City Link directors 'not guilty' of failing to notify government of looming redundancies

Out-Law News | 13 Nov 2015 | 2:27 pm | 3 min. read

City Link did not breach laws requiring them to notify the government that they were "proposing to dismiss" thousands of employees who were made redundant when the business became insolvent last year, a court has ruled.

The acquittal by Coventry magistrates' court of three former directors of the insolvent parcel delivery business comes at the end of the first criminal prosecution for failure to provide advanced notification in a collective redundancy consultation. The rules require employers to notify the business secretary at the point that they propose making 20 or more redundancies at one establishment, and at least 30 or 45 days before the redundancies take effect depending on the number of affected employees.

Corporate insolvency expert James Cameron of Pinsent Masons, the law firm behind Out-Law.com, said that company directors were often faced with a dilemma in insolvency cases.

"The basis of the prosecution in City Link indicates a common sense approach will be taken in insolvency scenarios," he said. "These are fluid situations where directors are often reluctant to disclose sensitive information before it becomes absolutely necessary. Rather than suggesting directors should jump the gun, the prosecutions seem to be targeting situations where directors fail to file an HR1 form despite concluding the company or its business cannot be rescued without redundancies," he said.

City Link was placed into administration on Christmas Eve 2014, resulting in the loss of over 2,500 jobs. Prosecutors in the case alleged that the firm's former managing director, David Smith, its finance director Robert Peto and non-executive director Thomas Wright became aware that redundancies were inevitable on 22 December 2014. However form HR1, notifying the Secretary of State of proposed redundancies, was not sent to the business secretary until 26 December 2014 when it was lodged by the company administrator.

Deputy district judge David Goodman ruled that although the only option for the business was to go into administration as of 22 December, the directors believed that the business could be saved and that there was the possibility of a sale. Once the administrator was appointed on 24 December, he advised that the business should keep trading until 26 December with redundancies an option if no buyer was found by 31 December 2014. This meant that, on the evidence of this case, there was no "proposal to make redundancies" or corresponding notification obligation on 22 December, he said.

Collective redundancy obligations are triggered when an employer proposes to make 20 or more employees redundant within a 90-day period at one establishment. The UK's Trade Union and Labour Relations (Consolidation) Act, which gives effect to the EU's Collective Redundancy Directive, requires that employers consult on proposals for collective redundancies with unions or representatives of the affected employees for at least 30 days where 20 or more redundancies are proposed, or for at least 45 days where more than 100 redundancies are proposed. A separate duty to inform the government about their proposals is triggered at the same time.

UK case law in relation to the point at which the proposal to dismiss crystallises, triggering these two duties, is currently uncertain as previous cases have resulted in seemingly different tests. One line of authority is that the duty arises not when closure is "mooted as a possibility but only when it is fixed as a clear, albeit provisional, intention" while another suggests that consultation must begin as soon as "a strategic or commercial decision compelling [the employer] to contemplate or plan for collective redundancies has been taken". The Court of Appeal is expected to provide guidance on the point when it considers the case of USA v Nolan next year.

Employment law expert Christopher Mordue of Pinsent Masons said that regardless of the not guilty verdict, the prosecutions had already affected the approach of company directors and insolvency practitioners in similar situations.

"We are already seeing them taking the increased risk of prosecution seriously and considering filing HR1s at an earlier stage than has previously been the case," he said. "The potential criminal liability from not acting soon enough makes the current legal uncertainty about when this obligation is triggered particularly unhelpful, making it even more vital that the Nolan appeal provides a clear statement of the trigger for filing and collective consultation."

"Full consultation may not be possible when the company is heading into insolvency, but even partial compliance may help to reduce the level of awards. Directors and insolvency practitioners would be well advised to ensure that the filing of the HR1 is accompanied by some form of engagement with the workforce with a view to minimising the value of any protective award claim that may follow and, in turn, maximising recovery for the creditors," he said.

Former City Link employees have begun a separate action seeking protective awards of up to 90 days pay per employee, alleging a failure in relation to the collective consultation duty on the basis that consultation did not begin when the proposal to dismiss arose.