Should an administrator consult? - Corporate Rescue and Insolvency (2010) 2 CRI 51

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Should an administrator consult?

An administrator may at some point in an administration be under a duty to inform and/or consult with employees of the insolvent company.

The administrator may be unable to fully comply with this duty, because the prescribed time periods are unrealistic in the fast-paced context of an administration.

A failure to comply may result in penalties, however these will not rank as administration expenses and, where they arise in the context of a sale, the risk can be (and often is) put on to the buyer.

It is a curiosity of this downturn that there have been relatively few genuine trading administrations; most administrations are either terminal (with an orderly run-down and sale of assets) or involve pre-packaged / accelerated sales of all, or substantially all of the assets of the insolvent company. In the former, the administrator makes redundant most staff, to retain only a skeleton staff to assist in the run-down process. In the latter, the employees will generally transfer to the buyer by automatic operation of TUPE. In both cases, the company in administration is potentially under a statutory duty to consult with the employees. In this article, we will be looking at the duties to inform and consult which might arise as a consequence of actions taken by administrators and what their inability or failure to comply means in practice.

Collective redundancies and protective awards

The duty to consult with employees when collective redundancies are proposed arises under section 188 of The Trade Union and Labour Relations (Consolidation) Act 1992. It is triggered when an employer proposes to dismiss as redundant twenty or more employees at one establishment within a period of ninety days or more. 

The employer must consult about the dismissals with the appropriate representatives of any of the employees who may be dismissed or other affected employees. Affected employees are those employees who may be affected by the proposed dismissals or who may be affected by measures taken in connection with such dismissals.  Clearly, this may be a wider category of employees than the dismissed employees. 

Employers are required to consult: (i) where twenty to ninety nine redundancies are proposed within a ninety day period, at least thirty days before the first of the dismissals take effect; and (ii) where a hundred or more dismissals are proposed within a ninety day period, at least ninety days before the first of the dismissals takes effect.

What happens if you fail to comply?

The bottom line is that if the employer fails to comply with the consultation requirements, and an employee brings a claim in respect of that failure, a tribunal may make a “protective award” in favour of the employees affected.  Where a protective award is made the employer will be required to pay remuneration to the affected employees for the “protected period”.  The protective award is subject to a maximum of 90 days’ pay.

The protected period is to be of such length as the tribunal determines to be just and equitable in all the circumstances, having regard to the seriousness of the employer's default in complying with any of the consultation and information requirements. It is not calculated by reference to the loss, if any, to the employees.  It is irrelevant that the outcome would have been the same for the employees whether they had been consulted or not.  Nor is the employer’s insolvency relevant to the size of any protective award.  The award is designed to be punitive in nature.  The award is also provable in an administration or liquidation as part of the normal proof of debt process (per the recent decision in Nortel [2010]).

Following the case of Susie Radin [2004], where there has been no consultation, the approach to such awards is to start with the maximum period and reduce only if there are mitigating circumstances.  It is, therefore, prudent to expect a tribunal to make the maximum award.  Once a protective award has been made, every employee to whom it relates is entitled to be paid remuneration for the protected period.

TUPE transfers

Leaving aside the dubious decision of the Employment Appeal Tribunal in Oakland v Wellswood (1998) (where it was held that an administration having at its core a pre-packaged sale was a terminal liquidation to which the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”) did not apply), TUPE typically arises on the sale of a business by an administrator. TUPE applies to transfer automatically the contracts of employment of individuals employed in the business immediately before the sale of the business, and any rights and liabilities in connection with their employment, to the buyer.

The fact that TUPE applies puts the company in administration (assuming that it is the employing entity), as transferor, under a duty to provide certain information to (and, if it envisages that it will take “measures”, to consult with) the appropriate (elected) representatives of the employees affected by the transfer.  The buyer (as transferee) is placed under a corresponding duty to provide the company in administration with information about any “measures” which it intends to take in respect of the employees after the purported transfer.  Measures include, for example, any proposal to change terms and conditions of employment.  The required information must be provided long enough before the transfer date to enable the transferor to have a discussion with the appropriate representatives about the information supplied.  If the duty to consult is also triggered (see below), the timescale must make allowance for this consultation process.

The transferor has no legal duty to consult with the appropriate employee representatives if it does not envisage taking any measures.  It is only required to consult with the appropriate representatives where it envisages taking measures in respect of its own employees (which is very uncommon).  There is no requirement to consult over the transferee’s proposed measures.  In most situations, therefore, the duty to consult will not arise; just the obligation to provide certain information about the transfer.

What happens if you fail to comply?

Failure to properly comply with these obligations may lead to employment tribunal claims by the affected employees or the appropriate employee representatives.  The employment tribunal can award compensation of up to 13 weeks’ gross (uncapped) pay for each affected employee depending on what it considers is just and equitable in all the circumstances.  The current trend is that employment tribunals are treating the 13 weeks’ maximum award as the starting point (similar to their treatment of protective awards) on the basis that the awards are punitive. 

The transferor and transferee are jointly and severally liable in respect of any award made.  If the company in administration is liable for an award due to the failure of the buyer in supplying the accurate information on its proposed measures, then the company in administration can ask the tribunal to order that the buyer pays all or part of the award.

How does an administrator comply?

There are a number of difficulties for an administrator faced with a duty to consult. The most obvious is timing. In most cases, there simply will not be enough time for an administrator to conduct a thirty- or ninety-day consultation exercise when planning collective redundancies. Nor will there be the time in most instances for the administrator to inform and consult employees in a pre-packaged administration sale process. In a typical “pre-pack”, the administrator only gains “standing” to deal with employees upon appointment, but then will effect the TUPE transfer minutes later. Maintaining confidentiality to preserve value may also militate against a consultation process, particularly where the workforce is large or disparate and risks of a leak exist.

You might therefore expect that insolvency, in some shape or form, would be carved-out from these duties. It is not. The rules can be relaxed in “special circumstances” but it is clear from the case law that insolvency of itself is not sufficiently special to merit a blanket relaxation: the circumstances would have to be out of the ordinary, or uncommon.

Assessing the liability for the insolvent estate…

Clearly, the quantum of the potential liability that could be imposed by a tribunal for failure to consult in either context is not insignificant. Neither are these loss-based tests, so it is not simply a case of rationalising that the employees would have always been worse off (or at least no better off) in any alternative scenario.

However, the generally accepted view is that a liability for a failure to consult is neither a personal liability of the administrator nor is it payable as an administration expense. The Court of Appeal in Re Huddersfield Fine Worsteds [2005] clarified that this was the case for protective awards, and most practitioners are relatively comfortable that a similar approach would be taken in respect of a failure to consult under and in accordance with TUPE. This is the case even if the obligation to inform and consult arises after expiry of the fourteen day period following commencement of administration, when contracts of employment are deemed adopted for the purposes of paragraph 99(5) of schedule B1 of the Insolvency Act 1986. Nevertheless, administration expenses is an unsettled area of law and, in respect of the TUPE liability, the law is untested and it is not inconceivable that a tribunal might take a different or unexpected view. For this reason, administrators typically do seek protection in the form of indemnities from buyers in the sale documentation.

So why would an administrator ever bother to attempt to consult, when the costs incurred in doing so (e.g. time costs and expenses of his staff) are payable as an administration expense?

The answer is that, in practice, they often don’t. And in many cases that will be the correct approach. However, administrators are officers of the court, under duties to act with utmost fairness (ex parte James (1874)) and in the interests of creditors as a whole. To ignore the duty to consult when compliance with it is in practice feasible and would not require a disproportionate expense on the insolvent estate may well leave an administrator open to criticism for letting unsecured claims against the estate swell. Of course, in most administrations these days, the “pot” for unsecured creditors is little more than the “prescribed part” set aside for them out of floating charge realisations, and so no one is likely to bother to object.

… and passing the liability on to a buyer

In a sale scenario where TUPE applies, the expectation is that the buyer will assume sole responsibility for such liabilities. In fact, any well-drafted administration business and asset sale agreement will contain a full suite of indemnities in favour of the administrator and the insolvent seller to contractually reflect this position (although the fact that liability is joint and several, and one party is solvent and the other is not, arguably makes such provisions “belt and braces”).

For a buyer, the legal risk is fairly easy to assess: employees either were or were not consulted prior to the transfer. If they were consulted, how adequate was the exercise? Likewise, it should be possible to define the maximum quantum of the liability for this risk by reference to the number of employees being transferred and their salaries. What is more difficult to assess is the likelihood of a claim being made. These are technical provisions of law and so one would not necessarily expect the average employee to be aware of them (although union members generally seem to be well informed of their rights). Unless they are taking their own advice, therefore, the risk of a claim being made in respect of non-union member employees could be assessed as relatively low.  Once a claim is made, however, the risk increases exponentially. This is because a tribunal only has to decide on the facts once; all other employees can then ride on the coat tails of the first claim to obtain their award. For a well advised buyer, reaching a quick settlement with a litigious employee with strict confidentiality undertakings before the tribunal gives its judgment will be key.

One would therefore reasonably expect a buyer to seek to reduce the consideration to reflect its assessment of the likelihood of these risks materialising, where it is possible to do so. To the extent that the buyer does successfully negotiate a price reduction, the gross realisations from the sale, before payment of secured creditors’ claims, will be reduced. It could be said that, from the perspective of the company in administration, the claim has been given super-priority, even though it is effectively unsecured as against the estate. Given the relatively short window of time for bringing these claims, in practice, some element of structured consideration (for example, akin to a locked-box) may be preferable.

Does this equate to a duty on an administrator to consult with employees, to maximise value for creditors by minimising the liabilities a buyer can be expected to assume? An administrator owes the company over which he has been appointed a duty to exercise reasonable skill and care in the conduct of the administration, and his or her decisions must be rational. This does not necessarily equate to a duty to, for example, take steps to enhance the value of what is being sold. But to the extent that an administrator can feasibly and reasonably take steps to mitigate a potential liability that arises as a result of their actions, some thought should be given to doing so.

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