22 Oct 2014 03:07pm

The problems facing insolvency practitioners

Vince Cable is right to be concerned about the cost of failure on the part of insolvency practitioners (IPs) to consult employee representatives about redundancies in accordance with the law. Given that protective awards are underwritten by the state, the taxpayer has apparently paid out £50 million in the last six years to fix failures by Deloitte alone. The aggregate cost to the taxpayer across the profession as a whole must be enormous. Questions need to be asked, but Cable is not going to find the answers in the alleged shortcomings of IPs; the answers lie much closer to home

The first problem he will discover is that the legislators have not provided a clear and stable platform of legal obligations. Cable once said “there can be no excuse for failing to comply with the law which is very clear in this area”; this assertion is simply unsustainable.

There are serious questions whether the law really works in the case of insolvencies

Take, for example, the bill of more than £18m paid by the taxpayer following Woolworths’ collapse. That bill came from a court decision, which redefined the nature of the consultation obligation, because of a conclusion that UK law is out of line with the underlying obligations of the European directive.

The concept that consultation obligations are referable to the numbers of redundancies proposed at an “establishment” has been on the statute books for nearly 40 years and it is remarkable that the true relevance and meaning of that term remains unclear. Employment lawyers, HR practitioners and IPs alike are currently in no-man’s land, unable to understand the true nature of the basic legal obligation until it is clarified on appeal. Criticism of IPs misses the point that they are shooting at a moving target.

Uncertainty around the true nature of employers’ obligations from legislation used to implement European directives is a familiar problem, where financial consequences are substantial. The Confederation of British Industry (CBI) recently warned that businesses face billions of pounds of costs from backdated claims in relation to holiday pay. Employers that thought they had been compliant with their legal obligations now find the goalposts have moved as a consequence of different interpretations about what UK law should say.

It makes no sense to operate in a legal system where the transposition of the European directives into domestic law is deficient, and where there is inconsistency in the interpretations of key terminology by courts here and in Europe. As the Elizabethan barrister Edward Coke said, “Certainty is the mother of quiet and repose, and uncertainty the cause of variance and contentions.”

Yet even when obligations are clear, there are serious questions whether the law really works in the case of insolvencies. The opportunity for meaningful consultation will frequently not arise because of rapidly changing circumstances. There is provision for this in the special circumstances defence, which reduces the nature of the consultation obligation to what is achievable in the circumstances. Yet from early days this provision has been interpreted narrowly.

Additionally, consultation necessarily involves the disclosure of information, even though the IP might conclude the disclosure of information at that time would be commercially insensitive; the failure to comply with the letter of the redundancy consultation law might be the price to be paid for seizing an opportunity.

One thing the IP usually does not have on their side is time, all the while they must juggle a number of priorities to make the best of an inherently difficult situation. Redundancy consultation obligations will have to be assessed by reference to those other priorities. The law as drafted sets up an inherent possibility of tension between the protected period for redundancy consultation and a frequent requirement to act swiftly in order to maximise returns to creditors. Pragmatism on the part of the IP is the inevitable result. They are usually acting under legal advice and it would be naïve to suggest that they simply can’t get it right.

There is an opportunity for the government to reduce the burden on the taxpayer by promoting certainty in the law and by ensuring that the specific pressures of an insolvency are reflected in a more realistic set of legal obligations – Cable may well conclude that this might be a better focus of attention than the hunt for scapegoats within the IP community.

Michael Ryley is a partner at national law firm Weightmans LLP

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