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Woolworths case reinforces consultation obligations
owed by administrators when considering redundancies

A recent Employment Tribunal decision has stressed the consultation obligations owed by administrators when considering redundancies, emphasising that:

• The administrators' duty to inform and consult is triggered once it becomes apparent that there is not going to be a quick sale of the business
• administrators must enter the consultation process with an open mind
• insolvency will not, in itself, be sufficient grounds to enable administrators to rely on the defence that there are "special circumstances" which render it not reasonably practicable to consult

In the recent Employment Tribunal decision of USDAW and Others v WW Realisations 1 Limited (in Liquidation) and another (ET3201156/2010), it was held that following the liquidation of Woolworths in November 2008 there was a "substantial serious failure" by the administrators to comply with collective consultation obligations under the Trade Union and Labour Relations (Consolidation) Act 1992 ("TULRCA"). TULRCA requires that employers consult trade unions or employee representatives if they are proposing 20 or more redundancies at an establishment over a period of 90 days or less.

Although the Tribunal held that the duty was not engaged in respect of those Woolworth stores with less that 20 employees, a 'protective' award of 60 days' gross pay was awarded to all other affected employees. It is estimated the award will total some £67 million. The case confirms that the rules relating to collective consultation apply equally to administrators as to employers and clarifies several key aspects of the administrators' duties. In particular:

• The duty to inform and consult under TULRCA is triggered when the employer is first proposing the redundancies in question. In the case of an administration, administrators might contemplate the possibility of redundancies from the outset. Once it becomes apparent that there is not going to be a quick sale the duty to inform and consult is triggered.
• Secondly, any consultation must be undertaken with a view to reaching an agreement on ways of avoiding or reducing redundancies or mitigating the consequences. Despite the administrators holding a consultation meeting on 16 December 2008 for union and employee representatives and the following day issuing written representations, the Tribunal was critical that the consultation had not been undertaken with an open mind. The format of the meeting, for example, which involved a prepared statement being read aloud, did little to suggest that responses would be properly considered.
• Finally, the case confirms the limited ambit of the 'special circumstances' defence. The defence, available where there are special circumstances which render it not reasonably practicable for the employer to comply with its obligations to consult, enables an employer to take only reasonable steps toward compliance under TURLCA. It was confirmed that insolvency itself is not enough to amount to a special circumstance.

This decision emphasises the importance of administrators familiarising themselves with their obligations under TULRCA and adopting clear strategies in relation to redundancies in order to avoid significant penalties under the Act which may undermine an administrator's ability to find a buyer for the business. Whilst it is recognised that administrators have the burden of an uncertain administration process to contend with, it is equally clear that they will be expected to manage this burden alongside the requirements under TULRCA.

Sums due under pension contribution notices
payable as an expense of the administration

The Court of Appeal has upheld the High Court's ruling in the Nortel GmbH (in Administration) and Lehman Brothers International (Europe) (in Administration) case (Bloom and others v The Pensions Regulator and others [2011] EWCA Civ 1124) that a financial support direction ("FSD") or contribution notice ("CN") issued after a company goes into administration or liquidation is payable as an expense of the administration. This means it will rank ahead of floating charge holders and unsecured creditors. Given the huge deficits in many pension schemes, this decision may have a substantial impact on many rescue negotiations and restructuring deals.

If the FSD or CN is issued before the company goes into administration, the liability that has accrued is treated as a provable debt and so payment of the FSD or CN will rank with other unsecured creditors. Timing of the notice is therefore crucial from an administrator's perspective, as well as for the other creditors - whose chances of receiving funds will be greatly reduced if a contribution must first be paid to a pension scheme.

In response to concerns voiced over the impact of this decision, the Pensions Regulator has noted that it is obliged to act reasonably before issuing a FSD and must take account of the parties directly affected by its regulatory actions.

Permission to appeal to the Supreme Court has been granted. There is some speculation that if the decision is not overturned by the Supreme Court the Government may be forced to push through new legislation to mitigate the effect of the decision.

Guidance from the ECJ on establishing a debtor's COMI

The ECJ has given further guidance on establishing a debtor's centre of main interests ("COMI") in Interedil Srl (in Liquidation) v Fallimento Interedil Srl (C-396/09).

Interedil was a company formed under Italian law. Its registered office was transferred from Italy to London in 2001, and on the same date the company was removed from the Register of Companies in Italy. It remained party to two leases in Italy.

Insolvency proceedings were filed against Interedil in Italy, which the company challenged by arguing that only the English court had jurisdiction to wind it up because its registered office had been transferred there. The Italian court nevertheless issued a winding up order.

The ECJ noted that the presumption in favour of opening insolvency proceedings in the Member State where the debtor's registered office is located could be rebutted if objective factors, ascertainable by third parties, show that the location of the company's registered office is not its COMI. Such factors include the place where the company pursues economic activities, the locations in which it holds assets, and the location of its actual centre of management and supervision. In this case, the company's interest in the Italian leases was not enough to displace the presumption that England, as the new location of the company's registered office, was the COMI.

The ECJ also noted that if a debtor no longer carries out any economic activities, insolvency proceedings can be started in the place of the last ascertainable COMI.

This decision is in line with recent judgments in some Member States that a "head office functions" test should be used in order to determine a company's COMI.

Judgment in foreign insolvency proceedings can be registered in the UK

In the recent case of New Cap Reinsurance Corporation Ltd and another v Grant and Others [2011] EWCA Civ 971 the Court of Appeal decided that foreign insolvency proceedings fall within the definition of "civil or commercial matters" in the Foreign Judgments (Reciprocal Enforcement) Act 1933, allowing judgments made in such proceedings in certain jurisdictions - in this case, Australia - to be registered in England by the judgment creditor. Registration of a foreign judgment under this Act allows it to be enforced as if made by the courts in the UK. If the conditions for registration are fulfilled, the court does not have any discretion to refuse to register the judgment.

The judicial interpretation of the phrase "civil or commercial matters" in this context might be contrasted with that taken to Brussels Regulation, where insolvency proceedings are not so classed - meaning that judgments obtained in such proceedings cannot be enforced under the Regulation.

Government withdraws plans for new pre-pack legislation

Following the report in our November 2011 bulletin that the enactment of the draft Insolvency (Amendment) (No 2) Rules 2011 had been delayed, the Department for Business Innovation & Skills has announced that it will not be seeking to introduce new legislative controls on pre-packs at this time.

The new legislation was intended to introduce increased regulation of pre-pack sales by liquidators and administrators to improve transparency in the process. It was criticised by insolvency practitioners, lawyers, creditor representatives and others, who were particularly concerned by a proposed new rule requiring administrators to give three days' notice to creditors when selling a business to a connected or associated party where the company's assets have not been openly marketed. They argued that a three day notice period could cause significant losses for the company concerned if its financial difficulties were made public. Currently insolvency practitioners only have to consult secured creditors and they do not have to give notice to unsecured creditors.

The Government will now look at what can be done to improve the existing regulatory framework, which includes the Statement of Insolvency Practice 16.

NAMA in Court

The High Court in England has decided that an assignment of a loan by NAMA (which had acquired its interest in that loan in June 2010 in exercise of its statutory powers) was subject to restrictions contained within the relevant facility agreement, thus fettering NAMA's own ability to sell on the debt: McKillen v Misland (Cyprus) Investments Limited [2012] EWHC 129 (Ch).

Conflicting case-law on out of court administration appointments continues

In Re Virtualpurple Professional Services Limited [2011] EWHC 3487 (Ch), the question of whether it is necessary for directors who are appointing administrators to serve notice of their intention to do so on the company itself was again considered in the High Court - the point also having arisen in the recent case of Minmar (929) Limited v Khalastchi [2011] EWHC 1159 (Ch), discussed in our last bulletin. In Virtualpurple, Norris J held that such notice was not necessary, taking the view that the requirement in rule 2.20(2) of the Insolvency Rules that notice be given to enforcement officers charged with execution against the company, anyone known to have distrained against the company, the supervisor of a CVA and the company itself was simply "for information purposes", to ensure that all of these people were aware of the interim moratorium which arises upon filing of the notice of intention. The giving of notice to these parties was not, thought the Judge, a precondition to the validity of the appointment of the administrators itself. In taking this approach Norris J disagreed with Sir Andrew Morritt C's judgment in Minmar.

In another High Court decision handed down on the same day, however, Warren J followed the approach in Minmar. National Westminster Bank plc v Msaada Group [2011] EWHC 3243 (Ch) concerned the purported appointment of an administrator to an insolvent partnership in respect of which a partnership voluntary arrangement ("PVA") was in place where the supervisor of that PVA had not been served with a notice of intention as required by rule 2.20(2) (as it applies to partnerships by the Insolvent Partnerships Order 1994). Warren J held that the failure to give notice did invalidate the appointment.

The law on this issue therefore sits in a state of confusion and a Court of Appeal decision or legislative intervention would provide welcome clarification.

Meantime, the High Court also considered the question of what constitutes valid notice under rule 2.20(2) in Re Bezier Acquisitions Limited [2011] EWHC 3299 (Ch). Here, the directors of an insolvent company held a board meeting at which they approved a notice of intention to appoint an administrator and a notice of appointment. Rule 2.8(2) suggests that notice should have been given by the directors to the company at its registered office - but this was not done. Instead, the notice of intention and notice itself were simply handed to a trainee solicitor in the firm retained to advise the insolvent company.

On an application by the administrators for a declaration that they had been validly appointed, the Court held that this was sufficient to amount to compliance with rule 2.20(2) because rules 12A.5 and 13.4 provide that where notice is to be given to a person it may be given to his solicitor if they are authorised to accept service on their behalf.

Contact us

For more information, please contact:

Michael Hughes
Partner
0141 271 5705
michael.hughes@mms.co.uk

Simon Colledge
Partner
020 7002 8536
simon.colledge@mms.co.uk

Shirley Li-Ting
Director
0141 271 5711
shirley.li-ting@mms.co.uk

Craig Neilson
Associate
020 7634 8804
craig.neilson@mms.co.uk

This briefing is written as a general guide only. It is not intended to contain definitive legal advice which should be sought as appropriate in relation to any particular matter.