Vol 2 (2005) - Issue 6

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The ‘Rescue Culture’ Survives as a Result of the Court of Appeal’s Recent Ruling on Administration Expenses

On 9 August 2005 the Court of Appeal overturned a landmark decision of the High Court which had called into question the priority of certain employment liabilities in administrations where the contracts of employment have been adopted by the administrator.

The first instance decision

On 27 July 2005, the High Court ruled that where an administrator has adopted employees’ contracts of employment, amounts due to employees in respect of protective awards and payments in lieu of notice (contractual or otherwise) take priority over the administrator’s fees and the administration costs.

Protective awards

The Employment Tribunals have the power to order an employer to pay an employee a protective award if it fails to consult with employee representatives of those employees who may be affected by proposed dismissals or by measures taken in connection with those dismissals, in a collective redundancy exercise. In a collective redundancy situation, the consultation exercise must involve discussions with employee representatives about the ways in which the potential redundancies can be avoided, how the impact of a redundancy exercise can be minimized and the ways in which the consequences of the redundancies can be mitigated, before any dismissal can take effect. While this duty can be avoided where there are special circumstances which render such consultation ‘not reasonably practicable’, it has been held that insolvency, per se, does not amount to a special circumstance.
The obligation to collectively consult is triggered ‘where an employer is proposing to dismiss as redundant twenty or more employees at one establishment within a period of ninety days or less’. Consultation must begin in ‘good time’ and where one hundred or more redundancies are proposed at one establishment within a ninety-day period, at least ninety days before the first of the dismissals takes effect. Otherwise, consultation must begin at least thirty days before the first of the dismissals takes effect. Failure to comply with this obligation may result in the employer being required to pay employees remuneration from the date of the dismissal up to a maximum of ninety days. In administrations, it may not be in the best interests of the creditors for a period of collective consultation of up to ninety days to take place before the administrator makes the collective redundancies. As such employees who find themselves redundant after the administrator has adopted their contracts of employment and where the obligation to collectively consult has been triggered but not adhered to, will have a claim for a protective award of up to ninety days’ pay each. In a large redundancy exercise conducted by an administrator after the employees’ contracts of employment have been adopted and where commercial pressures are such that it is not possible to undertake collective consultation for the requisite period, this would have a significant impact on the success of an administration.