Can you face criminal proceedings for large-scale redundancies?

Where employers propose to dismiss 20+ employees for redundancy at one establishment in a period of 90 days or less, section 188(1) of the Trade Union and Labour Relations (Consolidation) Act 1992 (“TULRCA”) requires employers to consult with representatives of the affected employees. That consultation must begin in good time and in any event at least 30 days before the first dismissal takes effect (rising to 45 days where 100+ redundancies are proposed).

In addition, employers also have a duty under section 193 of TULRCA to notify the Secretary of State of the proposed redundancies. This is done by submitting an HR1 form. The timescales for informing the Secretary of State are similar to but not exactly the same as the timescales which apply to collective consultation, since, in addition to providing at least 30 days’ notice before the first dismissal takes effect (rising to 45 days for 100+ redundancies), the notice must also be given to the Secretary of State before any employee is notified that their employment is to be terminated.

Under section 194(1) and (3) of TULRCA, an employer who fails to provide the required notice to the Secretary of State commits an offence and is liable to an unlimited fine, and any director, manager, secretary or ‘other similar officer of the body corporate’ whose consent, connivance or negligence results in that failure will be personally liable for an offence and unlimited fine. In the case of R (on the application of Palmer) v Northern Derbyshire Magistrates Court and another, the Supreme Court was required to determine whether the administrator of an insolvent company would be subject to these penalties.

The case concerned Mr Palmer, who, on 13 January 2015, was appointed as one of three joint administrators of West Coast Capital (USC) Ltd (“USC”), one of the Sports Direct group companies. The next day, Mr Palmer notified 84 employees at one of USC’s warehouses that they were at risk of redundancy and then dismissed them with immediate effect later that day. Mr Palmer did not give notice to the Secretary of State as required under TULRCA until 4 February 2015.

In July 2015, criminal proceedings were commenced against Mr Palmer, who argued in his defence that an administrator of a company appointed under Part II of the Insolvency Act 1986 (“IA”) was not an officer within the meaning of section 194(3) of TULRCA and, therefore, that he had not committed an offence.

After a district judge determined that Mr Palmer was personally liable as an ‘officer’ of the company, and a judicial review of that decision was rejected by the Divisional Court, Mr Palmer appealed to the Supreme Court, which held that an administrator is not an ‘officer’ of a company under section 194(3) of TULRCA.

In reaching its decision, the Supreme Cout found that there was no definition of ‘officer’ under TULRCA or any clear statement in any other authority that could be regarded as a definition. Reviewing the IA, the Supreme Court found that, of the many references to the term ‘officer’ in the IA, none of these suggested that an administrator could be considered an officer of a company and, in fact, some references actually drew a distinction between an officer and an administrator. It was clearly not the intention or effect of the IA to classify an administrator as an officer in the context of administration.

While the Divisional Court had relied on the cases of Home Treat Ltd, Re [1991] BCC 165 and Powertrain Ltd, Re [2015] EWHC 3998 (Ch), which held that an administrator and a liquidator were officers for the purposes of the Companies Act 1985 and 2006, the courts in these cases had not considered the distinction between administrators and officers in the IA and were in error. The Supreme Court also rejected the Divisional Court’s use of a functional test for determining which persons came within the category of ‘other similar officer’ in section 194 of TULRCA as a means of deterring non-compliance with legislation by administrators; this approach was not justified in light of the specific wording approved by parliament.

The Supreme Court therefore decided that the term ‘other similar officer’ in section 194(3) of TULRCA could not be read as applying to administrators in insolvency scenarios and that Mr Palmer was not subject to a conviction or fine. Whether a person is an officer for the purposes of TULRCA must be determined by asking whether that person holds an office within the constitutional structure of the corporate entity.

The Supreme Court’s decision will come as a relief to administrators who can now feel assured that they will not be held personally liable to criminal proceedings and fines for failing to file an HR1 form in time when carrying out large-scale redundancies for an insolvent company. Administrators can be appointed quickly and balancing the obligations to consult under TULRCA with acting in the best interests of creditors can be difficult. Nevertheless, it is still best practice for administrators to give notice to the Secretary of State in accordance with TULRCA wherever possible as failing to do so increases the risk of the prosecution of the company and protective awards for failing to consult employee representatives.

While this case was focused on a technical point regarding the obligations of administrators, it is an important reminder for all company directors and other managers of their potential exposure to criminal proceedings and unlimited fines as a punishment for failing to notify the Secretary of State of large-scale redundancy programmes. This is separate from, and in addition to, any liability for the employer.

If you are an employer or employee and you would like advice on your legal obligations or rights in any redundancy scenario, please get in touch at [email protected].