Date 8 July 2008
The Court of Appeal has recently held that a protective award made after the date of liquidation of a company, for failing to consult about collective redundancies prior to date of liquidation is a provable debt and therefore paid out of the Company's assets.
What is a Protective Award?
An obligation on an employer to consult arises where they propose to make large scale redundancies of 20 or more employees within a period of 90 days or less. Consultation must be with representatives of effected employees and also include notification to the BERR.
Potential sanctions for failing to consult can include a declaration and a protective award, payable to employees, of a sum equivalent to but not exceeding 90 days pay. Although it is at the Tribunal's discretion as to the amount to award, the Tribunals have held that the protective award is designed to be a sanction and not compensation. Therefore, where there is a complete failure to consult a Tribunal must award 90 days' pay and then reduce this according to mitigating circumstances.
Who is Normally Liable to Pay this Protective Award?
Previously an employee could not claim against the Company or its liquidator for a protective award and instead had to recover this from the Secretary of State.
The Court Appeal disagreed with this approach and held that the protective award was a provable debt in the liquidation of a company which includes:-
- Any debt or liability of which the company is subject at the date on which it goes into liquidation
- Any debt or liability to which the company may become subject after the date on which it goes into liquidation by reason of an obligation incurred before that date, provided that it is a contingent liability
Although the liability was reliant on a decision by a Tribunal and therefore after the date of liquidation, it was due to an obligation to consult that had arisen prior to that date. Therefore as a result it was held that is should be paid out of the Company's assets.
Implications of Decisions
The Court made the decision to deter an insolvent company from failing to consult with its' employees. Employers should note with caution that when an insolvency practitioner is appointed, the employees' contracts of employment terminate automatically and therefore consultation is necessary. They should also note that a complete failure to consult can make them liable for an award of the full 90 days' pay to each of the effected employees. This recent decision will mean that this will be a further liability to reduce any money remaining in the company to meet its' other outstanding debts.
For further information about any of the topics covered in this edition of Stay Alert, please contact Nikki Petken on 01727 798000 or by email at nikki.petken@salaw.com.
© SA Law 2008
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