Insolvency Oracle

Developments in UK insolvency by Michelle Butler

Lessons from Comet: quality consultation with employees, not quantity

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So what is the truth about the Comet Tribunal? Could the IPs be facing prosecution? Is the problem simply that the consultation legislation is impossible to meet in most insolvency situations or are there lessons to be learnt for IPs faced with potential redundancies, massive or moderate?

It has to be admitted that Deloittes were handling a massive case – almost 7,000 employees scattered over 250 establishments UK-wide in a high profile company attracting enormous press and public attention at a time when the high street seemed to be suffering the loss of one big name after another. But isn’t that what the Big 4 get paid the big bucks for?

The dilemma for IPs has often been described as being faced with a plethora of tough consultation requirements whilst remaining ever conscious of the risk that the wildfire of rumour and defeatism could destroy whatever business may be left to sell (or at least threaten to derail an organised closure plan). How can IPs ever hope to make everyone happy all of the time? But is the fear of what might happen to the business – and thus to creditors’ returns – if the “R” word gets out, especially when redundancies are only a contingency plan, justification for playing cloak-and-dagger? Or, in this modern world where it seems that transparency outweighs costs and consequences, should employee consultation mean putting all one’s cards on the table even when it seems that there may be little on which to consult?

The sheer scale of this job compounded the problems, but I think that the judgment has some valuable points for IPs handling cases of any size and may present a paradigm shift, putting an end to an outdated attitude of how employees should be treated in insolvency situations.

I found the Tribunal judgment as a pdf on the USDAW website at: http://www.usdaw.org.uk/tribunal1102571

Cutting to the chase, the Tribunal found that Comet:
• “failed to begin consultation in good time;
• “failed to include the topics of avoiding, reducing, or mitigating the consequences of redundancy;
• “failed to consult with a view to reaching agreement;
• “failed to consult with appropriate representatives (either the Union or elected representatives); and
• “failed to disclose, in large part, the required statutory information” (paragraph 185).

Consultation “in good time”

It is worth remembering that the statutory 90 and 30-day timescales set out by the Trade Union and Labour Relations (Consolidation) Act 1992 (“TULRCA”) are back-stops. S188 states that “Where an employer is proposing to dismiss as redundant 20 or more employees.., the consultation shall begin in good time and in any event…”

Interestingly, although the statutory timescale is what might come to most of our minds when we think about the consultation requirements, the judge said that, as in this case, “when the consultation that followed was with the wrong people, about the wrong issues, with misleading and incomplete information, then the time that consultation began, or should have begun, is not terribly important” and this issue was “by no means the most serious of [Comet’s] failings” (paragraph 203).

Comet was placed into administration on 2 November 2012. Prior to administration, Comet’s shareholder and secured creditor, Hailey Acquisitions Limited (“HAL”), had explored the company’s options and had instructed retail consultants, GA Europe (“GA”), to draw up a plan. The GA “Plan” as described by the Tribunal “involved the complete closure of the business. Although it related directly only to store closures, as the stores were closed, the rest of the business, all the other establishments, could be reduced proportionally; and once all the stores had closed, the rest of the business ceased to have a function and could be closed. Inherent to the adoption of that Plan is a ‘clear, albeit provisional, intention’ to make all the employees redundant” (paragraph 102). The Tribunal concluded that the arrival of GA consultants to the stores on 3 November “is clear evidence that the administrators had adopted the Plan… The plan was ‘to trade the stores for two weeks’. The first stores closed on 19 November. That was to be followed ‘by phased closure of the stores’… By 21 December, all the stores had closed and all employees dismissed as redundant, save for a handful” (paragraph 105).

But weren’t the administrators seeking to sell all, or part, of the business? Could it be said that the administrators “proposed” (per TULRCA) to make redundancies when they were actually trying to avoid that eventuality? Or does the “clear, albeit provisional, intention” phrase from the UK Coal Mining decision in 2008 apply in these circumstances and, by extension, perhaps to all insolvencies where a business sale resulting in the preservation of jobs is the primary intention? “The duty to consult arises when the proposal is still in its provisional stage; not when the decision has been taken. Once the decision has been taken, there is little to consult about” (paragraph 107).

The reality of any possibility of a sale “was hotly disputed” (paragraph 108) in evidence before the Tribunal. Comet’s Head of Finance “gave powerful reasons why the prospect of a sale was vanishingly small” (paragraph 109) and the judge stated that whatever the joint administrator’s “optimism may have been in the early days, sale of all or part was always an unlikely possibility, that quickly dwindled to a negligible one” (paragraph 111). In the judge’s view, “the administrators planned for closure from the outset” (paragraph 114).

As an aside, this is the origin of the criticism that has been Chinese-whispered by the press into the alleged possible ‘criminal offence’ in signing letters/documents to Vince Cable saying that there would be no redundancies. The administrators signed a Form HR1 (which, of course, whilst statutorily-required to be sent to the Secretary of State, never gets near to Dr Cable’s desk) on 5 November stating: “no proposed redundancies at present”. S194 TULRCA makes it a criminal offence to fail to notify the Secretary of State of proposed redundancies. The Tribunal “made no express finding beyond saying that we share Miss Nicolau’s (Comet’s Employment Counsel and General Manager for Employee Relations) surprise” (paragraph 34) at the contents of the Form. The administrators filed a second Form HR1 on 22 November stating that the proposed number of redundancies would be the full staff complement of 6,889, with an unknown date for the last dismissals and the reason for the redundancies as insolvency.

So what is “in good time”? The Tribunal illustrated that the statutory back-stop would be inappropriate in some cases. Some stores closed on 23 December. “To begin consultation 30 days before is to begin it after the key decisions have been taken, and after the store closure was in full swing. By then, the opportunity (if it had ever existed) to raise fresh working capital, to reassure suppliers and the public that Comet had a future, had passed. Closure was inevitable” (paragraph 121). “Consultation has to begin in good time in each establishment; and that means when the GA Plan… was adopted by the administrators and so became a proposal of Comet’s; and that was on 3 November, even if individual establishment closures were postponed for some time” (paragraph 122). Thus, the Tribunal concluded that “in no single instance, at no establishment, did consultation begin in good time in accordance with S188” (paragraph 123).

However, the judgment later seems to suggest that consultation might be achieved far quicker than the statutory timescales: “We accept that in Comet’s financial circumstances, there was never likely to be a 90 day consultation, or in many cases even a 60 day consultation… But in practice, given Comet’s financial situation, a full and frank consultation is unlikely ever to have required that period of time” (paragraph 199). This may be reflected in the Tribunal’s award, which was only 70 days for the employees dismissed early on (whereas those dismissed later were awarded 90 days): “For those [early-dismissed] employees, there was simply no consultation at all; but equally, there was simply no time for any meaningful consultation to be organised… There is some excuse in the early stages of insolvency” (paragraph 205, 207).

The Statutory Content of Consultation

S188(2) of TULRCA states that “the consultation shall include consultation about ways of: (a) avoiding the dismissals; (b) reducing the number of employees to be dismissed; and (c) mitigating the consequences of the dismissals”. But the Tribunal found that these statutory points were never referred to in meetings, agendas, or briefing notes to managers conducting meetings. The Tribunal also was critical of the company’s “limited” view of the consultation process as a means to provide information to employees and to receive their questions. The judge accepted that it may have been realistic for the company to fail to see the process as a way of consulting on how to avoid dismissals, as “by that stage the path to closure was clear and well on the way, even if not ‘a foregone conclusion’. But even if, in Comet’s view, inviting such suggestions would have been futile, the attempt should still have been made; the statute requires it” (paragraph 130).

The Tribunal acknowledged that, in this case, “proper consultation, had it occurred, may well have been nasty, brutish and short. The difficulties in the way of avoiding or reducing redundancies could have been set out: the absence of working capital, the requirement to repay the secured loan covering the existing working capital; the rationale for adopting the GA Plan could have been explained; that there was no money to keep paying wages or rent other than by liquidating the stock as quickly as possible; no money to pay for more stock; and that much of the stock was itself subject to retention of title” (paragraph 199).

The Tribunal recognised some of the issues facing the company/administrators in organising meaningful consultation. The process was “tightly controlled to ensure a consistent and uniform approach” (paragraph 66); managers in effect had been working to scripts, collecting – but prohibited from attempting to answer – questions, any answers being given via a centrally-issued document, for managers’ eyes only, at the next arranged meeting. “Such a process of question and answer, conducted over a number of meetings is inevitably cumbersome and slow, but could in principle amount to consultation… but in the short timescale allowed by the circumstances of administration, with a clear proposal to close the entire business before Christmas, it meant that meaningful consultation was most unlikely to be achieved through that model” (paragraph 126).

The Tribunal was critical of the “bland generality” of some of the answers provided. For example, “Why are we closing and why have certain stores been chosen?” was answered: “There are certain financial commitments at specific locations that we are unable to meet. We therefore have to close down that entity before these amounts fall due”. The judge felt that “a frank answer would have been: ‘There is no money to pay the rent for the next quarter. Therefore, your store is earmarked for closure two days before the next instalment of rent is due’… Without that information, it was not practicable for representatives to bring forward their own proposals” (paragraph 132).

But how practicable could any employee proposals hope to have been? The judge suggested that they could have tried to prolong the life of their store, say, at the expense of another in the locality. In one specific case, the judge suggested that it would have been useful for employees at the Service Centre to have learned that the services were to be placed with an alternative provider: staff could have been invited to work for the new provider “or indeed there might be a service provision change under TUPE” (paragraph 136).

Consultation “with a view to reaching agreement”

The Tribunal found on balance that there had never been any “intention to attempt to reach agreement through the consultation process” because of “the failure to provide key information: the existence of the GA Plan, for example; or to be frank about the number and timing of redundancies; to provide even basic information, such as store closure dates; … the failure ever to raise the key statutory issues [i.e. ways of avoiding dismissals etc.]…; the cumbersome structure adopted; and the willingness to ignore and by-pass the consultation process when it suited the administrators” (paragraph 145).

But what kind of agreement could ever be hoped to be reached in these circumstances? “We emphasise that we place no weight on the absence of actual agreement on the statutory items. Given the dire nature of the financial situation, the most that could ever have been hoped for by way of reaching agreement was a reluctant acceptance of the inevitable… But that is to look at the large national, overall picture. Within that picture, there was scope for meaningful consultation with the potential of reaching agreement at a local level on, for example, selection criteria where redundancies were phased over a period; alternative employment where establishments had the potential to transfer over or stand alone” (paragraphs 147, 148).

Employee representatives

Comet’s case was that it had consulted with representatives falling under S188(1B)(b)(ii) of TULRCA: “employee representatives elected by the affected employees, for the purposes of this section, in an election satisfying the requirements of S188A(1)”. However, the key issue was that there never had been any formal election process: some employees had put themselves forward for the job, others had been put forward by their colleagues (often, it seemed, when they were away on holiday!), and others had been asked by their managers to stand.

The judge concluded that the absence of a fair election – which could not be substituted by a fair selection – was fatal to Comet’s case in this regard. Although there had been no suggestion of abuse of the process, the judge noted that selection by managers could be abused: the manager could avoid selecting disgruntled employees, or such employees could conclude there was no point putting themselves forward if the manager made the ultimate decision.

The problem for Comet was that, since there was “no consultation with employee representatives elected for the purpose, there was no consultation at all within S188” (paragraph 177). Oops!

The Tribunal also commented that, given that Comet’s aim had long been a business sale or transfer and, failing that, redundancies, so that in either event consultation under TULRCA or TUPE would be necessary, Comet could have taken steps to put the machinery in place to elect representatives long before the administration began.

Disclosure of Statutory Information

S188(4) sets out a hefty list of information required to be disclosed in writing by the employer to the employee representatives. The judge found that Comet failed to address some of substance.

He felt that it had been “misleading to omit” (paragraph 151) the immediate reason for the administration – HAL’s demand for repayment of the loan – from “the reasons for his proposals” as regards redundancies. The judge noted that, given that he had found that the GA Plan had been adopted on 3 November, “that information could have been given to representatives from 3 November, as a firm, albeit provisional, proposal. The information provided at the first consultation meeting was completely misleading on this crucial point” (paragraph 152).

The judge observed that, although the GA Plan seen through would result in all employees being made redundant, the method of selecting employees for dismissal “was very significant in the short term” (paragraph 154) in these circumstances where the redundancies were staged. However, no information on the criteria or method of selection was shared, despite it being promised in a letter to representatives that itself was considered deficient by the judge, who suggested that the promise should have been “to share, discuss, and we hope, agree the criteria” (paragraph 155).

It seemed that employees, their representatives, and most of the managers tasked with the job of leading the consultation meetings, had been left in the dark as regards planned store closures and redundancies, where “it was generally possible to give employees notice of a day or two of the actual closure date” (paragraph 157), with dismissals generally occurring a day or two after closure. “Time and again we heard of redundancies being carried through immediately before and after consultation meetings at which those redundancies were never mentioned” (paragraph 142). “The failure of Comet to provide accurate information to representatives about this factor, the proposed method of carrying out dismissals, contributed more than any other to the widespread dissatisfaction and cynicism with which the consultation process came to be regarded” (paragraph 158).

“Special circumstances”?

Alright, so the Tribunal considered the consultation process a failure, but doesn’t TULRCA acknowledge “special circumstances which render it not reasonably practicable for the employer to comply with” (S188(7)) certain requirements? Does this apply in this case?

The judge referred to precedent that indicates that there is nothing special about insolvency. “What has to be established is that the insolvency is itself unexpected” (paragraph 180). In this case, because of HAL’s “sudden, unexpected and disastrous” withdrawal of working capital and demand for repayment, the judge found that the company’s administration did amount to special circumstances.

However, S188(7) continues to provide that the “special circumstances” factor falls away “where the decision leading to the proposed dismissals is that of a person controlling the employer (directly or indirectly)”. As “HAL controlled Comet” (paragraph 183) – although it is not clear whether the judge felt that this control was by reason of HAL being the shareholder or because it was the secured creditor and provider of working capital to Comet – the judge concluded that Comet could not rely on the “special circumstances” defence.

“Going through the motions”

Perhaps the administrators’ mindset towards the consultation process may be revealed by the contents of their letter to employees dated 12 November: “the company is proposing to commence a collective consultation programme with Comet staff. This is intended to offer a means to provide information about the company’s plans for the future, and for the representatives to raise questions, and air their views on any proposals” (paragraph 51). However, the judge summarised the aims of the statutory provisions as: “to require the employer to consult with elected representatives, once redundancies have been proposed, in good time and with a view to avoiding redundancies, reducing their number and mitigating their effects. To do that with authority, the representatives should be elected; and they should be provided with the necessary statutory information, including the reasons for the proposals and the scope of the proposals (numbers and descriptions of employees involved, the method of selection and the timescale). Since the consultation must be with a view to reaching agreement, it requires a serious engagement with the issues raised, conscientious consideration of questions and issues raised, an element of dialogue and mutual exchange” (paragraph 192).

Despite conducting over 600 meetings and identifying 572 employee representatives, the judge felt that “it is the quality and [the consultation’s] compliance with the statutory provisions that counts” (paragraph 191). He stated that this was “in essence a case of an employer going through the motions. This was the appearance of consultation, but not the reality. It is not just and equitable to give credit to an employer for going through the motions, without any intention of engaging meaningfully in consultation, however extensive the effort put into the consultation process” (paragraph 197).

Lessons to be learnt

This case reveals some relatively straightforward, but essential, checks that can be made as regards standard documents etc., for example:

• Ensure that all documentation around the consultation process covers the statutory points that must be addressed in consultation meetings and that case-specific disclosures of the statutory information are meaningful.
• Ensure that reference is made to consultation and agreement, not merely information provision.
• Ensure that the election process of employee representatives (where required, not forgetting recognised trade unions and other existing employee representatives) complies with statute and don’t be tempted to cut corners with a view to getting on with the consultation itself. Refer to the election process in pre-insolvency advice letters: after all, consultation is required under TUPE as well as TULRCA.
• Take care when completing Forms HR1 and remember to submit further forms in good time and where necessary.

However, perhaps more difficult but more vital lessons that arise from this judgment involve the seeming mindset change that appears to be required:

• Be as open as possible and as is sensible about the company’s situation and the business’ prospects, even if they are bleak. Avoid relying on vague statements about insolvent companies in general.
• Don’t get too hung up on the statutory consultation timescales, but rather concentrate on being honest about the situation when the prospect of redundancies is first contemplated. Keep in mind the aim of meaningful consultation with a view to agreement, however small the window of opportunity and inevitable the outcome, rather than ticking boxes as regards meetings held.
• Don’t treat all employees as one unit. If different circumstances and plans exist for different “pools”, tailor discussions accordingly and consider the smaller pictures. Even if the big picture is an inevitable close-down, there may be scope for meaningful consultation on parts of the plan.
• If you use separate staff, departments, or external consultants to deal with employee matters in insolvency cases, make sure that they are kept up to date and are given the assistance and authority needed to update and consult with employee representatives.
• Continue to update employee representatives as events move on.
• Make a serious effort to consult.

Am I forgetting how all this may impact on an administrator’s ability to meet his primary goal of achieving a Para 3 objective? Personally, I remain conscious of those tensions, but I do wonder if being entirely honest and upfront with employees can be constructive, rather than destructive. I’m sure that those more cynical than me, who continue to see the insolvency and the consultation requirements as mutually exclusive, will have opportunities to air their concerns, when the government’s eye turns again to IPs as it contemplates the RPS’ bill for the Comet protective awards.

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