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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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