Factual and Procedural Background
This opinion concerns an application by the liquidator of Company A for directions under section 112 of the Insolvency Act 1986 regarding proofs of debt submitted by former employees in respect of protective awards made by an Employment Tribunal pursuant to section 189 of the Trade Union and Labour Relations (Consolidation) Act 1992.
On 10th February 2006, Company A, then insolvent, terminated the employment of 40 employees without sufficient consultation as required by section 188 of the 1992 Act. The company entered administration on 16th February 2006, with the liquidator appointed as administrator, and subsequently the administration was converted into a liquidation effective 13th April 2006.
Following the dismissals, a trade union brought proceedings on behalf of the employees under section 189 of the 1992 Act alleging failure to consult. On 31st August 2006, the Employment Tribunal upheld the complaint and made protective awards in favour of the dismissed employees for the maximum period allowed.
The liquidator seeks directions on whether these protective awards constitute provable debts in the liquidation, which affects their priority and treatment under insolvency rules.
Legal Issues Presented
- Are the employees' entitlements under protective awards provable debts in the liquidation of Company A?
- If provable, do these debts constitute preferential debts under the Insolvency Act 1986?
- Does the statutory obligation to consult under section 188 of the 1992 Act constitute an "obligation incurred" making protective awards provable under Insolvency Rule 13.12(1)(b)?
- Are protective awards payable as expenses of the liquidation under Insolvency Rule 4.218?
Arguments of the Parties
Liquidator's Arguments
- The employees’ claims may not be provable debts because the protective awards were discretionary and made after the liquidation commenced.
- The obligation to consult under section 188 does not create enforceable rights or debts at the liquidation date, only a right to apply for an Employment Tribunal decision.
- Protective awards arise from the tribunal’s discretion and thus are not debts or liabilities existing at the liquidation date.
- Protective awards are not expenses of the liquidation and therefore not payable out of the company's assets in priority to creditors.
Employees' and Respondents' Arguments
- The claims are provable debts as they are claims by creditors and may be present, future, certain or contingent under Insolvency Rules.
- The company was under a statutory obligation to consult before dismissal, which was breached, thus incurring a liability before liquidation.
- The protective awards are liabilities arising from that pre-liquidation obligation and therefore provable under Insolvency Rule 13.12(1)(b).
- Alternatively, the protective awards are necessary disbursements or expenses of the liquidation under Insolvency Rule 4.218.
- It was argued that the tribunal was effectively bound to make protective awards once a breach was found, making the awards less discretionary.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Glenister v Rowe [2000] Ch 76 |
Discretionary liabilities dependent on future court orders are not contingent debts provable in bankruptcy. |
The court applied this principle analogously to company liquidation, holding protective awards were not provable debts at the liquidation date because they depended on a tribunal discretion exercised after liquidation began. |
| R (ex parte Steele) v Birmingham City Council [2005] EWCA Civ 1824 |
Claims dependent on future determinations by a third party are not contingent liabilities provable in bankruptcy. |
The court held the protective awards similarly were not provable debts at liquidation because the liability arose only upon the tribunal's discretionary decision made post-liquidation. |
| Re T&N Limited [2006] 1 WLR 1728 |
Interpretation of "obligation incurred" in insolvency rules excludes duties not conferring enforceable rights before liquidation. |
The court used this precedent to reject that the consultation duty under section 188 created an enforceable obligation giving rise to provable debts before liquidation. |
| Julius v Lord Bishop of Oxford [1880] 5 App Cases 214 |
Distinction between powers that are discretionary and those coupled with a duty to act. |
The court rejected the argument that the tribunal was under a duty to make protective awards, affirming the discretionary nature of the tribunal’s power. |
| Secretary of State for Trade and Industry v Frid [2004] 2 AC 506 |
Example of "obligation incurred" as an enforceable pre-liquidation contract liability. |
The court referenced this to illustrate what constitutes an "obligation incurred" for provability purposes, distinguishing it from non-enforceable duties like the consultation duty. |
Court's Reasoning and Analysis
The court examined the statutory framework under the 1992 Act relating to protective awards and the consultation duty, noting that the duty to consult under section 188 did not itself confer enforceable rights on employees but only a right to apply to an Employment Tribunal. The tribunal’s power to make protective awards was discretionary, not obligatory, as confirmed by precedent including Julius v Lord Bishop of Oxford.
Applying the Insolvency Rules 1986, the court considered whether the employees' claims were provable debts at the date of liquidation. It held that since the protective awards depended on a discretionary decision made after liquidation commenced, no certain or contingent debt existed at that date. The court relied heavily on the Court of Appeal decisions in Glenister v Rowe and R (ex parte Steele), which established that claims contingent on future discretionary decisions are not provable debts.
The court rejected the argument that the company’s statutory duty to consult constituted an "obligation incurred" before liquidation giving rise to provable debts, finding that such obligation did not create enforceable rights but only a right to seek a discretionary tribunal award.
Finally, the court dismissed the contention that protective awards were expenses of the liquidation payable in priority, holding that such awards do not fall within the category of expenses under Insolvency Rule 4.218.
The court acknowledged the harshness of this outcome for employees but stated it was bound by the current legal framework and that any change lies with Parliament.
Holding and Implications
The court held that the protective awards made by the Employment Tribunal are not provable debts in the liquidation of Company A and are not payable as expenses of the liquidation.
This decision means that the employees who received protective awards have no enforceable claims against the company’s assets in the liquidation process. The ruling does not establish new precedent but applies existing legal principles to the facts. The court recognized that this may produce a harsh result for employees but indicated that any remedial change would require legislative intervention.
The court granted permission to appeal to the Court of Appeal and extended the time for appealing, acknowledging the importance and public interest in the issues raised.