Day v Haine (Re Compound Sections Ltd) [2008] EWCA Civ 626, [2008] ICR 1102

Administration - Employment Tribunal

Alaric Watson appeared for the Liquidator (Respondent to the Appeal).

Following a mass redundancy without prior consultation, C was placed in administration, which was shortly after converted into liquidation. The Union brought Employment Tribunal ("ET") proceedings on behalf of many of the sacked employees under S 189 of TULR(C)A 1992, upon which the ET eventually made a declaration and a protective award pursuant to S 189(2). The Liquidator sought a direction from the Court pursuant to S 112 of the Insolvency Act 1986 ("IA") as to whether the protective awards constituted debts provable in the liquidation. The Secretary of State for BERR was joined as an interested party. At first instance ([2007] BPIR 1470), Sir Donald Rattee, sitting as a Judge of the Chancery Division, held that a protective award made by an ET after the date of winding up in respect of a failure to consult in accordance with the requirements of S 188 of TULR(C)A could not rank as a debt provable in the liquidation of the employer within the meaning of IR 12.3 and 13.12. The Judge observed that the protective awards did not arise by reason of an obligation imposed on the company prior to the date of insolvency but rather resulted from the exercise of a (judicial) discretion exercised after that date, so that, applying the reasoning of the Court of Appeal in Glenister v Rowe [2000] Ch 76 and R (Steele) v Birmingham City Council [2006] 1 WLR 2380, as at that date, there could have been no debt, contingent or otherwise. The employees and the Secretary of State appealed.

The Court of Appeal, allowing the appeal, approached the problem very much as a question of employment law and EU law, rather than one of insolvency law. The Court accepted the Appellants' argument that if the Judge had been right the UK would have failed properly to implement the Collective Redundancies Directive, since an unscrupulous employer could evade the consequences of failing to consult simply by putting the company into liquidation or administration. The provisions of S 189 of TULR(C)A must be interpreted in light of the UK's obligation to introduce legislation that would provide a remedy that was "effective, proportionate and dissuasive". If the ET had an unfettered discretion this would not be achieved. The Court of Appeal in GMB v Susie Radin Ltd [2004] 2 All ER 279 had analysed protective awards as primarily punitive in nature and where there had been a complete failure to consult, as in the instant case, the correct approach for the ET was to start from the maximum award of 90 days pay and discount for such mitigating factors as there might be, which is in fact what the ET had done in this case. On this basis, the Court in this case decided, the ET here really had had no option but to make an award (or as it was put by Jacob LJ during the course of the hearing, if they had declined to make any award that would have been obviously appealable), so that no real discretion was being exercised. Therefore, on the facts of this case, the protective awards properly analysed were contingent debts, within the meaning of IR 13.12(1)(b). On this basis, both Glenister v Rowe and Steele could be distinguished.

This decision is in keeping with the current trend towards an inclusive definition of provable debts in insolvency, but it is unsatisfactory in several respects. First, the Court expressly shrank from the conclusion that "may" in S 189(2) of TULR(C)A should be read as "must"; the decision whether to make a protective award therefore remains in the discretion of the ET. What ultimately enabled the Court to distinguish Glenister v Rowe and Steele was not the nature of the award (which was accepted as discretionary) but the fact that on the facts of this case the ET had (in reality) no choice but to exercise the discretion in one particular way. In effect, therefore, this decision is only authority for the provability of such awards where it is obvious on the facts that such awards were "inevitable". Where the boundaries of such a notion are to be drawn remains completely at large. This does not provide anything like the certainty that was hoped for. Moreover, that on the facts of this case the ET had effectively no choice and that had it declined to make an award that decision would have been overturned on appeal does not, on a proper analysis, distinguish the matter from Glenister v Rowe, where on the facts a refusal to make a costs award would have been equally susceptible to appeal. Nor is the obligation imposed by statute (here, to consult in accordance with S 188) materially different from that in Steele (an absolute statutory obligation to provide full and truthful answers when claiming job seekers' allowance). Finally, the analysis on the basis of the UK's obligations to implement the Collective Redundancies Directive is itself flawed: first, because it takes no account of the situation where the employer is an individual rather than a company, since this ruling provides exactly the opposite effect in such cases to that postulated by the Court (in that the bankrupt walks away "free" of the liability); secondly, because the "deterrent" effect on the corporate employer is unlikely to be significantly greater if the awards are provable - it is the non-employee creditors not the company that would suffer - and in any event the employees are "adequately" protected by the provisions of Part XII of the Employment Rights Act 1986 in accordance with the Insolvent Employers' Directive (80/987/EEC). How long we will need to wait to find clarification remains to be seen.

POST SCRIPT: The alternative ground of appeal, that such awards were an expense of the liquidation, as being a "necessary disbursement" under IR 4.218(1)(m), was withdrawn during the hearing (after heavy hints from the bench). Sir Donald Rattee's ruling that they could not be such an expense (distinguishing Re Toshoku Finance (UK) plc [2002] 1 WLR 671) therefore remains unchallenged.