May 23, 2022

Volume XII, Number 143

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May 23, 2022

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Failure to File a HC1 Form (even if Inadvertent) Could Result in An Administrator Facing Criminal Prosecution

Employment law and insolvency law can sometimes have a strained relationship, particularly when laws safeguarding employee rights find themselves in conflict with an insolvency practitioner’s duty to act in the interests of all the creditors (as opposed to any one group). But the case of Palmer vs Northern Derbyshire Magistrates’ Court should be heeded by insolvency practitioners since it confirms they can be criminally liable for not notifying the secretary of state about proposed redundancies.

This blog considers Palmer, why the court reached the conclusions it did and its implications for insolvency practitioners particularly in situations where there is insufficient time between appointment and making redundancies to give the required notice.

The facts

Mr Forsey was the sole director of USC, a company ultimately owned by Sports Direct. A notice of intention to appoint was filed on 6 January 2015. Between then and 11 January 2015, USC removed fixtures, fittings and equipment from a warehouse it operated in Dundonald.

On 13 January administrators were appointed. Mr Palmer’s remit as joint administrator included dealing with the employees. The business and assets were sold to another company in the Sports Direct group whom Mr Forsey was a director on the day of appointment, but which excluded the business and operations of the Dundonald warehouse. On 14 January, employees at the Dundonald warehouse were given notices of the proposed redundancies. Just minutes later they were then handed a dismissal letter.

Mr Forsey had not completed the HC1 notification to the secretary of state even when the warehouse was being stripped and it was clear operations would cease from the site. On appointment Mr Palmer did not make the notification either. He sent in the form after being prompted by the Redundancy Payments Service and it was received on 4 February. The form was dated 14 January and he advised it was substantially completed on that date but finalising and sending it had been overlooked.

The law

Section 193(2) of Trade Union and Labour Relations (Consolidation) Act 1992 (“TULRCA”) states that an employer proposing to dismiss as redundant 20 or more employees at one establishment within such a period shall notify the Secretary of State, in writing, of his proposal:

(a) before giving notice to terminate an employee’s contract of employment in respect of any of those dismissals, and

(b) at least 30 days before the first of those dismissals takes effect

There are similar provisions if the employer is looking to make 100+ redundancies in a 90 day period with the period before dismissals can take effect increased to 45.

Section 194(1) of TULCRA states that an employer who fails to give notice to the secretary of state in accordance with section 193 commits an offence and is liable on summary conviction to a fine not exceeding level 5 on the standard scale. It further notes in s193(3) that “where an offence under this section committed by a body corporate is proved to have been committed with the consent or connivance of, or to be attributable to neglect on the part of, any director, manager, secretary or other similar officer of the body corporate, or any person purporting to act in any such capacity, he as well as the body corporate is guilty of the offence and liable to be proceeded against and punished accordingly”.

Also of note is s193(7) TULCRA which states if there are special circumstances rendering it not reasonably practicable for the employer to comply requirements of subsections s193, he shall take all such steps towards compliance with that requirement as are reasonably practicable in the circumstances.

The main arguments

For the secretary of state, it was submitted that the proposal by USC to make collective redundancies at the Dundonald warehouse was in existence by at least 8 January 2015. Both Mr Forsey and Mr Palmer consented to, connived in, or neglected to prevent the failure by USC to notify the secretary of state of the proposed redundancies, contrary to s.194 TULRCA. In the case of Mr Forsey, this was in the period from early January up to 13 January 2015; and in the case of Mr Palmer it was from 13 January up until the receipt of the HR1 on 4 February 2015

The administrator contended he could not be made the subject of a prosecution for an offence under s194(3) because an administrator is not a “director, manager, secretary or other similar officer” of the company.

The court’s view

The court considered that an employer fails to give notice to the secretary of state “if a relevant proposal comes into being and no notice is given, or if a notice is given, but it is either given after the first redundancy notice, or given less than the relevant specified period before the first dismissal “takes effect”” (emphasis added).

In this case, the secretary of state was not notified by Mr Forsey, and the notice from the administrator was sent after the redundancy notices were issued. The offence was established. Then, the court had to decide whether an administrator could be liable for that offence under s194 TULCRA alongside Mr Forsey.

It held that the district judge was correct to find that an administrator could be prosecuted under s194 TULCRA. It considered that an administrator is responsible for managing the business of the company and the functions he undertakes are similar. Nobody else could give the statutory notice on behalf of the company once the company was in administration, other than with the administrator’s permission. The administrator is “undoubtedly carrying out a managerial function in place of the directors, even if all he is managing is the orderly disposal of company assets and the laying off of the workforce”.

The court considered and heard representations on whether the special circumstances defence contained in s193(7) TULCRA could be invoked in a situation where the notice was given but there was insufficient time to allow the full notice period before making the dismissals. This is where the judgment is particularly concerning from a restructuring perspective. The court acknowledged there may be circumstances where this defence could be invoked whilst also accepting that courts had thus far taken quite a restrictive view on the defence- and certainly that insolvency itself was not a special circumstance.

Practical solutions for administrators?

The decision brings into sharp focus the tension between insolvency and employment laws.

An administrator must act in the best interest of creditors, which may involve making immediate redundancies.  However making immediate redundancies places the administrator at risk of criminal sanction.

There is no current solution that resolves this conflict (unless the law in this area is changed) which means that a proposed administrator may think twice about taking office if they have to make redundancies on or shortly following appointment. In most cases, where redundancies are required it is not practical to give employees the full notice period because the administrator will ‘adopt’ the employees’ contracts after 14 days, which would then elevate their claims to preferential status – something that may conflict with the administrator’s duties to act in the creditors’ best interest overall.

Often administration results in the business and assets of the company being sold, which allows all employees to TUPE transfer.  In those cases notice to the secretary of state is not required. But what if the sale falls through last minute, and redundancies are needed?  There is no penalty for filing form HC1, even if no redundancies result, and therefore merit in filing just in case.

Filing notice will not eliminate risk entirely, and from the outset a proposed administrator should consider all realistic outcomes as soon as or before the decision to appoint is made. If the directors choose not to issue the notice prior to the appointment and/or the administrator does not issue the notice once appointed the administrator can be found liable if the redundancies are then made.

Whilst the principle of giving notice of proposed redundancies to the secretary of state is unlikely to concern many administrators who will already do this as a matter of course, the reasoning of the court in determining the construction of the offence and the question-marks left over the special circumstances defence is clearly a concern which may ultimately need to be cured by legislation.

It is rare to have the luxury of time in the early stages of an insolvency. Often, to best protect the interests of the overall body of creditors, quick action is needed and truly meaningful consultation may be difficult or impossible. This could impact the decisions of insolvency practitioners to take certain cases where this issue is in play. It remains to be seen whether an insolvency practitioner would be found guilty and punished where he or she has given notice but not allowed/been able to allow for the time required by TULCRA before the employees are dismissed. Notwithstanding, the best advice for an administrator appointed over a company who has not provided the HC1 already, and where 20+ redundancies are anticipated, to send the HC1 asap giving as much notice as is reasonably practicable before any redundancies are made. It seems it would be criminal not to do so.

What is the outcome for the administrator in the Palmer case?

The matter was originally heard in the magistrates court but the proceedings were adjourned in part to allow Mr Palmer to seek judicial review as to whether he could be liable for the offence. In light of the findings in this case, the criminal proceedings will now go ahead. Unfortunately, for the administrator, his oversight regarding the HC1 form may result in unwelcome criminal penalties. We will have to wait and see if and to what extent the criminal court imposes sanctions Mr Palmer.

© Copyright 2022 Squire Patton Boggs (US) LLPNational Law Review, Volume XII, Number 10
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About this Author

Mark Prior, Squire Patton Boggs, Manchester, Restructuring, Insolvency
Senior Associate

Mark is a senior associate in our Restructuring & Insolvency practice based in our Manchester office. 

His particular expertise covers commercial and legal issues involved in corporate recovery, turnaround and reconstruction, and insolvency law. Mark advises on all formal insolvency processes and has considerable experience in preparing and negotiating legal documentation for the sale or purchase of businesses and assets, and distressed property portfolios. Mark has also advised directors on trading and prepared several cases for court...

44 161 830 5266
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