Contingency plan

Day v Haine and anor

If employers fail to consult their employees before dismissing them, they may be liable to pay them a protective award. In Day v Haine and anor, the Court of Appeal overturned the earlier High Court decision and said that the company still has to pay up, even if it has gone into insolvency.

Unite the Union – Amicus Section instructed Thompsons to act on behalf of the employees.

Basic facts

Prior to going into liquidation in February 2006, Compound Sections Ltd dismissed 40 of its employees for reason of redundancy. However, it failed to consult them as required under section 188 of the Trade Union and Labour Relations (Consolidation) Act 1992. The employees’ union, Amicus, lodged claims for protective awards under section 189(2) of the Act, which were duly awarded by a tribunal in August 2006.

The liquidator then made an application to the High Court to ascertain whether the awards were debts that the company should pay. The High Court said that they did not “constitute debts provable in the liquidation within the meaning of rules 12.3 and 13.12 of the Insolvency Rules 1986”.

This was because the claimants had '”failed to establish any debt or liability to which the company was subject at the date on which it went into liquidation”. As a result, the obligation to pay the awards fell on the Secretary of State (although the employees can only recover part of the award from the Secretary of State).

Relevant law

Rule 12.3(1) states that “all claims by creditors are provable as debts against the company … whether they are present or future, certain or contingent, ascertained or sounding only in damages”.

Rule 13.12(1) provides that “debt” includes any debt that the company owes on the date it goes into liquidation, plus any to which it becomes subject after that date “by reason of any obligation incurred before that date”.

Rule 13.12(3) states that it is irrelevant whether the debt is for the present or future, certain or contingent (ie on something else happening), fixed or liquidated.

Court of Appeal

The Court of Appeal said that although the claim had come up in the context of insolvency, it was really about employment law. In particular, whether or not the provisions of the 1992 Act could be read in such a way that they correctly reflected the provisions of European Directive 98/59 on the approximation of the laws of member states relating to collective redundancies.

It pointed out that under rule 13.12(3) a company could become liable to pay a protective award after the date of liquidation as the result of an obligation incurred before that date. It was immaterial whether the liability was present or future, fixed or liquidated – it just had to stem from a breach of obligation prior to the liquidation.

As the protective award was a measure enforcing an obligation on an employer, the Court said that the penalty for failing to do so had to be “effective, proportionate and dissuasive”. As directive 98/59 required member states to have in force judicial or administrative procedures for enforcing obligations, the liability to pay could not be discretionary. That meant it was at the very least a contingent liability within the meaning of rule 13.12(3).

Following the guidance set down in Susie Radin Ltd v GMB (LELR 90), the Court of Appeal said that the purpose of the protective award was to penalise employers, not to compensate employees and that “where there is no mitigation for the breach (as here) the proper award is for the maximum period permitted by the Act”.

As the company had completely breached the obligation to consult under section 188, the tribunal “realistically did not have a discretion to refuse an award”. The awards were therefore contingent liabilities that had arisen before the company went into liquidation when it failed to consult with its employees and so fell to be paid by the company within rule 13.