Under our previous post Permacell Finance: judgements affecting charge holders, commentators debated the then recent High Court case of Day v Haine, in which Sir Donald Rattee held that a protective award (for the employer's failure to consult on redundancies pursuant to s189 Trade Union and Labour Relations (Consolidation) Act 1992) made after the date of liquidation is not a provable debt.

The Court of Appeal has now reversed that decision - Haine v Secretary of State for Business Enterprise & Regulatory Reform & Anor [2008] EWCA Civ 626 (11 June 2008).

The Court of Appeal's approach was that this is not essentially an insolvency issue, but rather a matter of employment law in the particular context of an EU Directive. The focus of this purposive judgement appears to be on protection of the workforce through the discouragement of failure to consult by the levy of a financial penalty on the company; and there is sympathy for the Secretary of State

"to whom are transferred the workforce's rights under the 1992 Act [and who] has no means of recouping his expenditure from the employer by proving in the company's liquidation."

What is not explicitly recognised is that any such expenditure by the Secretary of State is limited by s186 Employment Rights Act 1996, whereby each employee's maximum entitlement from the Secretary of State for all employment debts is (currently) £330 per week for eight weeks.

Is it right that the financial penalty should fall largely on creditors (and partly on the Secretary of State) in an insolvency? How will that discourage directors of going concerns who might be tempted to avoid consultation?

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In 2003 the Enterprise Act made several major changes to insolvency law, including dropping the preferential status of the main government departments and the creation, through Section 176A of the Insolvency Act 1986, of a 'prescribed part'. This was done in an attempt to improve the chances of unsecured creditors receiving some return in 'larger' liquidations. It has taken until now to answer the question of whether a floating charge holder who experiences a shortfall on their secured debt, which would fall to be unsecured, can share in the 'prescribed part', discussed in a previous post here.

In a judgement handed down by the Birmingham High Court recently in the Permacell Finesse case, HHJ Purle QC decided that floating charge holders should not have a further crack of the whip by sharing in the prescribed part.

The Judge made his views abundantly clear, saying:

'The prohibition on distributing the prescribed part to a floating charge holder is in my judgment absolute'.

The Judge seems to have given effect to what he believes was parliament's intention at the time, namely to give banks and other floating charge holders the benefit of increased realisations through the abolition of Crown preference without having a detrimental effect on the unsecured creditors' distribution prospects.

The case will probably come as no surprise to bankers and other institutional floating charge holders as it is a case of quid pro quo.

However, the decision presumably comes as another blow to the charge holder in Permacell, coming soon after the Employment Appeals Tribunal made a 'protective award' of 90 days pay to employees because the employees were not properly consulted about their proposed redundancies under the Trade Union and Labour Relations (Consolidation) Act 1992.

The Act requires that employees be consulted even in an insolvency situation where there can be only one outcome. And claims under a protective award rank preferentially, i.e. before the floating charge. Follow this link to the EAT decision: Evans & Others -v- Permacell Finesse Limited (In Administration).

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