Lessons from failed City Link redundancy prosecutions

City Link
By David Menzies, ICAS Director of Insolvency

23 November 2015

The recent failed prosecution of former City Link directors does not mean that employers can avoid their responsibilities, reports David Menzies.

The recent high profile prosecution of and resultant not guilty verdicts against three former directors of City Link, the courier delivery firm which collapsed on Christmas Eve 2014, has highlighted some important issues for directors of financially distressed companies and those involved in rescue and turnaround situations.

Under section 193 of the Trade Union and Labour Relations (Consolidation) Act 1992 (TULRCA) there is a duty to notify the Secretary of State of the potential of collective redundancies as soon as there is a proposal to make 20 or more employees redundant at a single location. Failure to notify the Secretary of State is a criminal offence, and from 12 March 2015 the potential fine is unlimited in value.

As demonstrated by this and a further pending case against the directors and an administrator of USC, the failure to notify is an area attracting the close attention of the Insolvency Service.

Background to the City Link case

The background to the City Link case was that the business had been trading at a loss, and the directors had been taking professional advice about possible options to address the company’s difficulties. A turnaround plan was developed with a view to restructuring the business, which was dependent on additional funding from its principal shareholder.

On 22 December 2014 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, realising that the company would become insolvent within a matter of weeks, within hours 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. The administrator notified the Secretary of State at the earliest opportunity, which was 26 December.

An offer was made for the business but was not acceptable to the administrator as being in the interests of the creditors.

The not-guilty verdict

A previous case indicated 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 view was that that decision to put the company into administration made large-scale redundancies inevitable or almost inevitable, triggering the notification requirement and amounted to a proposal to dismiss its staff as redundant.

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.

In delivering his verdict and reasons the judge took time to specifically highlight and praise the evidence provided by Hunter Kelly CA of EY, administrator of City Link. He said:

“[Mr Kelly was a] highly impressive witness… scrupulously fair in his evidence…sought not to take sides but...assist the court..fairly and with the benefit of his considerable expertise."

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 verdict in this case was very much dependent on the facts of the case. It cannot be taken as a precedent that directors can be absolved of responsibility to provide advance notification of collective redundancies.

The written verdict and reasons are available on the R3 website.

Image credit: BasPhoto / Shutterstock.com


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