Insolvency Alone will not Excuse a Failure to Follow the Collective Consultation Rules During Redundancies

It is clear from the recent EAT case of Carillion Services Ltd that Tribunals are continuing to take a tough stance with insolvency office holders who do not follow the redundancy collective consultation process when making employees of an insolvent company redundant.

The Law

The consultation requirements are set out in the Trade Union and Labour Relation (Consolidation) Act 1992 (TULRCA). Where an employer (or Administrator appointed in respect of an employer) intends to make at least 20 employees redundant from one establishment within any 90-day period they must first:

• Inform the relevant trade union of the affected employees, or if no union is recognised, an employee elected representative;
• Consult with the appropriate representatives to discuss, amongst other aspects, methods to avoid or reduce the number of dismissals and reducing their impact; and
• Notify the Department for Business Energy and Industrial Strategy at least 30 days before the first dismissal (or 45 days for 100+ redundancies).

What are the penalties for breaching TULRCA? 

Penalties for non-compliance include:

• a declaration of wrongdoing which allows affected employees to bring a claim for a protective award against the remaining assets of the company or the directors; and
• personal liability for directors and insolvency office holders. This can lead to criminal prosecution alongside an unlimited fine. 

Are there any defences? 

TULRCA provides a limited ‘special circumstances’ defence, which applies when there are ‘special circumstances’ which mean that it is not reasonably practicable for the employer to comply fully with the rules. The employer must still do all that it reasonably can in the circumstances. 

Whilst the case of Clarks of Hove v Bakers Union was decided before the implementation of TULRCA, the decision in that case as to what amounts to “special circumstances”, and whether they reduce liability, were accepted in Carillion. 

Clarks established three questions to determine whether this defence applied:

• Were there special circumstances?

In terms of insolvency, the defence is more likely to be accepted where there is a sudden and unexpected failure of the company (such as a fire destroying its entire stock). Where however there is some forewarning (such as poor financial performance or a flurry of debt claims), the Tribunal will be more likely to conclude that the Company should have been aware of its impending financial doom, and that it should have started a consultation process earlier. 

• If the answer to the first question is “yes”, did those special circumstances mean that it was not reasonably practicable for the employer to comply with the requirements?; and
• Considering the circumstances, were all other reasonably practicable steps taken towards compliance?

Carillion’s insolvency and the circumstances leading to redundancies

In July 2017, it became clear that Carillion was facing financial difficulties, when it issued a profit warning and its share price fell dramatically. On 15 January 2018, the High Court placed a number of Carillion group companies into compulsory liquidation, on an expedited basis following the presentation of a petition on 14 January 2018. Whilst many Carillion employees were redeployed as service contracts were transferred to other service providers, many were dismissed over various dates. 

Employees subsequently issued claims for protective awards for Carillion’s failure to comply with the collective consultation requirements.

The Official Receiver, Carillion’s liquidator, accepted that there was little to no consultation with staff, due to the limited time between the presentation of the winding up petition and the compulsory winding up order, but argued that insolvent employers were protected by the ‘special circumstances’ defence and therefore were only required to take the steps towards compliance that were reasonably practicable at the time.

Case Ruling

The key question was whether the ‘special circumstances’ test, established in Clarks, still applied.

The EAT held that:

• Despite the lapse in time and changes in legislation, the legal test for “special circumstances” remained good law in that insolvency of itself cannot be relied on as a “special circumstance”. Instead, “special circumstances” need to be something out of the ordinary, something uncommon, in other words ‘a sudden disaster’. If the failure of the employer resulted from a gradual deterioration in its finances, where the employer could ‘see the writing on the wall’, the Tribunal may find it was not a special circumstance. 
• However, enquiries into whether there are ‘special circumstances’ are not made ‘in a vacuum’ and ultimately each case will turn on the facts.

As Carillion’s financial difficulties were clear in July 2017 and the liquidation did not occur until January 2018, there was no sudden disaster and therefore there were no “special circumstances” on the facts justifying a departure from the consultation requirements. 

Consequently, 263 former employees were granted the right to seek compensation in a hearing scheduled for 2022.

Our comment

When a business is experiencing serious financial difficulties, and it is clear that 20 or more jobs may be at risk as a result, the business (and any appointed or prospective insolvency office holders such as Administrators) should take urgent legal advice about the collective consultation rules, and what steps the business could and should take to help minimise the risk of claims for protective awards. It is clear that insolvency itself will not support a “special circumstances” defence.

For more information on the article above, please contact our restructuring & insolvency team.