AEI, a manufacturer was in financial difficulty. It received advice from its accountants that unless it reduced costs, there was a risk of the company trading whilst insolvent. The potential liabilities that the company directors could incur for wrongful trading or breach of fiduciary duty would not be desirable and, arguably, such potential liabilities should encourage directors of insolvent companies to take early action.
The directors then made 124 employees redundant with immediate effect. The employees successfully claimed in the Employment Tribunal (ET) that there had been a breach of the duty to consult under s.188 TULCRA. The employment tribunal made 90 day protective awards to each employee under s.189 TULRCA. On appeal to the EAT, the decision to make 90 day awards was overturned and 60 day awards were made instead. In explaining its decision, the EAT stressed that the purpose of making a protective award is penal, not compensatory. It is designed to encourage employers to comply with their obligation to consult. It was obliged to take into account mitigating factors and ask why the company acted as it did. The company could not trade lawfully following the advice it received from its accountants. In those circumstances, it was wrong for the ET to anticipate that a 90 day consultation could have taken place although the EAT accepted that a shorter consultation period of 10 days or so could have been undertaken.
It is noteworthy that no argument was advanced that there were special circumstances to excuse non-compliance with s.188 TULRCA. The appeal related to the length of the award made. It does demonstrate that even where there is no special circumstances defence available, it may still be worth challenging the length of any award.
The decision highlights the interesting dynamic between employment and insolvency law. The company, and through their duties to the company, the directors, have obligations to creditors and employees. Decisions such as AEI and the earlier decision of Pressure Coolers v Malloy (on the TUPE implication of administration) tend to show that the EAT favours certainty for the employees ahead of insolvency ramifications for the company and the directors.
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