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Insolvent Companies, Consultation and Protective Awards

Many of you will be familiar with section 188 of the Trade Union and Labour Relations (Consolidated) Act 1992 (“TULRCA”), which defines and governs the roles of trade unions. Under this section an Employment Tribunal (“ET”) may order an employer to pay its employees a ‘protective award’ where the employer has failed to consult the employee representatives when proposing to make 100 or more redundancies.

In this scenario a protective award is in effect a penalty payment equating to a maximum of 45 days’ wages (since April 6 2013, previously 90 days) for each employee, so can be very costly, particularly given that amount for a weeks’ pay is uncapped.

The question which frequently arises is whether it would be reasonable to expect an insolvent employer to continue trading for 45 days so that they can inform and consult their employees?

Background

The Employment Appeal Tribunal (“EAT”) recently dealt with this issue in AEI Cables v GMB.

Here the employer AEI was a manufacturer of copper wiring that had become mired in financial difficulty following a sharp increase in the price of copper. This resulted in financial advice from the company accountants that unless the company cut costs immediately it would be trading whilst insolvent; the consequences for which are that the directors could become personally liable for company debts as well as incurring criminal liability for fraudulent trading.

Put between a figurative rock and hard place when no further funding could be obtained from the bank, the directors made 124 employees redundant with immediate effect. Not having been informed or consulted about such a mass redundancy situation the employees successfully claimed AEI had breached TULRCA and the original Employment Tribunal (“ET”) made a protective award of 90 days’ pay to each employee.

On appeal as to whether it would be reasonable to expect an insolvent employer to continue trading for 45 days so that they can inform and consult their employees?

The EAT reduced this original award to 60 days. This was done on the basis that a full consultation period of 90 days (the required period for a redundancy situation of this size at the time) would not have been possible given the difficult circumstances the directors found themselves in.

Although the failure to consult here was clear, because no consultation whatsoever took place when some could have, a punitive award of 60 days still stood. Effectively the EAT sought to balance the financial dire straits of the company with its absolute failure to consult, the latter never being denied by the company, it was only on the basis of the apparent harshness of the 90 day award which AEI successfully appealed on.

Conclusion

Thankfully common sense prevailed in this case. Employees who are unceremoniously handed redundancy termination letters and locked out of the factory gates deserve protection and the companies that operate in such a way should have financial sanctions made against them. However where the directors of a company, as with AEI, face criminal charges if they continue to trade, there should be some allowance made for the extremeness of such situations and the rash actions they prompt.

Whether you are an employer or employee if you have a TUPE issue and would like a free consultation please do not hesitate to contact me on 01133 50 40 30 or at samira.cakali@scesolicitors.co.uk


Samira Cakali

Samira Cakali is a pragmatic and approachable solicitor advocate with extensive contentious and non-contentious experience in the fields of employment law as well as civil litigation, within a range of commercial businesses from SME’s to multinationals as well as senior executives.

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