Prosecutions highlight criminal offence that could have severe consequences for business leaders
Recent news coverage of the prosecution of former directors of City Link, the delivery business that collapsed last Christmas, has brought into sharp focus a criminal offence which has been on the statute book for more than 20 years – but which appears to have been rarely pursued.
David Smith, who was the managing director, Robert Peto, the ex-financial director, and non-executive director Thomas Wright have been charged under the Trade Union and Labour Relations (Consolidation) Act 1992 for failing to give enough warning before making a large number of redundancies.
The offence of failing to notify the Business Secretary of an intention to make 20 or more redundancies can be committed by company directors, company secretaries, members of a Limited Liability Partnership, business partners, managers or anyone acting in such capacity.
Conviction could result in an unlimited fine in the Magistrates’ Court, if the offence was committed after 12 March 2015.
But the consequences could go beyond the fine itself – making disqualification as a director more likely or leading to an investigation by a professional body, if, for example, the perpetrator was a lawyer or accountant.
The same legislation is being used against Dave Forsey, the Sports Direct chief executive, who is alleged to have failed to give enough notice of redundancy plans for staff in the firm’s fashion chain USC. USC’s Administrator also faces trial.
The Duty To Notify
The Trade Union and Labour Relations (Consolidation) Act 1992 requires an employer to notify the Secretary of State in writing if they propose to make 20 to 99 redundancies within a 90 day period.
The notification is required before the employer gives notice to terminate an employee’s contract and at least 30 days before the first dismissal takes effect. If the intention is to make 100 or more redundancies, the employer has to provide notice at least 45 days before the first dismissal takes effect. The notification is via Form HR1.
Defence
The Act provides a defence for those facing investigation and prosecution. The defendant would need to establish that:
1. There were “special circumstances” which meant that it wasn’t “reasonably practicable” for the notification requirements to be met; and
2. Steps were taken towards compliance with the notification requirements that were “reasonably practicable” in the particular circumstances of the case.
There is an obvious tension between these requirements and directors’ duties in relation to the solvency of a company.
Directors have to act in the best interests of creditors. However, complying with the notification requirements stipulated in the Act may not necessarily be conducive to that responsibility, especially where a quick sale of the business is likely to achieve the best outcome for the creditors. Such a situation might constitute “special circumstances”.
Given the conflicting obligations, directors may well be at a loss as to what to do – a true Catch 22 situation.
Why Now?
In instances of insolvency it is unlikely that the employer will be in a position to make statutory redundancy payments to employees. These employees are able to claim their statutory redundancy payments from the Government’s Redundancy Payments Office.
The recent prosecution of the City Link Directors continues a theme of authorities increasingly looking to hold senior managers accountable for legal or regulatory failings.
What Should You Do?
Pre-emptive specialist advice and assistance is essential if civil claims and criminal prosecution is to be avoided.
Andrew West and Brian Morron of our Employment Law Team can be contacted at 01473 298102.
If you find yourself facing investigation by the Department for Business, Innovation and Skills for a criminal offence, Gotelee is one of the few firms in East Anglia to offer a specialist and experienced team of private criminal and regulatory defence solicitors in a position to advise and represent clients throughout the investigation and court stage. Hugh Rowland and Howard Catherall of the Criminal and Regulatory Defence Team can be contacted at 01473 211121
The Legal 500 has identified Andrew, Brian, Hugh and Howard as Leading Lawyers in their particular fields.
