Thanks to Laura Samuel of Berrymans Lace Mawer for preparing this case summary
Is it reasonable to expect an insolvent employer to continue to trade for 90 days, so that it can inform and consult in accordance with its obligations under s.188 TULCRA 1992? No, says the Employment Appeal Tribunal in AEI Cables v GMB.
AEI, a manufacturer of copper wiring, had suffered financial difficulty as a result of a steep increase in the price of copper. It received advice from its accountants that, unless it reduced costs, there was a risk of the company trading whilst insolvent. The consequences of trading whilst insolvent are that the directors could incur personal liability for obligations assumed, and may also incur criminal liability for fraudulent trading. Following an unsuccessful request for an overdraft, the directors made 124 employees redundant with immediate effect.
The workers successfully claimed in the Employment Tribunal that there had been a breach of the duty to consult under s.188 TULCRA. The employment tribunal made 90 day protective awards to each employee under s.189 TULRCA.
On appeal to the EAT, the decision to make 90 day awards was overturned and 60 day awards were made instead. In explaining its decision, the EAT stressed that the purpose of making a protective award is penal, not compensatory. It is designed to encourage employers to comply with their obligation to consult. The ET was obliged to take into account mitigating factors, and should have asked the important question: “why did the respondent act as it did?” Had the ET asked this question, it would have seen that the company could not trade lawfully following the advice it received from its accountants. In those circumstances, it was wrong for the ET to anticipate that a 90 day consultation could have taken place.
On the basis that AEI’s failure to consult was complete, but that “some consultation could clearly have taken place” in the limited time available, the EAT decided that an order for 60 days was appropriate.