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IPs Feel the Heat Over Mass Redundancies in Insolvency

Thursday, 13 November 2014

The recent redundancy claims against high-street electrical retailer Comet have highlighted the issues faced by administrators making mass redundancies in insolvency. The case has also heightened political pressure on insolvency practitioners to ensure that their duties relating to employment law are properly conformed to during insolvency processes. The fallout means that, as well as facing reprimands from the regulator and financial penalties, IPs have seen the threat of criminal sanctions heightened if they get it wrong.

Facts of the Comet Case

An employment tribunal found that Deloitte did not follow correct procedures after failing to carry out a collective consultancy on redundancies at Comet. By doing so, former employees were able to bring claims for unfair dismissal under employment law. The claimant employees have now been granted 90 days pay which could mean a total of around £26m being awarded.

Political Pressure on Insolvency Practitioners

It should be noted that the former employees of Comet will not be paid compensation by the now insolvent company but by the taxpayer at a cost of £70 million. That includes the nearly £26 million cost of compensation claims. As a result of what has happened with Comet, political pressure on insolvency practitioners has mounted.

Business Secretary, Vince Cable has ordered an inquiry into the collapse of Comet and asked the Institute of Chartered Accountants in England and Wales to consider whether or not there had been a conflict of interest. He stated that there should have been no reason as to why there was a failure to comply with the law and because of this the administrators of Comet may face disciplinary hearings.

Insolvency Practitioners Must Exercise Caution

The circumstances of the Comet administration have no doubt caused insolvency practitioners to heed the fact that the potential risks they now face are greater than ever. They potentially face disciplinary penalties and criminal sanctions if they fail to comply with statutory obligations which are already onerous in the light of the practical realities of an insolvency process.

Obligations include a requirement to undergo a collective redundancy automatically when there are 20 or more employees being made redundant within 90 days. Consultation must occur 30 days (or 45 days if it is more than 100 employees) before dismissals take place. The Secretary of State must be notified within the same time frames; failure to do so can result in a criminal offence. Practitioners must also file a HR1 form with the Department for Business Innovation and Skills, outlining the proposals for redundancy.

As well as following statutory obligations, insolvency practitioners should perform certain duties which will help protect their position as much as possible. For example, they should keep employees updated on the timing of redundancies and provide documents containing questions raised during consultation. Moreover, they should involve the use of representatives from trade unions as well as elected employee representatives. One of the issues raised in the Comet case was the fact that management selected employee representatives.

Comment

The Comet case has caused much debate and concern over mass redundancies in insolvency. A review by the Insolvency Service is due to be released soon. It is set to address whether pre-pack administrations are a viable rescue tool or simply an abuse of the insolvency system. The result of this review could determine whether insolvency law will be completely overhauled. Meanwhile Business Secretary, Vince Cable, is trying to pass a bill through Parliament to help tighten insolvency litigation. Until there are further developments on these fronts in reforming the law, insolvency practitioners must exercise caution.

For specialist advice on insolvency and litigation arising from insolvency contact Peter Gourri today by email PGourri@rollingsons.co.uk or telephone 0207 611 4848.

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