctance amongst IPs to take on the role of administrator, as seeking directions from the Court would not solve the issue. The Court has no power to protect the administrator or prevent an administrator incurring criminal liability.
Ultimately, the Court took these arguments into account but concluded that none of these issues or problems prevented an administrator from being personally liable for the criminal offence under TULRCA. If, as a result, that leads to a surge in windings-up or to wholesale refusals by insolvency practitioners to take on the role of administrator, it 'will be a matter for Parliament to address'.
As a result, any IP considering appointment as an administrator, as well as those already appointed, needs to consider these issues and risks.
How administrators can protect themselves from criminal liability
- Before appointment consider whether there has been a breach of TULRCA - have 20 or more redundancies already been made without notifying the Secretary of State or has the employer already 'proposed' to redundancies but not notified at the correct time? If so, and if possible, advise they submit a HR1. Also consider whether the administration will be viable if redundancies cannot be made for 30 days. What will be the impact on funding requirements, and potential loss to creditors? Would an immediate winding-up give a better outcome for creditors?
- Immediate assessment on appointment: The Court confirmed that liability would be from appointment. Therefore as soon as the administrator is appointed, they must assess whether there is a need to close stores or sites, or cut employment costs and, importantly, if this would trigger the obligation to file an HR1 and start a consultation process. It may be challenging to determine when the obligation both to start consultation and to submit a HR1 form is triggered, especially when the financial position is changing rapidly. Administrators need to consider the obligation to notify at regular intervals and submit a form if redundancies are 'proposed' at any stage.
- Act on the side of caution: there is no liability for submitting a HR1 where there are no eventual redundancies. Therefore it is better to submit a form rather than not do so.
- Submit a HR1 even if there is a potential buyer: often an administrator will be looking for a buyer of a business, which could lead to a TUPE transfer of staff (and so avoid the need for redundancies). However, if the business will close down quickly if unsuccessful, it may be appropriate to submit the HR1 form even before it is clear that a sale will be unsuccessful. There is no guarantee that a buyer will be found or that any sale will go ahead and, therefore, at the outset the point may already have been reached where redundancies have been proposed.
This case has been a long time progressing and there may be a further appeal to the Court of Appeal before the criminal prosecution can proceed. However, this decision confirms the principle that administrators can be criminally liable for a failure to submit the HR1 in collective redundancies under TULRCA and this is the current position under law.
Administrators may be deterred from taking appointments or there may be an increase in windings-up as a result, but it seems unlikely that Parliament would address the issue before any appeal to the Court of Appeal (and potentially to the Supreme Court), which would take considerable time. Even if Parliament did decide to intervene in light of resistance by administrators, any change to legislation would also take a long time to achieve.
In the meantime, insolvency practitioners need to be aware of this risk, and take action to avoid it.
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