Factual and Procedural Background
The appeal arises from an order made by Judge Rattee of the Chancery Division on 15 October 2007 concerning the liquidation of Company A (Compound Sections Limited). The Appellant, representing former employees of Company A, and the Secretary of State for Business Enterprise and Regulatory Reform jointly appeal against the Liquidator of Company A. The underlying dispute concerns whether protective awards granted by an Employment Tribunal to former employees for the employer's failure to consult on collective redundancies are provable debts in the liquidation of Company A.
Company A, insolvent by 10 February 2006, dismissed 40 employees without fulfilling its statutory duty to consult under section 188 of the Trade Union and Labour Relations (Consolidation) Act 1992 (the 1992 Act). The Employment Tribunal made protective awards on 31 August 2006, which the Liquidator sought directions on whether they constituted provable debts under the Insolvency Rules 1986. Judge Rattee ruled that these protective awards were not provable debts nor expenses of the liquidation, a decision now under appeal.
Legal Issues Presented
- Whether protective awards made under section 189(2) of the 1992 Act constitute debts or liabilities provable in the liquidation of a company under rules 12.3 and 13.12 of the Insolvency Rules 1986.
- Whether the existence of a judicial discretion in making protective awards affects their status as provable debts.
- Whether the UK’s statutory scheme properly implements the requirements of Council Directive 98/59/EC concerning collective redundancies, particularly regarding enforcement of protective awards.
Arguments of the Parties
Appellants' Arguments (Former Employees and Secretary of State)
- The protective awards are contingent liabilities arising from an obligation incurred by Company A before liquidation, specifically the statutory duty to consult under section 188 of the 1992 Act.
- The discretion of the Employment Tribunal to make a protective award is effectively constrained, especially in cases of total failure to consult, making the award almost inevitable and thus a contingent liability.
- The protective awards should be treated as provable debts under rule 13.12(1)(b) of the Insolvency Rules 1986, as they arise by reason of an obligation incurred prior to liquidation.
- UK law must be construed purposively to comply with the EU Directive requiring effective, proportionate, and dissuasive penalties for breaches of consultation obligations.
- Judgments in Glenister v Rowe and Steele are distinguishable because they dealt with different statutory contexts lacking the same pre-existing obligation and near-automatic liability.
- The Secretary of State, as statutory guarantor, pays protective awards but cannot recover these sums from the liquidation unless the awards are provable debts.
Respondent's Arguments (Liquidator)
- The protective awards do not constitute enforceable debts or liabilities at the date of liquidation because the employees only have a right to apply to the Employment Tribunal for an award, which is discretionary.
- The breach of the duty to consult under section 188(8) of the 1992 Act does not confer a cause of action or enforceable right to compensation on employees prior to the making of a protective award.
- The protective award regime is self-contained and analogous to other statutory schemes (such as section 71 of the Social Security Administration Act 1992) where no liability arises until a formal determination.
- Case law (Glenister and Steele) supports that contingent liabilities dependent on judicial discretion are not provable debts in insolvency.
- The discretion in making protective awards is fundamental and prevents these awards from being treated as provable debts under the Insolvency Rules.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Glenister v Rowe [2000] Ch 76 |
Whether a contingent liability dependent on judicial discretion is provable in insolvency. |
The court distinguished this precedent, noting that the discretionary costs order in Glenister differs from the protective award which arises from a statutory breach and is near certain. |
| Regina (Steele) v Birmingham City Council [2005] EWCA Civ 1814 |
Whether a contingent liability dependent on a statutory determination is provable in insolvency. |
The court found Steele distinguishable because the Secretary of State’s determination was discretionary and no obligation existed prior to that determination, unlike the statutory obligation to consult here. |
| Secretary of State for Trade and Industry v Frid [2004] 2 AC 506 |
Definition of "liability" and provability of debts arising from obligations incurred before insolvency. |
Supported the broad interpretation of liability, including contingent liabilities arising from statutory obligations. |
| GMB v Susie Radin Ltd [2004] EWCA Civ 180 |
Proper exercise of discretion by Employment Tribunals in making protective awards. |
Confirmed that while tribunals have discretion, it is generally exercised by making protective awards for maximum periods in cases of complete failure to consult. |
| EC Commission v Greece Case 68/88 [1989] ECR 2965 |
Requirement that penalties under EU law be effective, proportionate, and dissuasive. |
Referenced to emphasize the necessity for protective awards to be enforceable and effective penalties under EU law. |
| In re Smith ex parte Edwards (1886) 3 Morrell 179 |
Effect of discretion in arbitration costs on provability of liabilities in bankruptcy. |
Supported the proposition that discretion in awarding costs does not negate the existence of a provable liability. |
Court's Reasoning and Analysis
The court began by reviewing the statutory framework governing collective redundancies and protective awards under the 1992 Act, the Insolvency Rules 1986, and the relevant EU Directive. It acknowledged that the protective awards stem from the employer’s breach of the consultation duty under section 188, which is a statutory obligation incurred before liquidation.
The court rejected the respondent’s contention that the protective awards were not provable debts because they depended on the Employment Tribunal’s discretion. It emphasized the decision in Susie Radin, which clarified that although tribunals have discretion to make protective awards, in cases of complete failure to consult, the discretion is effectively constrained and awards for the maximum period are the norm.
Applying this reasoning, the court concluded that the liability to pay protective awards is a contingent liability under rule 13.12(1)(b) of the Insolvency Rules, as it arises from an obligation incurred before liquidation and may give rise to a debt after liquidation. The court held that the existence of discretion does not negate the liability; it merely makes it contingent.
The court distinguished prior authorities (Glenister and Steele) relied upon by the respondent, noting those cases involved different statutory contexts where no obligation or liability existed prior to the relevant insolvency event. By contrast, the protective award liability arises directly from the employer’s pre-liquidation breach, with the tribunal’s discretion being limited and the award effectively mandatory in the circumstances.
The court also underscored the importance of construing domestic legislation purposively to comply with the EU Directive, which requires judicial or administrative procedures to enforce obligations effectively and proportionately. To hold otherwise would undermine the Directive’s purpose and provide perverse incentives for employers to breach consultation duties without financial consequence.
Holding and Implications
The court ALLOWED THE APPEAL, holding that protective awards under section 189(2) of the 1992 Act constitute contingent liabilities provable in the liquidation of a company under rule 13.12(1)(b) of the Insolvency Rules 1986.
The direct consequence is that such protective awards are debts provable in liquidation, enabling employees or their subrogated representatives, such as the Secretary of State, to claim in the liquidation process. This decision prevents employers from evading their statutory obligations by entering liquidation and ensures compliance with the EU Directive’s requirement for effective enforcement mechanisms.
No new precedent was established beyond clarifying the application of existing insolvency and employment law principles in the context of protective awards and their enforceability in liquidation.