Insolvency Practitioners beware – The potential risk of criminal liability for breaching employment law

The High Court’s judgment in R (on the application of Palmer) v Northern Derbyshire Magistrates’ Court [2021] EWHC 3013 held that an insolvency practitioner appointed as an administrator of a company can be found criminally liable under section 194 of the Trade Union and Labour Relations (Consolidation) Act 1992 (“TULRCA”), for not notifying the secretary of state about proposed redundancies.

Relevant law

Employment solicitors have long understood the civil and criminal consequences of failing to handle large redundancy positions in accordance with TULRCA.

Under TULRCA, where an employer proposes to make 20 or more employees redundant at one establishment within a period of 90 days or less, the employer has an obligation to notify the Secretary of State of that proposal in writing, via an “HR1” form, before giving notices of termination and at least 30 days before the dismissals take effect (section 193 TULRCA).

An employer who fails to provide notice of collective redundancies commits a criminal offence and may be liable for an unlimited fine (section 194(1) TULRCA). Similarly, a “director, manager, secretary or other similar officer of the body corporate” of the employer can also be held personally liable if they consent to, connive to or negligently fail to prevent the company from failing to provide an HR1 notice (section 194(3) TULRCA).

Facts and decision in Palmer v Northern Derbyshire Magistrates’ Court

Mr Palmer was one of three administrators appointed when West Coast Capital (USC) Ltd (“USC”) went into administration on 13 January 2015.

The following day, the 84 employees who worked at USC’s warehouse in Scotland were given a letter by Mr Palmer informing them that they were at risk of redundancy and of USC’s intention to consult with them “insofar as possible within the timeframes”. Not less than 15 minutes later, the same employees were handed a further letter signed by Mr Palmer, informing them that they were dismissed with immediate effect. Mr Palmer submitted form HR1 on 4 February, over two weeks after the dismissals.

Criminal charges were subsequently brought against Mr Palmer regarding the failure by USC to comply with the form HR1 requirements in section 193 TULRCA.

Mr Palmer argued that he had not committed an offence because an appointed administrator is not an “officer” within the meaning of section 194 TULRCA. The Northern Derbyshire Magistrates Court rejected this argument, citing that as a matter of ordinary language, the words “similar officer” would naturally be understood to refer to a person who carries out the types of functions which are normally undertaken by the directors, managers and secretaries of the company. He was issued with a level 5 fine (which at that time was up to £5,000 but which has now changed to permit unlimited fines to be imposed).

Mr Palmer sought to challenge this decision by way of judicial review but the Divisional Court rejected this application together with Mr Palmer’s application for permission to appeal. Mr Palmer sought permission to appeal to the Supreme Court on 8 March 2023 and the decision is awaited.

Implications

The offence committed by Mr Palmer is a summary only offence, meaning it is only triable in the magistrates’ court  where a fine, not imprisonment, could be imposed. Nonetheless, this judgment obviously has serious implications for administrators because it has the potential to create a conflict of interests between the administrator’s role to secure the best outcome for creditors, and the administrators’ own personal interests to avoid criminal liability.

A potential conflict arises because existing legislation provides that the administrator will be taken to have ‘adopted’ any contract of employment which is not terminated within 14 days of their appointment; the adoption of contracts means those employees rank preferentially above other creditors including the administrator’s costs. If therefore an administrator was obliged to wait 30 days before the first dismissal takes effect, they would be taken to have adopted those contracts of employment and altered the ranking order of creditors; if the Administrator wanted to avoid that where there were 20 or more affected employees, they would have little alternative but to place the company into liquidation which would automatically terminate the contracts of employment without a requirement for the filing of an HR1 form.

A liquidation would mean that the administrator loses the ability to sell the business as a going concern which might have been the better outcome for creditors.

In the circumstances, this is a delicate balancing act for administrators.

Next steps

Mr Palmer’s application for permission to appeal to the Supreme Court was heard on 8 March 2023 and we await a decision. Further details will be provided by way of an update blog once the judgment has been published.

Should you require any assistance with regards to TULRCA obligations, please do not hesitate to get in contact with Simeon Gilchrist or Linky Trott or any other member of the Restructuring and Insolvency or Employment teams.

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