12 June 2013

Insolvent Companies, Consultation and Protective Awards

Under section 188 of the Trade Union and Labour Relations (Consolidated) Act 1992 ("TULRCA") an Employment Tribunal may order an employer to pay its employees a ‘protective award' where the employer has failed to consult the employee representatives when proposing to make 100 or more redundancies.

A protective award is in effect a penalty payment equating to a maximum of 45 days' wages for each employee. This can be very costly, particularly given that amount for a weeks' pay is uncapped.

The question which frequently arises is whether it would be reasonable to expect an insolvent employer to continue trading for 45 days so that they can inform and consult their employees?

The Appeal Tribunal recently dealt with this issue in AEI Cables v GMB.

Here the employer AEI was a manufacturer of copper wiring that had become mired in financial difficulty following a sharp increase in the price of copper. This resulted in financial advice from the company accountants that unless the company cut costs immediately it would be trading whilst insolvent; the consequences for which are that the directors could become personally liable for company debts as well as incurring criminal liability for fraudulent trading.

Caught between a figurative rock and hard place and with no further funding available from their bank, the directors made 124 employees redundant with immediate effect and with no consultation. The employees successfully claimed AEI had breached TULRCA and were awarded of 90 days' pay each

The Appeal Tribunal reduced this to 60 days pay. Whilst it was accepted that a full consultation period would not have been possible, some punishment for the complete failure to consult at all was considered appropriate

Conclusion

In the current financial climate this is not an unusual occurrence. The Courts appear to recognise this, but only up to a point. Whilst it seems advisable to try and initiate some sort of consultation with employees prior to an insolvency, perhaps commercial considerations will override that. In particular, although such an award may be made, it may make no difference to an insolvent company which by definition cannot pay its debts.