Haine & Secretary of State for Business Enterprise & Regulatory Reform V Day [2008] EWCA Civ 626

Background

This case was concerned with whether protective awards made to employees by the Employment Tribunal after the date of the employer's liquidation were debts provable in the liquidation.

Facts

The First Appellant was a representative of the former employees of Compound Services Limited {"the Company"}. The Second Appellant was the Secretary of State for Business, Enterprise and Regulatory Reform. The Respondent was the liquidator of the Company.

On 10 February 2006 the Company, which was insolvent, terminated the employment of 40 of its employees. An Administration Order was made on 16 February 2006. The Company went into liquidation on 13 April 2006. Contrary to Section 188 of the Trade Union and Labour Relations Act 1992, the Company failed to consult with the employees' representatives about the proposed dismissals. On 31 August 2006, following complaints made to the Employment Tribunal by the employees' union, the employees secured protective awards.

The Company failed to pay the remuneration due under the awards to the employees. A number of the former employees sought to prove in the liquidation.

The liquidator applied for directions under Section 112 of the Insolvency Act as to whether entitlements under the awards were provable in the liquidation. If provable then, at least in part, they would constitute preferential debts in the liquidation.

Rules 12 and 13 of the Insolvency Rules 1986 contain the relevant provisions. Rule 12.3(1) provides that, in a winding up, 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 defines "debt" for the purposes of a winding up to include:
" .. any debt or liability to which the company may become subject after [the date of the liquidation] by reason of any obligation incurred before that date;"

The decision of the High Court.

The liquidator's application for directions was decided in the High Court by Sir Donald Rattee on 15 October 2007. He held that the protective awards did not constitute debts provable in the liquidation for the purposes of rules 12.3 and 13.12 of the Insolvency Rules 1986.

The essence of the decision was that, as at the date of the liquidation, the employees had no enforceable rights against the Company in respect of the protective awards. Their rights at that time were merely to make a complaint to the Employment Tribunal which could, it its discretion, make an award in their favour. The awards were not liabilities to which the employer had become subject following the date of liquidation by reason of an "obligation incurred before that date" under rule 13(12)(1)(b) of the Insolvency Rules 1986.

The approach of the Court of Appeal.

The Court of Appeal adopted a very different approach to the case. The decision in the High Court had been reached without any reference to the consolidated Council Directive 98/59/EC of 20 July 1998 {"the Directive"} which provides for the approximation of the laws of EC Member States relating to collective redundancies.

Although the problem arose in an insolvency context, it was essentially one of employment law in the context of an EU Directive. The UK has a duty under EU law to take all necessary measures to ensure that infringements of EU law are penalised under conditions which make the penalty "effective, proportionate and dissuasive". See: EC Commission v Greece Case 68/88 [1989] ECR 2965.

Article 6 of the Directive provides that Member States must ensure that judicial or administrative procedures for the enforcement of obligations under the Directive are available to workers representatives or workers.

The Court of Appeal considered that the Directive was central to the case, pointing out that, if the High Court was right:

".. the effect of the 1992 Act is to provide a perverse incentive to employers operating through the medium of companies not to fulfil their obligations under the 1992 Act."

In the result, the Court of Appeal allowed the appeal for the following reasons:

1. As a matter of language the liability to pay the protective award amounted to a liability "to which the company may become subject after [the date of liquidation] by reason of an obligation incurred before that date". The liability was contingent on the Tribunal making an award but, under rule 13(12)(3) of the Insolvency Rules 1986, it was immaterial whether the relevant liability was present or future, fixed or liquidated. The liability stemmed from a pre-liquidation breach of obligation by the Company.

2. The Employment Tribunal realistically did not have any discretion to refuse an award. The discretion, being judicial, had to be exercised according to proper legal principles so that the Employment Tribunal was not free to impose (or refuse to impose) a protective award as it pleased. On the facts, the discretion could only rationally be exercised one way. Support this conclusion, the Court of Appeal referred to the decision in GMB v Susie Radin [2004] EWCA Civ 180 in which it had been held that the proper approach in the ET to these awards was to start with the maximum period. This was to be reduced only if there were mitigating circumstances justifying such reduction as the ET considered appropriate.

3. UK legislation should be read so as to comply with the Directive which it was intended to implement. To treat the liability as merely discretionary would be wrong. The liability was at the very least a contingent liability within the meaning of rule 13(12)(3) of the Insolvency Rules 1986.

Conclusion

A protective award made to employees after the date of liquidation is now to be regarded as a debt provable in the liquidation. This was a decision which was heavily influenced by policy considerations. The key was to protect employees and the taxpayer against defaults of an insolvent employer.

UK legislation is to be interpreted so as to give proper effect to the Directive on collective redundancies. The penalty for any default on employer obligations has to be effective, proportionate and dissuasive. This is only achievable if the penalty actually falls on the employer.