The Government’s first reported cause of action, pursuant to section 194 of the Trade Union and Labour Relations (Consolidation) Act 1992 (“TULRCA”), has failed to convince Coventry Magistrates’ Court following the recent collapse of City Link, thereby providing some comfort to former directors, as well as insolvency practitioners, of companies in administration as to potentially unlimited criminal liability for failure to consult their “retrospective crystal ball”.

Under section 193 of TULRCA, employers are obliged to notify the Secretary of State for Business, Innovation and Skills on an Insolvency Services form, Form HR1, where they are proposing to dismiss, as redundant, 100 or more employees at one establishment within a 90-day period. Failure to provide notification to the Secretary of State is a criminal offence (section 194, TULRCA) and the employer will be liable on summary conviction to a fine not exceeding level 5 on the standard scale. Since 12 March 2015, level 5 criminal fines are unlimited (section 85, Legal Aid, Sentencing and Punishment of Offenders Act 2012); before that date the maximum fine was £5,000.

Prior to City Link (“the Company”) having been placed into administration on 24 December 2014, the three ex-directors, David Smith, Robert Peto and Thomas Wright, failed to provide notification to the Secretary of State, notwithstanding the Company’s obvious insolvent state. The directors’ defence was that their ongoing negotiations to sell the Company were such that redundancies were not an inevitable or indeed likely consequence. Once in administration, and having rejected a £17m offer to rescue the Company, the Company’s administrator provided the necessary notification to the Secretary of State, on 26 December 2014, that mass redundancies would be inevitable.

In a two day trial earlier this month, prosecuting lawyers argued that director David Smith would have seen that City Link’s demise was inevitable had he looked into a crystal ball. Somewhat unsurprisingly, Deputy District Judge David Goodman adjudged: “Retrospective use of a crystal ball is a concept I struggled at the time to understand… A director cannot be expected to put a crystal ball on his or her desk at a time of huge shock and turmoil, and predict the likely consequences of an action, unless a consequence is either the only foreseeable one or is the only consequence that can be reasonably envisaged.”

Whilst the prosecution’s arguments appeared to carry little clout with Mr Goodman, the real question to be answered and the overwhelming basis for his judgment was “whether City Link and its directors had a duty to notify the Government, in the two days just before Christmas, that it was proposing to make its workforce redundant”. It was held that this was not the Company’s, nor the directors’, intention: “The defendants say that redundancies were not the only foreseeable consequence, nor in their view, even the most likely one, because they believed the business could be sold”.

Mr Goodman concluded: “The proposal to make the workforce redundant was made by the administrator” and, accordingly, acquitted the three directors of the Government’s allegations.
Trade unions are inevitably disappointed with the verdict, which flies in the face of the Parliamentary Inquiry into the City Link collapse to make stronger employment laws, and have vowed to “campaign with the wider trade union movement to protect British workers from the raw bandit capitalism laid bare at City Link last Christmas”. Notwithstanding their acquittal, the three directors in question are also said to have “overwhelming feelings are sadness and regret that, despite their very best efforts in dreadful circumstances, they could not save City Link from insolvency and that so many people lost their jobs at the end of last year”.

One of the few people to derive any joy (albeit limited) from the not-so-cheery festive tale is the chief executive of FTSE 100 company, Sports Direct, who is the only other person to have been charged with a criminal offence under section 194 TULRCA, the proceedings for which are ongoing at Chesterfield Magistrates’ Court.

For further information regarding this topic, please contact Simeon Gilchrist – Partner or Sophia Mew – Associate. Alternatively, please contact us on:

t: 020 7691 4000 | e: info@edwincoe.com

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