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Protective awards prove to be no protection in winding up
27 March 2008
Employee protective awards made after the date of liquidation
are not debts provable in the liquidation and are not payable as
expenses of the winding up. This is what the High Court held
recently in Day v Haine [2007] All ER (D) 298.
The contracts of 40 employees were terminated
by the company by reason of redundancy. The company went into
administration and then into liquidation. The trade union brought
proceedings on the employees' behalf in the employment tribunal
claiming that the employees had not been properly consulted. The
tribunal upheld the claim and, four months after the company went
into liquidation, made a declaration and protective awards pursuant
to section 189(2) of the Trade Union (Labour Relations) Act
1992.
The liquidator sought directions as to whether
the protective awards constituted preferential debts and were
therefore provable in the liquidation. The liquidator submitted
that the protective awards were not provable in the liquidation.
The respondents argued that the awards were provable as they were a
debt or liability to which the company had become subject following
the date of liquidation by reason of an "obligation incurred before
that date" under Rule 13 of the Insolvency Rules 1986. Failing
that, the respondents contended, the awards were expenses of the
liquidation under rule 4.218(1).
The High Court agreed with the liquidator. As
at the date of the liquidation the employees had no enforceable
right against the company. A breach by a company of the duty to
consult prior to making employees redundant simply gives a right to
apply to the tribunal to ask it to determine the breach and
exercise its discretion to make a protective award. There was no
"obligation incurred" as at the date of the liquidation. The
protective awards were not provable and were not payable as
expenses of the liquidation.
Although this has produced a harsh result, it
was a conclusion the court was compelled to reach on the present
state of the law. The case is now going to appeal, with a Court of
Appeal hearing set for 23 or 24 April. Pending the appeal, the
Insolvency Service has requested IPs not to formally reject proofs
of debt submitted by the Redundancy Payments Directorate (RPD) in
respect of protective awards. Otherwise, the RPD will have to
appeal the rejection and the court would have to stay the appeal
until the outcome of Day is known.
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