When an employer is proposing to make more than 20 employees redundant within any 90-day period, they have a duty to consult with staff or their representatives over ways to mitigate the impact of the job losses. The employer must also notify the secretary of state in writing at least 30 days before the redundancies are made.

The majority (82%) of respondents to the Insolvency Service’s call for evidence said meaningful consultation is not possible in an insolvency situation, largely because by beginning the consultation process, the chances of rescuing the business could be reduced considerably if competitors and employees became aware of the company’s financial difficulties.

Respondents also indicated a perceived conflict between employment and insolvency law. Under employment law the obligation to avoid, reduce or mitigate the number of dismissals was often seen to be a cause of tension with the circumstances and objectives of the insolvency. Many respondents spoke of the difficulties facing insolvency practitioners with a lack of time and/or money making consulting challenging. Often by the time they were appointed there was little scope for ‘meaningful consultation’ with a view to reaching an agreement to avoid or reduce redundancies.

In response, the government has approved a package of non-legislative measures to help insolvent employers and insolvency practitioners engage with staff when proposing large scale redundancies. At a later date, the government will consider if additional measures are necessary such as a new statement of insolvency practice.

New guidance will set out minimum expectations for insolvency practitioners to notify the government in advanced of collective redundancy proposals; to comply with the requirement to consult when seeking to rescue or wind up a business;  and to provide information on how to ensure legal compliance when electing employee representatives.

It could include,  if advising pre-appointment, reminding directors on the their duty to consult with employees; taking steps to commence consultation where trading is continued post insolvency even if the circumstances of insolvency mean that the process is cut short or truncated; and preparing a contemporaneous statement setting out the circumstances of the dismissals and action taken or to be taken by the insolvency practitioner.

The government says this statement will provide transparency for other interested parties e.g. employment tribunals assessing protective award claims may be interested in the decision-making process undertaken by the insolvency practitioner when consulting with employees.

Concerns around confidentiality were also raised by call for evidence respondents in relation to the requirement to notify the secretary of state, with some suggesting the requirement for the employer to send the notice to the employee representative at the same time meant that any information leak could compromise a potential rescue.

In response the government proposes to update existing guidance to make the purpose of the notification and how to complete the form clearer, and will explore ways to reduce the burdens involved in submitting the form.

Responses highlighted that the lack of a preexisting structure for employee engagement can be a significant inhibitor to consultation for insolvency practitioners when first appointed. The government therefore proposes to draw together information on what insolvency practitioners can do to ensure compliance with the requirement to consult while rescuing the business or managing an orderly winding down of the company.

For some respondents, the sanctions for failing to consult (a protective award against the company) was considered ineffective in an insolvency situation, while there have been few prosecutions for failure to notify the secretary of state.

The Insolvency Service said it believes that the current package of sanctions is effective and in the main, collective redundancy consultation legislation operates well, and the emphasis going forward will be on developing effective new guidance over introducing new legislation.

‘Very positive’

Trade body R3 has welcomed the government’s recognition of the difficulties in consulting on collective redundancies in insolvency situations and its decision to provide additional guidance as a ‘very positive’ move, saying more regulation would have compounded the problems in an already complex area.

Caroline Sumner, R3’s technical director, said: ‘A full consultation requires an alternative to redundancy which often isn’t there when a company has failed. The cost of keeping staff on and running the consultation means less money can get back to creditors, but maximising creditor returns is one of the primary goals of an insolvency procedure.

‘Not making staff redundant quickly could prevent them from accessing benefits or applying for new roles, trapping them in a situation where they’re not being paid by their insolvent employer.

‘The difficulty in resolving these issues often means significant protective awards are made to employees by employment tribunals. These costs are typically met by the taxpayer in the first instance rather than the insolvent company. It’s just not clear who the existing set-up is meant to help.

‘Guidance will help resolve some of the issues which exist between employment and insolvency law and we look forward to working with the government to ensure the new guidance is a success.’

Consultation outcome Collective Redundancy Consultation for Employers facing Insolvency