Failure to inform and consult on redundancies while insolvent

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AEI Cables Ltd v GMB and others

In DLA Piper’s case of the week, the Employment Appeal Tribunal (EAT) held that the employment tribunal, when setting a protective award for failure to inform and consult on redundancies, should have taken account of the period during which the company was insolvent.


Facts


AEI Cables Ltd (AEI), a manufacturer of copper wiring and cable, ran into financial difficulty due to the steep increase in copper from September 2010 to February 2011. From February 2011, it was clear that the business required restructuring and possible redundancies, and general discussions with trade unions and among directors began.

Between 17 and 20 May 2011, the company’s accountants, who specialised in company reconstruction, warned that unless AEI reduced its costs quickly or acquired new funding, there was a risk of it trading while insolvent. To trade while insolvent would have further exposed the directors to personal liability for wrongful or fraudulent trading.

When AEI’s bank refused to extend its overdraft after a meeting on 25 May 2011, the decision was made to close one of the company’s plants immediately. The union was informed that the company had no choice but to make 124 employees redundant.

On 27 May 2011, letters were sent to 124 employees, summarily dismissing them immediately.

The employment tribunal held that “there was a complete failure to consult with either the trade union or with individuals” by AEI, in breach of its duties under s.188 of the Trade Union and Labour Relations (Consolidation) Act 1992 (TUL(C)RA). The tribunal held that there were no special circumstances on which AEI could rely to excuse its non-compliance, and appeared to consider that it would have been appropriate for consultation to begin between 17 and 20 May.

Given the severity of the breach, the employment tribunal found that it was just and equitable to make an award for the maximum period of 90 days’ pay, pursuant to s.189 of TUL(C)RA. AEI appealed against the level of the award.


Decision


The EAT paid regard to the Court of Appeal decision in Susie Radin Ltd v GMB and others [2004] IRLR 400 CA, which is the authority on how the courts should approach issuing awards under s.189 of TUL(C)RA. The EAT found that employment tribunals are bound to take account of mitigating factors. In those circumstances, the EAT held that “it is clearly wrong for the employment tribunal [in this case] to anticipate that a 90-day consultation period could have started”.

The EAT held that “the employment tribunal failed to have sufficient regard to the insolvency and the consequences of trading and that a consultation period of 90 days was simply not possible”. The EAT was of the opinion that, if the tribunal had taken into account mitigating factors and asked why AEI acted as it did, it could not have ignored the fact that AEI was simply unable to trade lawfully after receiving the accountants’ advice. However, in the circumstances, some consultation could have taken place in the period 17 to 20 May, or at least from 25 May. In taking into account the impending insolvency as a mitigating factor and weighing it up against the complete failure to inform and consult, the EAT awarded a protective award of 60 days.


Implications


The failure of the employment tribunal to take into account the company’s insolvency and the EAT overturning that decision highlights the need for tribunals to consider the impact of a company’s insolvency on its ability to collectively consult.

However, despite the real and imminent threat of insolvency and the exposure of personal liability facing the directors, the EAT still reduced the protective award by 30 days only, meaning a protective award of 60 days’ pay for each employee still stood. The sanction reinforces the need for employers to collectively consult as, even when in financial difficulty, their duty to consult will not be entirely excused.

The EAT recognised that the purpose of making a protective award is penal and designed to encourage employers to comply with their obligations to inform and consult, rather than compensate employees. The reduction of only 30 days affirms this position.

Bethan Jones, associate, DLA Piper








Practical guidance from XpertHR on collective redundancy consultation


Line manager briefing on collective redundancies This line manager briefing looks at the law and best practice where the employer is proposing to dismiss 20 or more employees within 90 days.

Informing and consulting prior to redundancies The XpertHR employment law manual provides guidance on when employers have to inform and consult in advance of redundancies.

How to arrange the election of employee representatives for collective redundancy consultation purposes Practical guidance for employers on how to arrange the election of employee representatives for collective redundancy consultation purposes.

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