3 Jun 2015 02:28pm

How insolvency practitioners stay on the right side of the law

For insolvency practitioners there is a tension between disposing of the assets of an insolvent company and meeting the legal rights of its employees. Rob Haynes looks at how IPs stay on the right side of the law

As in politics, a week is a long time in the world of insolvency. Yet while it is not uncommon – especially in the case of pre-packed sale – to see a swift disposal of a distressed business in a matter of days, some high-profile cases in recent years have highlighted the often unwelcome position many insolvency practitioners (IPs) find themselves in when balancing their insolvency duties while adhering to employment legislation.

In early 2015, IPs Duff & Phelps and the Gallagher Partnership found themselves being scrutinised by the Insolvency Service for their actions in the administration of fashion outlet USC. The issue is whether the pre-package deal in which 28 USC stores owned by Sports Direct were taken on by its Republic division was the appropriate solution. Meanwhile, 60 former USC employees are taking legal action. The staff, based at USC’s Ayrshire warehouse, claim they were informed of the restructure 15 minutes after entering the consultation process.

“Constructive engagement with employees is important at all times, but especially when facing insolvency”

And it is that issue of timing that is proving a flashpoint for the IP industry. Mike Jervis, restructuring and insolvency partner at PwC, has worked on a number of high-profile insolvencies, including Enron, Lehman, and more recently, video entertainment retailer Game. He explains: “There can be a clash between employment law and insolvency law. Employment law provides set consultation periods for employees facing redundancy or a transfer of employer; IPs often find themselves in a situation that practically doesn’t allow that. For example, there may not be funding to pay wages and the IP may need to close down part of the business.”

The aspect of employment legislation that is proving contentious is section 188 of the Trade Union and Labour Relations Act (TULRA) 1992.
As executives of the court, insolvency practitioners are called upon to sort out the often chaotic finances of distressed businesses with a view to returning funds to creditors.

But TULRA demands that consultation must start once there is a “clear intention” to make at least 20 workers redundant and commence at least 30 days before the first dismissal happens. In cases where there are more than 100 planned redundancies, the time requirement rises to at least 90 days. The two aspects of the law are clearly at odds. Jervis continues: “Practically, IPs must do everything they can to engage in consultation, which often has to be limited. Without having made cuts on the first day at Game, for instance, it would have been impossible to have sold the business on the seventh day. Nobody would have paid lock, stock and barrel for it.”

So why the apparent clash in the law? Robert Forsyth, senior associate at DLA Piper, which advises IP firms on the legal position in such cases, explains: “There is tension between the duties of IPs after their appointment, and the strict obligations on companies when making collective redundancies, given the lack of time and funding often available to IPs in insolvent situations. Since the credit crisis, the number of insolvencies has risen and these issues have come under increased focus.”

He welcomes an end to the invidious position in which IPs often find themselves and prefers a change in employment law, or at least clarification. “Ideally, there would be some relaxing of the collective redundancy procedure in insolvency situations, though this will need to come from the EU,” he says. “While there needs to be some regulation, the current obligations are extremely onerous. IPs are required to act in the best interests of the creditors, and part of that may involve reducing the risk of disgruntled ex-employees taking legal action against the insolvent company.”

It is an issue that concerns government, with payouts by the Insolvency Practice for unacceptable insolvencies running into the tens of millions of pounds every year. Indeed, in 2014, the Insolvency Service referred IPs at Deloitte to ICAEW over the administration of failed high street electronics retailer Comet. In a statement, the service said the Employment Tribunal “made a Protective Award of between 70 and 90 days because of inadequate consultation with employees prior to them being made redundant as required by law”. Under the Insolvency Service’s Redundancy Payment Scheme, some £18.4m in redundancy fees was awarded to 4,838 ex-employees of the chain.

For Bob Pinder, ICAEW regional director, professional standards, there are significant practical issues in complying with the requirements. “It’s particularly difficult where the IP is appointed and there are no funds to retain and pay staff. In these cases little meaningful consultation can take place. When the IP gets involved at the 11th hour, there is often little manoeuvrability.”

He sees an added problem by the time the IPs get involved: retaining people while at the same time letting them know what’s going on via the formal consultation. “When employees – particularly talented employees – get wind of a problem, they’re going to walk. That’s another dilemma.”

Pinder recently spoke at a BIS Select Committee on the issue of insolvency regulation. Where once the government was cut and dried in its advice to IPs, insisting they must adhere to the rigours of TULRA, there are signs the government finally recognises the conflict between employment law and insolvency legislation following its recent call for evidence. The call asks for input into three main areas: understanding of the current requirements, their purpose and benefits; factors that facilitate or inhibit effective consultation; and ensuring timely notification and effective consultation.

Although it is early days, many in the industry expect the government to issue more practical advice to IPs, given the often impractical demands of TULRA. A change in the law is not out of the question.

“Government seems to recognise that the issue should be about good quality consultation with the resources available, rather than insisting that where more than 20 employees are going to be made redundant IPs have to consult for a certain period of time,” says Pinder. “The call for evidence will hopefully tease out practical solutions. For instance, IPs may need to provide more information about re-training options for staff, or establishing a staff representative when unions are absent.”

In a statement, Jo Swinson, former parliamentary under secretary of state for employment relations, consumer and postal affairs, confirmed the government’s backing of consultation periods, while acknowledging the possible need for change: “Constructive engagement with employees is important for business at all times, but especially when facing situations such as insolvency. The purpose of this call for evidence is to look at consultation with employees where a business is facing insolvency or has moved into an insolvency process.”

She also stated the current system generally works well, is effectively complied with and its benefits agreed upon.

Perhaps this is why the IPs economia has spoken to fail to see the industry changing its stance in the wake of high-profile cases such as USC and Comet. Yet the call for evidence in England and Wales matches moves by the EU (first made in 2011) to align insolvency law across the continent, and for Jervis these moves could have serious implications for IPs in the UK.

He sees a problem with inconsistency in many of the jurisdictions, and highlights France as a case in point. “In France, insolvencies are driven by the position of employees, and there is a statutory element that preserves employment, regardless of the company going through an insolvency.” The French approach also treats redundancies as a direct cost of the insolvency, which is different to the approach in England and Wales. In Germany, too, employees are entitled to “insolvency money”, which covers wages for three months.

The framework for IPs in England and Wales is to prioritise businesses as a going concern, which sits at odds with the French model mentioned earlier by Jervis. “The risk in France is that businesses often get sold without the problems having been solved in any way, so they merely get passed along to the buyer,” adds Jervis.

Therein lies the rub, and although many practitioners in England and Wales would prefer a revision to employment law to meet the special needs of insolvencies, developments in Europe may force the industry to move in the opposite direction.

In March 2014, the European Commission recommended national insolvency frameworks that enable companies “to restructure at an early stage with a view to preventing their insolvency, and therefore maximise the total value to creditors, employees, owners and the economy as a whole”. It is this kind of rhetoric, and the state of insolvency law in countries such as France and Germany, that suggest the winds of change may begin to blow in England and Wales.

Jervis concludes: “Over time, I think English insolvency law will move more towards the continental model. Inexorably we’ll be following regulation that is tilted towards employees.”

Rob Haynes


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