APPEARANCES
| For the Appellant |
MR B CARR
(of Counsel)
The Treasury Solicitor
Queen Anne's Chambers
28 The Broadway
London
SW1H 9JS |
| For the Respondents |
NO APPEARANCE BY OR ON BEHALF OF THE RESPONDENTS |
MR JUSTICE BURTON: This is an appeal by the Secretary of State for Trade and Industry that immediately raises the issue, which we understand is going to be dealt with on another occasion, that the lay members of this Tribunal are appointed by the Crown on fixed term renewable appointments but are paid by the Secretary of State for Trade and Industry and consequently they feel that this is a matter which ought to be disclosed for the purposes of the record, albeit that neither of them feel, as I do not, that on the facts of this case there was any conflict of interest which should prevent them from adjudicating.
- The appeal is in respect of a decision by the Chairman of the Employment Tribunal in Leicester sitting alone, Mr Blood in which applications were made by Mrs Henson and Miss Hemmings (whom I shall call 'the employees') for payments against the first respondent, Mrs Berry, their former employer, and the second respondent, the Secretary of State for Trade and Industry. The conclusion by the Chairman was that both the employees had been made redundant and were entitled to redundancy payments, which he quantified, and that both of them were entitled to certain sums, which he quantified, by way of payment in lieu of notice, unpaid wages and in the case of Mrs Henson, unpaid holiday pay. He made the order on the evidence before him against the Secretary of State for Trade and Industry. The basis on which he made that order was that in this view he was entitled so to do pursuant to sections 166 and 182 of the Employment Rights Act 1996.
- Those two sections are different in this respect, that section 166 relates to recovery in appropriate circumstances from the Secretary of State of redundancy payments due to be paid, and unpaid, by an ex-employer; whereas section 182 relates to recovery of other sums due under a contract of employment, in this case the pay in lieu of notice, unpaid salary and holiday pay to which I have referred.
- So far as the redundancy payments are concerned, there are two bases on which an order can be made or agreement can be reached that the monies should be paid direct by the Secretary of State to the employee if they are unpaid by the employer.
- I shall deal immediately with the first basis which applies only to redundancy payments and not, as I shall make clear, to the unpaid salaries etc. Under section 166(1)(a):
"(1) Where an employee claims that his employer is liable to pay to him an employer's payment [in this case redundancy] and either –
(a) that the employee has taken all reasonable steps, other than legal proceedings, to recover the payment from the employer and the employer has refused or failed to pay it, or has paid part of it and has refused or failed to pay the balance …
the employee may apply to the Secretary of State for a payment under this section."
That is a self-explanatory subsection, and I shall call it the 166(1)(a) route.
- It appears, however, that this is not the route that was taken by the employees in this case. In written submissions, which were first of all set out in correspondence with the Regional Secretary of Industrial Tribunals on 19th December 1997 and then in substance repeated in written submissions for the purposes of the Employment Tribunal on 9th March 1998, the Secretary of State made it clear that in principle there was willingness to make a payment in respect of the unpaid redundancy pay under this section. What was said was:
"The Department takes the view that an employee has taken all reasonable steps to recover the redundancy payment to which he is entitled, even though he has not commenced Tribunal proceedings against his employer, where an employee informs the Department in writing that the amount claimed by him in respect of redundancy pay is due from the employer but the employer is not in a position to make the payment by reason of financial difficulties. If the employer produces certain specific documentation to the Department which supports the financial difficulty claim, including the employer's acknowledgement of the debt, the Department will make a payment to the employee without requiring the employee to take proceedings against the employer at an Industrial Tribunal. The reason for this exception is that the Secretary of State is the guardian of the National Insurance Fund and in this way protects her position in relation to that Fund by ensuring that she is in a position to recover the amount due to the Fund without too much difficulty."
The letter concluded:
"If the employer fails to comply with the award [that is if the Tribunal were satisfied that the applicants were entitled to a redundancy payment and obtained such an award] within a reasonable period of time and the applicants notify the Department of this, the Department will make a payment to the applicants under sections 166 & 167 of the Act as quickly as possible."
- That avenue was, it seems, not pursued in terms by the employees. It may be that the reason that that was not done, at any rate prior to the hearings before the Chairman, was because the employer, Mrs Berry, had failed to produce the necessary information to the Secretary of State or to the employees, which did not enable the employees to give the Secretary of State the information the Secretary of State needed, and this appears from the Originating Application before the Tribunal. But by the time the matter had come on for hearing, this should and could have been resolved, not least because Mrs Berry herself, it appears, appeared at the Tribunal. The Chairman, however, did not make an order, as it seems to us he could and should have done, at least in relation to the redundancy payments under section 166(1)(a). We have been told by Mr Carr that, notwithstanding that on the face of it, this appeal before us now against the Employment Tribunal decision is an appeal against the whole of the award which was made by the Chairman in the circumstances to which I will refer, in fact that part of the sums, that were awarded by the Tribunal in the circumstances to which I shall refer, which relate to redundancy payments, have in fact been paid by the Secretary of State. Mr Carr gives on behalf of the Secretary of State's behalf an undertaking that if the redundancy payments have not in fact been made, as he is instructed and believes, they will be made.
- That leaves the balance of the claim, which relates to the payments in lieu of notice etc, but because the Chairman in fact ordered all the sums, including the redundancy payments, not under the 166(1)(a) route but under what I shall refer to as the 166(1)(b) route so far as the redundancy payments are concerned, and the 182 route so far as the balance is concerned, the Secretary of State has had to appeal against the whole decision of the Chairman, and does appeal as a matter of principle.
- I turn then to that second route. So far as redundancy payments are concerned, the second route is contained in section 166(1)(b). It seems to us that it would be unusual for this route to need to be followed in respect of a redundancy payment, because of the much easier availability of the 166(1)(a) route, to which I have referred, and which would be satisfied in respect of almost any situation in which an employee had quantified the amount owed to him, or had it admitted and then had taken reasonable steps, short of litigation or bankruptcy proceedings, to obtain the money. Section 166(1)(b) however provides as follows:
"(1) Where an employee claims that his employer is liable to pay him an employer's payment [an unpaid redundancy payment in this case] and
…
(b) that the employer is insolvent and the whole or part of the payment remains unpaid,
the employee may apply to the Secretary of State for a payment under this section."
Section 182, which applies to contractual payments other than redundancy payments, reads as follows:
"If, on an application made to him in writing by an employee, the Secretary of State is satisfied that-
(a) the employee's employer has become insolvent,
(b) the employee's employment has been terminated, and
(c) on the appropriate date the employee was entitled to be paid the whole or part of any debt to which this Part applies,
the Secretary of State shall, subject to section 186, pay the employee out of the National Insurance Fund the amount to which, in the opinion of the Secretary of State, the employee is entitled in respect of the debt."
Section 186 places a financial limit on section 182.
- Both the second routes, the 166(1)(b) route in respect of redundancy payments, and the only route in respect of all other payments under section 182, therefore depend upon the Secretary of State being satisfied that the ex-employer has become insolvent.
- Before I turn to the statutory definition of insolvency in such a case, I shall refer to the facts of this case. Both the employees had been employed by Mrs Berry, trading as TDL Finishers (of which she was sole proprietor), but that business closed on 15th August 1997 when after an unfortunate break-in she had to cease trading in the business of making and finishing ladies sports garments. Mrs Berry worked at the time of the Tribunal hearing as a waitress in a public house restaurant. She gave evidence before the Chairman that she had not been made bankrupt. He then in paragraph 8 of the decision recites the following situation, which he found to be the case in relation to Mrs Berry:
"However, she is unable to pay various creditors who include the Inland Revenue for PAYE (£7,000), the suppliers of machinery which was stolen during the break in referred to (£4,000), her landlord for rent owed on the business premises (£2,000) and her bank for a personal loan (£3,500). She has an arrangement with the Inland Revenue to pay off her liabilities to them at £150 per month. She also has an arrangement with her former landlord, in respect of rent arrears paying at £50 per month. The debt in respect of the machinery is at present sub judice in view of a dispute in respect of the insurance claim in connection with which she is represented by solicitors. She has no capital out of which to meet her liabilities to the applicants. …"
- It was contended and, as I shall indicate in due course, the Chairman found, that notwithstanding that Mrs Berry had not been made bankrupt, in the light of those facts she was insolvent for the purposes of sections 166(1)(b) and 182(a). Unlike other statutes the Employment Rights Act 1996 does not leave open the question of insolvency; for example, in relation to company insolvency under the Insolvency Act 1986 it is made clear that it is a ground for winding-up proceedings if the debtor is insolvent, and the creditor is entitled to prove insolvency to the satisfaction of the court, if he can, in any number of ways, but he is given by the 1986 Act an easy way of showing such insolvency by the service of a notice, and there is a deemed insolvency in the event that such notice is not complied with. That, as I have indicated, enables the alleged factual scenario of insolvency to be proved, but also gives a deemed method of proving it, which, in practice, most people will follow to avoid any argument. The structure under the Employment Rights Act however is not that at all. The Employment Rights Act requires satisfactory proof of insolvency, but then expressly limits such proof to the forms set out in the section and no other. It does not therefore leave the question of insolvency to proof at large. In order to establish insolvency the particular ingredients required by the statute have to be established. The wording is identical for both sections 166 and 182 and they appear in relation to section 166 in sections 166(5) and (6) and in relation to section 182 they appear in section 183(1) and (2). As they are in identical terms I shall read only the passage relating to section 166:
"(5) An employer is insolvent for the purposes of subsection (1)(b)-
(a) where the employer is an individual, if (but only if) subsection (6) is satisfied …"
Subsection (6) reads:
"This subsection is satisfied in the case of an employer who is an individual-
(a) in England and Wales if-
(i) he has been adjudged bankrupt or has made a composition or arrangement with his creditors, …"
- The conclusion of the Chairman of the Tribunal was, it seems, in the absence of the Secretary of State and notwithstanding receipt of her written submissions, that that subsection and the equivalent subsection in section 183 could be satisfied on the facts recited by the Chairman by a conclusion that there was an arrangement with, as the Chairman put it, various creditors. The conclusion of the Chairman in paragraph 8, from which I have already cited, is as follows:
"Notwithstanding the fact that the second respondent's bankruptcy search is clear, that search relates to bankruptcy proceeding only. The first respondent [Mrs Berry] has clearly entered into an arrangement with certain creditors and the provisions of section 166(6)(a)(i) and section 183 of the Act are satisfied."
That was the conclusion on the basis of which he found liable the Secretary of State both for the redundancy payments, which could have followed the alternative route under section 166(1)(a), but as I have explained did not, and the other payments which would not have been recoverable at all under section 166. We are entirely satisfied that that was an impermissible decision in law.
- Mr Carr, in his admirable skeleton argument, has drawn our attention to two matters by way of statutory or case law background. The first is the EU Council Directive on insolvency (80/987/EEC), Articles 1 and 2. That Directive, with which it is to be hoped and assumed our own proceedings and procedures comply, indicates that it applies to:
"employees' claims arising from contracts of employment or employment relationships and existing against employers who are in a state of insolvency within the meaning of Article 2(1)."
The definition of the state of insolvency in Article 2 is once again one which is intended to be hard and fast and not leaving open, it seems to us, some kind of factual exploration of financial difficulties on the part of the employer. Article 2 says:
"1. For the purposes of this Directive, an employer shall be deemed to be in a state of insolvency:
(a) where a request has been made for the opening of proceedings involving the employer's assets, as provided for under the laws, regulations and administrative provisions of the Member State concerned, to satisfy collectively the claims of creditors and which make it possible to take into consideration the claims referred to in Article 1(1), and
(b) where the authority which is competent pursuant to the said laws, regulations and administrative provisions has:
- either decided to open the proceedings,
- or established that the employer's undertaking or business has been definitively closed down and that the available assets are insufficient to warrant the opening of proceedings."
The procedural set up postulated by that Article is not entirely easy to fit within the English statutory provisions of bankruptcy, and of course it is not necessary for each member state to legislate exactly in accordance with that provision. Equally, the words that are used are "an employer shall be deemed to be in a state of insolvency" which might lead it open for the possibility of a state of insolvency to be proved in some other way. But what is does make clear is that, insofar as there is European guidance to the Member States, what is underlined is the need for a formal arrangement, and in particular for proceedings to be opened and taken up by the relevant court which are intended to satisfy collectively the claims of creditors, and what would not be foreseeable under that Directive as being required in any Member State's legislation is to allow for insolvency to depend upon individual arrangements with some creditors.
- The case law background is Secretary of State for Trade and Industry v Forde [1997] IRLR 387 in which the decision of the EAT was given by His Honour Judge Hicks QC. That was a case under the then equivalent of section 166 and 182 where the employer was a two partner firm. One of the partners in the firm had been adjudicated bankrupt but the other had not, but appeared to be in some financial difficulty. The facts were recited by Judge Hicks on this basis, that both the two partners were clearly very unlikely to be in a position to pay any sums, and by the time of the Tribunal one of those partners had been adjudicated bankrupt. Judge Hicks continues at paragraph 3:
"At the hearing before the industrial tribunal, the tribunal found as a fact that Mr Crowley had been adjudicated bankrupt but that Mr Hurley had not, or, as the tribunal put it, there was no evidence that Mr Hurley was insolvent. We think that must have been effectively a reference to the way in which insolvency is defined in the Act, to which we must come in due course, because in the ordinary sense of the word there was quite a lot of evidence that Mr Hurley was insolvent, not least the fact that both he and Mr Crowley were under prosecution for offences involving fraud, as well as the cessation of trading and the fact that Mr Hurley had disappeared from his previous residence. But, as we shall show when we come to deal with the definitions, the tribunal was undoubtedly correct in saying that for the purposes of the Act Mr Hurley was not insolvent."
The conclusion of the Tribunal was that the Act required that, in order for an employer to be shown to be insolvent for the purposes of liability of being established on the Secretary of State, the specific requirements of the statute must be followed, namely that there must be satisfaction that the employer had either been adjudicated bankrupt or had entered into a composition or arrangement with his creditors. In those circumstances, notwithstanding the facts of that case, the Tribunal concluded that there was insufficient to establish the Secretary of State's liability in respect of anything other than redundancy payments, which in that case were admitted before the Tribunal pursuant to what would be the 166(1)(a) route. Judge Hicks said at paragraph 14:
"… The simple fact that the company is plainly totally incapable of paying its debts will not do. For that reason, the corresponding escape route is not open in this case, and that is the reason why we have concentrated on the stark question; 'What does it mean to require that the employer is bankrupt, when the employer is a partnership?
For the reasons we have given, we reluctantly feel that we have to answer that by saying that what is required is that every partner must have been adjudicated bankrupt, and on that basis the appeal must be allowed. … We simply allow the appeal, and discharge the order for payment against the Secretary of State except so far as it relates to the unappealed decision as to the redundancy payment."
- We are of course not bound by the decision of Judge Hicks, but it is very persuasive as a decision of the Employment Appeal Tribunal. But we are clear that that decision was right, and insofar as the facts and/or the precise question before us are marginally different, we come to exactly the same conclusion.
- I must first address the question as to whether such a conclusion would cause unfairness or whether we need to feel reluctant in coming to this conclusion. It is inevitably unsatisfactory that anyone should feel unhappy, as these employees plainly do as appears in a letter that they sent to the Court, although they have not attended, at an outcome. In this case the remedy has been entirely within their own hands. In order to come within the statute all they needed to do, and still need to do, is to issue a bankruptcy notice, which will be likely to qualify them for the payments they seek, because if the service of a bankruptcy notice prompts Mrs Berry to pay up, or indeed any other creditors who wish Mrs Berry to stay out of bankruptcy to pay up on her behalf, then the monies which are due to the employees will thus be supplied. If, on the other hand, there is no compliance with the bankruptcy notice and bankruptcy proceedings are then proceeded with to adjudication, then although that may be an unfortunate result for Mrs Berry, the employees will, for relatively little additional expense or effort, achieve what they wish. Therefore, no injustice will be done because, if indeed Mrs Berry is insolvent, all they need to do so is to establish a bankruptcy and they will be paid.
- The converse would, it seems to us however, lead to potential unfairness in many other areas of commercial life. It appears to us that it was specifically required that insolvency be defined carefully in this case. Not simply because this involved payments to be made by the Secretary of State, but because in many other areas of commercial life insolvency is an important question and there is more than one reason for being careful before deciding that a party should be deemed to be insolvent. Of course I leave aside entirely any areas in which it is left open to decide as a question of fact whether a particular person is unable to pay his or her debts. But where it is to be concluded, and has to be concluded for some purpose, that a party is insolvent, it is perfectly understandable that a strict statutory procedure or a strict definition is established. Thus:
(1) In this case it is only if a party is established to be insolvent that the burden which is ordinarily the employer's own is passed to the State. That should not be rendered too easy. Certainly in this case what has occurred is obviously unfortunate for Mrs Berry and the fact that she took the trouble to appear before the Tribunal clearly must have impressed the Chairman. So we are not here speaking of the kind of situation which can happen in which an individual can run out of money, and then start up another business, or a company can cease to trade and those promoting it start again, shuffling off their liabilities on the Secretary of State and then starting again free from obligation, or leaving some creditors paid and others unpaid with the Secretary of State to pick up the pieces on behalf of some of those who are unpaid. But that can and does happen, and it must obviously not be something that can be done as a matter of course.
(2) It appears to us that there would be ramifications in situations way outside the employment position, if, as the Chairman concluded here, an arrangement with some creditors were enough to mean that on a statutory or strict definition a party was insolvent. That could mean that those of us who make an arrangement with one or two creditors, for any kind of reason, to pay them late, or pay them less, could be held to fall foul of such a definition, and thus find ourselves categorised as insolvent. This can apply in commercial situations in which, for example, agency agreements are very often made subject to be terminable at will and without notice in the event that one of the parties is insolvent, which is very often defined, as here, as a situation in which a party has either been adjudicated bankrupt or has made a composition or arrangement with his creditors. The matter cannot be left uncertain, and cannot in our view apply to the making of an arrangement with 'certain creditors'. I have also noted section 261(5) of the Trade Union and Labour Relations (Consolidation) Act 1992 where the Secretary of State can automatically terminate the office of a member of the Central Arbitration Committee if he 'has become bankrupt or made an arrangement with his creditors.'
- I turn then to the construction of the relevant similar words in this statute. It appears to us quite clear that is intended to refer to what the Directive has referred to as the collective satisfaction of creditors. This is not something which is simply imposed by the Directive, but has been the bulwark of our insolvency law for many years. The courts set their face against preferences, against the selective paying off of some creditors and the leaving to sink or swim of others. What this statute, it seems to me, is intended to do is to say that someone will be insolvent if they are either adjudicated bankrupt, or they enter into an arrangement which is effectively a declaration of insolvency coupled with the making of collective arrangements short of court proceedings which enables all the creditors to be paid. That is what is referred to when the statute refers to insolvency being defined as being a situation in which an employer is either declared bankrupt or makes a composition or arrangement with his creditors. This does not mean an arrangement with one creditor or even two or more creditors. A composition of creditors is well established by reference to a deed of composition, and an arrangement with creditors has been statutorily regulated now by way of the IVA since the Insolvency Act 1985, and then the Insolvency Act 1986 which superseded it. This particular provision, Mr Carr points out, dates back to the Redundancy Payments Act 1965, and thus antedates the actual setting up of the new statutorily approved forms of IVA, but nevertheless it seems to us quite clearly intended to relate to such collective arrangements or compositions. In those circumstances the arrangement which it appears Mrs Berry has made with some of her creditors, or even various creditors, cannot possibly qualify, and does not qualify, for a composition or arrangement with creditors as set down by the provisions of the Act.
- The conclusion that we have come to, that this is a statutory definition which must strictly be construed as Judge Hicks considered in Forde, is emphasised by something which I do not think he referred to, but which has weighed very heavily with us, and that is the words in parenthesis in sections 166(5)(a) and 183(1)(a) namely "if (but only if)" subsection (6) is satisfied in section 166, and subsection (2) is satisfied in section 183. It is quite plain that this is intended to be a difficult and restricted hoop through which applicants must fit before they can prove their employer's insolvency and qualify for compensation at the hands of the Department of Trade and Industry, rather than from the employer who owes them the contractual debt. I emphasise that this is limited to notice payments, holiday payments etc. whereas the hoop through which they must jump to recover unpaid redundancy monies is considerably lower and larger.
- In those circumstances we have no doubt at all that the Chairman, attempting as he no doubt was to assist the employees, was not entitled to follow the route he did. If he had wished to assist them, an alternative would have been to have ordered the redundancy payments, which we understand have in fact now been paid by the Secretary of State voluntarily, to be paid under section 166(1)(a), and explained to the employees that they could take the course, which it seems to us they could still now take, of issuing a bankruptcy notice and obtaining an adjudication against Mrs Berry.
- In those circumstances, we allow this appeal on the basis of the undertaking that has been given to us. Mr Carr, in the absence of the employees but based on a request in their written representations, applied for leave to appeal on their behalf but leave to appeal is refused.
