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15/06/2015

Government action needed on redundancy consultations in insolvencies – R3

  • Incompatibility comes at big cost to taxpayer
  • Full compliance with consultation requirements is often impossible when companies fail

Government action is needed to reform the collective redundancy process in insolvencies, says R3 the insolvency trade body, in its response to the government call for evidence on the matter (closed Friday12 June).

The profession is calling for a number of measures including clear guidance from government and reform of the protective award compensation regime, which currently sees the taxpayer foot the bill for incomplete redundancy consultations.

Current rules require 45 days of redundancy consultation, and alternatives to redundancy to be discussed. Insolvent businesses however, do not have the funds to comply and there are rarely any realistic alternatives. This leaves insolvency practitioners seeking to comply with the law in an impossible position. 

Andrew Tate, R3 vice-president, says: "The government call for evidence is very welcome. This is a perfect chance to embrace the calls for reform and sort out the very real problems that exist with trying to consult on redundancy when companies fail."

"Existing consultation requirements are near impossible to fulfil in many company insolvency situations. This is a hopeless state of affairs which needs to be addressed urgently."

"Clear guidance is needed from government. Insolvency practitioners will try and save jobs and businesses, but the rules on what they should do when they cant are problematic and unworkable. R3 has called for clarity now for some time. The government needs to work with a range of stakeholders, from the unions to the insolvency profession to achieve meaningful reform."

Since 2009, there has been a Memorandum of Understanding between R3, the Insolvency Service, and Jobcentre Plus to enable advice to be given quickly to employees made redundant as a result of insolvency.

Andrew Tate continues: "Insolvency practitioners should always provide as much advice to employees as possible about redundancies, and the profession works closely with Jobcentre Plus to make sure help is available. However, in a fast-moving insolvency situation, with limited time and money, and where job losses are inevitable, a full 45-day consultation can often be impossible."

"Companies can become insolvent incredibly rapidly. There may not be enough money left to pay salaries for a week let alone 45 days while consultation takes place, or even to pay for the consultation process itself. Moreover in an insolvency process the future of the business might not be clear enough for meaningful consultation."

"The success of the MOU between R3 and Jobcentre Plus which has helped 120,000 people facing redundancy in the last five years shows that non-regulatory solutions are possible."

Protective awards

If a full consultation cannot be completed, the insolvent company may be required to pay employees a protective award by an Employment Tribunal. Since the company is insolvent, this award is usually paid by the taxpayer via the National Insurance Fund the fund then seeks to recoup this payment from the insolvent companys remaining assets later on.

Andrew Tate says: "The existing protective award scheme does not work. The current legislation intends that the awards be a penalty for non-consultation, but the companys management has no incentive to avoid the penalty: they are no longer involved or liable by the time the penalty is awarded. The award punishes the taxpayer in this situation and there is little deterrent."

"Even if the company management knows redundancies are likely, they can choose not consult and leave the insolvency practitioner, employees, taxpayer, and other creditors to carry the can later on."

"A protective award in insolvency becomes a penalty borne by the taxpayer and the other creditors of the failed business. Every additional pound that the insolvent companys estate has to pay back to the taxpayer is a pound less back to the companys other creditors."

Notes to editors:

  • R3 is the trade body for Insolvency Professionals and represents the UK’s Insolvency Practitioners.

  • R3 comments on a wide variety of personal and corporate insolvency issues. Contact the press office, or see www.r3.org.uk for further information.

  • R3 promotes best practice for professionals working with financially troubled individuals and businesses; all R3 members are regulated by recognised professional bodies
     
  • R3 stands for 'Rescue, Recovery, and Renewal' and is also known as the Association of Business Recovery Professionals.