The Government’s proposed new guidance for consulting on collective redundancies in insolvency situations is ‘very positive’, says insolvency and restructuring trade body R3.

Following a number of high-profile insolvency cases where employees were made redundant without the full statutory consultation period, the Government has been looking at reforms which could be made to redundancy consultations. R3 has long called for reform so that inevitable clashes between insolvency and employment law can be resolved. The Government’s proposed guidance could help get a better deal for employees, employers, insolvency practitioners, and the taxpayer.

Caroline Sumner, R3’s technical director, said “The Government’s recognition of the difficulties faced when consulting on collective redundancies in insolvency situations is very positive. Having called for reform for a number of years, we’re pleased to see action finally being taken. We’re also pleased that the Government understands that new guidance rather than regulation is needed. Additional regulation would have compounded the problems in an already complex area.”

“Recognising that insolvencies are a special situation and that they require different approaches to redundancy consultations is a pragmatic step. The current situation does not work for employees, employers, the taxpayers, or insolvency practitioners. New guidance will help get a better deal for everyone.”

“Collective redundancy consultations are required by statute but the special nature of insolvencies, and the speed with which they happen, often result in an inability to undertake the full consultation process. A full consultation requires an alternative to redundancy which often isn’t there when a company has failed. The cost of keeping staff on and running the consultation means less money can get back to creditors, but maximising creditor returns is one of the primary goals of an insolvency procedure. Not making staff redundant quickly could prevent them from accessing benefits or applying for new roles, trapping them in a situation where they’re not being paid by their insolvent employer.

“The difficulty in resolving these issues often means significant ‘protective awards’ are made to employees by Employment Tribunals. These costs are typically met by the taxpayer in the first instance rather than the insolvent company. It’s just not clear who the existing set-up is meant to help.Guidance will help resolve some of the issues which exist between employment and insolvency law and we look forward to working with the Government to ensure the new guidance is a success. Insolvency practitioners should try as far as they can to consult on redundancies, and this guidance will help them do that.”

“While the Government says it will consider regulation in future, we should see how the guidance works first. Insolvency practitioners find themselves in an impossible position when caught between employment law and the realities of an insolvency, so additional regulation would have led to punishment for practitioners trying to do their jobs with few alternatives.”

Under employment law*, in situations where there will be more than 20 redundancies in one location, there must be at least 30 days’ consultation for employees before the first redundancy is made (45 days for 100+ redundancies). This can cause problems in insolvencies, particularly where a company has failed because:

  • The cost of retaining employees while consulting – and running the consultation – can exhaust the company’s remaining funds. The depletion of funds can make business and job rescue unviable and it makes it difficult for insolvency practitioners to comply with their obligations under insolvency law to maximise returns to creditors. Serious threats to creditor returns could also threaten businesses’ confidence to lend and trade.
  • An insolvent company may not have the funds to pay employees while consultations take place. When a company has failed without prospects for rescue, this can leave employees ‘trapped’: if they resign from the company to seek new work they risk losing redundancy benefits (e.g. statutory redundancy pay, paid by the government); if they stay, they face at least a month without pay.
  • When a company fails, no meaningful consultation can take place: there is no realistic alternative to redundancies. In these circumstances, a 30- or 45-day consultation serves little practical purpose.
  • In an ideal world, redundancy consultations would start before a company becomes insolvent. However, company finances can deteriorate very rapidly in some cases, making this difficult. Insolvency situations can also be fast-moving and unpredictable, making formal consultation processes difficult to manage.

When claims are brought before the Employment Tribunal for a failure to consult, a significant ‘protective award’ may be made against the company for the benefit of employees. However, because the company is insolvent, the award is paid by the taxpayer, who then becomes an unsecured creditor in the insolvency process.

 

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