In October we issued an article on the criminal charges that had been brought against the former directors of City Link Limited (in administration) for their failure to notify the Secretary of State of proposals for collective redundancies under section 193 of the Trade Union and Labour Relations (Consolidation) Act 1992. This section applies where an employer is proposing to dismiss 100 or more employees as redundant within a period of 90 days or less. In any such case notification has to be given before any notices of dismissal are given and at least 45 days before the first dismissal takes effect. Although the provisions under which the directors were prosecuted had been on the statute book for many years but they had not tended to be used but in this case a prosecution had been recommended by the Insolvency Service.
Following a two-day trial earlier this month, the former directors were acquitted of those charges.
The Court found that the former directors could not at the relevant time have foreseen the redundancies, as the directors “genuinely believed” that a £17m offer to rescue City Link was “not only possible but quite probable”. As redundancies had not been expected, it was held that the former directors had not breached the duty to give the Secretary of State notice of proposed collective redundancy dismissals. The employees were dismissed by the administrators following their appointment.
The prosecution argued that the use of a “crystal ball” would have forecast that redundancies were inevitable at City Link. However, Judge David Goodman stated: “Retrospective use of a crystal ball is a concept I struggled at the time to understand … A director cannot be expected to put a crystal ball on his or her desk at a time of huge shock and turmoil, and predict the likely consequences of an action, unless a consequence is either the only foreseeable one or is the only consequence that can be reasonably envisaged.” The Judge said the directors had made no “overt proposal to make workers redundant before the administrators took over nor was there an inevitability or near-inevitability that redundancies must flow from the plan to go into administration”. Rather “the proposal to make the workforce redundant was made by the administrator”.
This decision will certainly be welcome news for directors of financially distressed companies, as well as to insolvency practitioners. It was fact specific but the facts of the case were not entirely unusual ones. In this case the directors were acquitted on the basis of a finding of fact that redundancies were not foreseen by the former directors of City Link. In other cases where they are inevitable, the outcome for directors may not be so favourable. It will also be interesting to see whether the Secretary of State will bring charges for breaches of section 193 in other cases in future. A case being brought against the former chief executive of Sports Direct, who has been charged with the same criminal offence with regard to the administration of West Coast Capital (USC) Limited will be watched closely when it is heard in March.
While this case brings some relief to directors, it does illustrate a difference of approach as between employment law and insolvency law. The particular employment law requiring notice to the Security of State (and the complimentary duty to consult with employees’ representatives in advance of collective redundancies) is hard to reconcile with insolvency law, which obliges companies to act in the best interests of creditors. Giving advance notice of redundancies may serve to diminish the prospects of a company avoiding administration or may result in an earlier entry into administration than would otherwise have been the case. Insolvency experts are to submit their views on this problem to the Department for Business, Innovation and Skills, who will publish their findings. However, the fact that the employment law provisions derive from an EU Directive is a constraint on change.