The decision in R. (on the application of Palmer) v Northern Derbyshire Magistrates’ Court has confirmed that an administrator can be prosecuted and potentially incur personal liability for a failure to notify the Insolvency Service of proposed collective redundancies. 

Background to the decision

The case concerned the administration of the retailer USC and the requirement to notify the Insolvency Service of proposed redundancies pursuant to the Trade Union and Labour Relations (Consolidation) Act 1992 (TULRCA). 

Administrators were appointed to USC on 13 January 2015. On 14 January 2015, the company’s employees were handed a letter signed by one of the administrators informing them they were at risk of redundancy. Around 15 minutes later, the employees were handed a further letter advising them that, following consultation, the company was unable to identify any alternative to their redundancy. 

After press reports, the Insolvency Service contacted the administrators to ask whether they had given notification of the proposed redundancies as required by TULRCA. On 4 February 2015, notification was given to the Insolvency Service by one of the administrators filing a form HR1. 

However, this meant that notification had not been given within the statutory timescales, and criminal proceedings were therefore raised against the administrator. Those proceedings were adjourned when the administrator applied for judicial review claiming that, as administrator, he did not fall within the relevant categories of persons who could be prosecuted. 

What are the statutory requirements?

Section 193 of TULRCA requires an employer to notify the Secretary of State (via the Insolvency Service) where it proposes to dismiss 20 or more employees at one establishment. Notice must be given at least 30 days before the first dismissals take effect (or 45 days if the proposal is to dismiss 100 or more employees). An employer who fails to do so commits an offence, although it is a defence if there were “special circumstances”, meaning it was not reasonably practicable for the employer to comply. 

Section 194 of TULRCA then provides that where such an offence is committed by an employer “with the consent or connivance of… any director, manager, secretary or other similar officer,” that person is also guilty of an offence and can face a fine not exceeding level 5 on the standard scale (unlimited in England and £5,000 in Scotland).

Do the requirements apply to administrators?

The administrator argued that if the obligation to give 30 days’ notice applied to companies in administration it could result in circumstances where administrators would be required to choose between committing a criminal offence or breaching their statutory duties to act in the interests of creditors (if, for example, it was not in the interests of creditors to pay wages for this period). 

The court accepted there may be cases where an administrator might find themselves in this “unenviable position”. However, it ultimately concluded that the statutory provisions were intended to protect employees and this protection would be diminished if administrators were not caught by section 194 of TULRCA. In the court’s view, an administrator would naturally be understood to be a “similar officer” to a director and it was right that those with responsibility for the day-to-day management of the employer should be capable of incurring personal liability for a failure to give the statutory notice.

In relation to a special circumstances defence, the court also made clear this is only available in very limited cases. Administration itself is not a special circumstance and, for the defence to apply, something out of the ordinary must have occurred.

Accordingly, the court held that an administrator can be prosecuted under section 194 of TULRCA and rejected the administrator’s application for judicial review. 

Key takeaways for administrators

The question of whether the administrator has any personal liability has yet to be determined. The effect of this decision is that the criminal proceedings against the administrator can be continued (subject to any appeal of the High Court’s decision) in order to determine whether an offence has been committed. 

However, in the meantime, insolvency practitioners should take note of the Insolvency Service’s willingness to pursue a prosecution against an administrator, which raises difficult questions when making collective redundancies.

As ever, forewarned is forearmed and insolvency practitioners should give careful consideration to whether there is a need to make collective redundancies of 20 or more employees, whether trading can continue for the statutory 30 day notice period, and whether the directors may already have proposed redundancies that have yet to be notified. At any time where collective redundancies are proposed, a form HR1 should be submitted as soon as possible and appropriate advice should be sought. 

If you would like more information on this subject, please contact Suzanne Knowles at [email protected], Gillian Moore at [email protected], or your usual Shepherd and Wedderburn contact.