In a recent case, the Court held that a prosecution can be brought against an administrator if they are held to be conniving in the failure of the employer to notify the Secretary of State of collective redundancies. The Court also held that the English Court had jurisdiction to hear the claim notwithstanding that the affected employees were based in Scotland but the proposal had been decided in England. This case will be of particular interest to those advising administrators.
Under section 193(1) Trade Union and Labour Relations (Consolidation) Act 1992 (TULRCA) a company is required to give notice to the Secretary of State, using a HR1 form, of proposed collective redundancies. This requirement 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. The form must be submitted before giving notice of termination to the employees and at least 30 days (or 45 days if it is 100 or more redundancies) before the first of those dismissals takes effect. Failure to make the notification is a criminal offence unless the company can show that there were “special circumstances”. Insolvency, or the wish to keep the financial position of the company confidential, are not considered sufficient to fall within the special circumstances defence, unless in addition there is something “unexpected”. Under section 194(3), where an offence committed by a corporate body 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, that person, as well as the body corporate, is guilty of the offence and liable to be prosecuted.
In this case the sole director of the company and one of its administrators applied for judicial review of decisions made by the district judge. The failure to submit the notification regarding the redundancies allegedly occurred while the administrator was carrying out his office in respect of a company in administration. The application for judicial review was refused.
Administrators can be covered
The administrator argued that administrators are not covered by the offence under TULRCA. He argued that an administrator is not a “manager… or similar officer of the company”. Instead, he is an officer of the court and his rights and duties are prescribed by statute. In addition, unlike directors, the administrator is obliged to act in the interests of external parties (the creditors) and treat them as paramount, where as a company director must always act in the best interests of the company.
However, the court rejected this argument, holding that the focus of Parliament in this part of TULRCA is on the functions undertaken by the individual concerned, not on the duties they owe. As such, an administrator assumes a managerial role in succession to the directors and is responsible for conducting or managing the business of the company as a whole. The powers that the administrator has includes the express power to dismiss the company’s employees. In practical terms, the administrator is the only person who could give the statutory notice on behalf of the company, unless another person does so under his direction.
The court also pointed out that if the administrator did not fall within this section, then it would lead to a vacuum in responsibility which would deprive the section of much of its force.
The judicial review did not consider the personal liability of the claimants. For an agent of the company to have personal liability, it must be proved that the offence was committed with their consent or connivance or if it was attributable to their neglect. The intention behind their actions is therefore important and is yet to be determined by the Magistrates Court.
Counsel for the administrator pointed out the difficulties with the administrator being held potentially personally liable:
- Waiting for more than 14 days before dismissing any employees would result in their claims against the company ranking preferentially. If an administrator caused the company to continue the employment of an employee for more than 14 days then this would mean that he has adopted the contract.
- If the administrator knew that he would be forced to wait for 30 days or risk potential criminal sanction then he would be more likely to invite the court to wind up the company rather than to continue with the administration that would be put in place to help continue the company trading.
- An administrator would be put in the invidious situation where he had to choose between breaching his statutory duties or committing a criminal offence.
- This could lead to a reluctance among insolvency practitioners to take on the role of administrator.
While the court acknowledged these concerns it held that ultimately these were matters for Parliament to address. In the meantime, insolvency practitioners need to be aware of the potential liability and ensure that they avoid any potential claim under s 194(3).