Recent news reports have highlighted that the number of corporate insolvencies has continued to rise during 2022 and 2023, with the retail sector being particularly affected. Many companies are struggling to meet the demands of repaying government support provided during lockdown, increased running costs and high wages coupled with lower demand due to the cost of living crisis.
Corporate insolvencies can impact employees in the affected business in many ways: an employer may be unable to pay wages, holiday pay or other sums due to employees and/or there may be a need to make mass redundancies. Insolvencies also carry concerns for the directors: they may be found guilty of wrongful trading; possible disqualification, as well as potential exposure to criminal liability for failing to notify the Secretary of State in relation to proposed collective redundancies. Section 193 of the Trade Union and Labour Relations (Consolidation) Act 1992 (TULRCA) requires a company to notify the Secretary of State of any proposals to make 20 or more redundancies within a 90-day period at one establishment, such notification to be made at least 30 days before the first dismissal takes place using the HR1 form. Whilst to date there has not been a conviction for failure to comply with this requirement there has been an increasing expectation that such a conviction may be forthcoming, and a recent case has come close.
R (on the application of Palmer) v Northern Derbyshire Magistrates Court and Another  UKSC 38 concerned the administration of USC (a wholly owned subsidiary of Sports Direct.com Retail Limited) in 2015. During the administration, a large number of redundancies were made on the closure of USC’s Glasgow warehouse. Affected employees were awarded the maximum protective award by the employment tribunal for USC’s failure to undertake collective redundancy consultation. The HR1 form was not sent until after the employees had been dismissed and when the Insolvency Service queried the issue with USC’s administrators. Criminal charges were issued against Mr Palmer, one of the joint administrators and Mr Forsey, one of USC’s directors, regarding the failure to file the HR1 form. Mr Palmer entered a plea of not guilty and challenged the legality of the case against him.
The issue to be determined by the Supreme Court was whether Mr Palmer as an administrator of USC could himself be guilty of the offence of failure to notify.
Overturning an earlier decision of a Magistrates’ Court, the Supreme Court determined that an administrator is not an ‘officer’ of the company within the meaning of section 194(3) of TULRCA. This was on the basis that an officer in that context means a person who holds an office within the constitutional structure of the company. The Court held that the Insolvency Act 1986 does not regard an administrator as an officer of the company over which the administrator is appointed. As a result, the allegations of criminal liability against Mr Palmer cannot progress.
Whether the case against Mr Forsey progresses is yet to be seen and the prosecution will face an uphill struggle because, in administration scenarios, it can be difficult to establish the necessary intent exists to make collective redundancies so as to trigger the duty to notify until the administrator is actually appointed. The administrator’s primary statutory duty is to rescue the business, and therefore up until the time of their appointment the directors of a company might consider that collective redundancies could be avoided, and the duty to notify would not be triggered. Just the risk of an administrator being appointed is unlikely to be enough to trigger the duty. However, once the administrator has been appointed a reasonably quick decision is likely to be made as to whether collective redundancies are required and the HR1 form filed.
Any case needs to be considered on its own facts including whether any ‘special circumstances’ existed which meant that it was not possible to comply with the duty to notify. It is noteworthy that in the circumstances of USC it did not file the HR1 form until after the redundancies had been implemented.
The Supreme Court’s decision brings useful clarification to the potential exposure for administrators in respect of the duty to notify the Secretary of State in relation to collective redundancies. However, despite the personal reprieve for administrators, there is a continuing risk of a criminal conviction and potential personal liability for directors where a company fails to file an HR1 form. The potential trigger and timing of this duty therefore remains an important consideration for directors of a business in distress and, as a matter of professional practice, for administrators appointed to help rescue that business.