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17/11/2015

City Link – The Verdict & What It Means

From R3’s technical team

The verdict has now been delivered in the City Link case, and the directors were held not guilty. A similar case, concerning retailer USC, is due to be heard in March 2016.

The cases concern the alleged failure to notify the Secretary of State of proposed collective redundancies.

The verdict in City Link was very much dependent on the facts of the case, and cannot be taken as diminishing the importance of complying with the notification requirements.

The legislation

The duty to notify the Secretary of State of redundancies arises by virtue of section 193 of the Trade Union and Labour Relations (Consolidation) Act 1992 (TULRCA). Failure to notify the Secretary of State is a criminal offence, and from 12 March 2015 the potential fine has been unlimited in value.

Background

In City Link, the business had been trading at a loss, and the directors had been taking professional advice about the possible options for addressing the company’s difficulties. A turnaround plan was developed with a view to restructuring the business, which was dependent on an input of funding from its principal shareholder. Various options for a sale of the business had been considered but none materialised. The directors therefore concentrated on the turnaround plan.

On 22 December the directors were informed by the principal shareholder that the plan had been rejected and that the funding necessary to implement it would not be forthcoming. The directors realised that the company would become insolvent by mid-January, and on the same day took the decision to place the company into administration. The administrator traded the company briefly, but formed the view that if a buyer could not be found by 31 December there would have to be substantial redundancies.

In the event an offer was made, but was not acceptable in the interests of the creditors. The administrator took the decision to make the workforce redundant and notified the Secretary of State at the earliest opportunity, which was 26 December.

The prosecution case

The central issue was whether the need to notify the Secretary of State arose when the decision was taken by the board of directors of City Link on 22 December to put the company into administration.

In UK Coal Mining Ltd v NUM 2008 IRLR 4 it was held that “Any plan where dismissals will inevitably, or almost inevitably, result will amount to proposals to dismiss employees as redundant, provided the plan is fixed as a clear, albeit provisional, intention”. The prosecution case was that that decision to put the company into administration made large-scale redundancies inevitable or almost inevitable, triggering the notification requirement.

For the prosecution to be correct about that, it would have to prove that the decision taken by City Link on 22 December amounted to a proposal to dismiss its staff as redundant. For the purposes of convicting the defendant directors, the prosecution would have to prove that City Link committed an offence under section 194(1) of TULRCA, and in respect of each defendant, that City Link’s offence was committed with the consent of the defendant, or that he connived at the offence, or that the offence was committed by his neglect: section 194(3).

The verdict

The defendants had given credible evidence that they genuinely believed that a sale in administration was not only possible, but quite probable. There had been interest from major national companies, and the business was more likely to be attractive to a potential buyer when in administration because an administrator could sell the business without its attendant liabilities. Deputy district judge Goodman found that no proposal was formed by City Link on 22 December, or at all, to make the workforce redundant, nor was there an inevitability or near inevitability that redundancies must flow from the plan to go into administration. The defendants were therefore not guilty of the offences charged.

Conclusion

The judge added:

“I would add only that no employer should take that finding to be a precedent that an employer can avoid its responsibility under section 193 simply by going into administration. My finding in this case that no proposal had been made is based on the evidence in this case, not on a general principle in relation to administration generally.”

The full text of the decision is available here.

Ed. You can read more about the City Link in this Guardian article; for those with access to The Times website, you can read R3's comments on the judgment in their story here.

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.

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