A Warning Shot to IPs influenced by the Conservative Party? – Pat McFadden's letter to IPs on their responsibility towards employees within admins

09 MAR 2009

As a company nears insolvency and enters Professor David Milman’s twilight zone, it is interesting to mull on the different stakeholders who are involved at this critical time. The relationship between directors and creditors has been explored in great depth by Professor Andrew Keay in a number of articles and his recent monograph on, inter alia, sections 213 and 214 of the Insolvency Act 1986 (IA86).

A letter sent on the 4 March 2009 by Mr Pat McFadden MP, the minister with overall responsibility for the Insolvency Service, as Minister of State for Employment Relations and Postal Affairs at BERR, highlights another group of key stakeholder relationships, namely: the relationship between the company and its employees and the relationship between the Insolvency Practitioner (IPs) and a company's employees.  In the letter Mr McFadden reminds IPs of their obligations towards employees in an administration. That these professionals supposedly need reminding of this obligation is in itself a bit worrying. This begs the question: what was the motivation for the letter? In a recent blog entry I mentioned the Conservative Party and Institute of Directors’ (IOD) claims that Chapter 11 is better for employees than administration. Whether or not this is true is a matter for further investigation. But the Conservative Party and IOD contentions must surely have influenced the Minister. Are these claims the genesis of this recent letter? Do IPs really need reminding of their statutory responsibilities in this manner?

There are a number of other issues that arise from the contents of Mr McFadden's letter. I will take these paragraph by paragraph. A copy of the letter is available from me if required:

• Paragraph 4 - The administrator cannot do much on their appointment if the employer has not already pre warned the employees or started a consultation process. In most cases the employers have not started this process because they do not want their financial difficulties out in the open especially if they have been trying to sell the business. Who in their right mind would the pay full price for a business when they can pick it up in the fire sale of an insolvency?

• Paragraph 5 -  A certain form of nonsense arises when you try and apply normal processes in an insolvent situation. Any protected award is an unsecured claim so in reality this point is really of very little consequence as dividends to unsecured creditors are few and far between

• Paragraph 6 - Does Mr McFadden think there is sufficient time to have meaningful discussions with employees' representatives after the appointment of an officeholer? This point is all the more pressing when one considers funding. Could this species of discussion occur especially when there is no funding to continue the trading? In this situation usually all but a few key people will be made redundant on day one of the appointment.  Retaining anyone for longer is an expense of the administration and will invariably eat into funds belonging to the secured and preferential creditors.

• Paragraph 7 - When and how does Mr McFadden think funding will be provided to continue trading?

• Paragraph 8 - This paragraph is rather strange. If the employer has not started the consultation before appointment how would an officeholder continue to fund the payment of all employees for the 30 days when the outcome will almost certainly already be known. If there is either a purchaser or interested party a pre-pack administration may be put in place. Everyone except staff will have to go either on day one or within a short period of time, hence the problem raised by the Paramount decision (Re Paramount Airways Ltd (No.3) [1995] BCC 319 ) and the subsequent amendments to the IA86 by the two Insolvency Acts of 1994.

• Paragraph 10 -  Mr McFadden's letter was sent to IPs and not to turnaround specialists. Admittedly some individuals undertake both roles. However, it is a bit strange including this comment when this is not the target audience for the letter. Does Mr McFadden clearly understand the market?

Perhaps the most important issue to focus on as regards the letter is not the motivation for sending it or some of the problems raised in the preceding paragraph regarding the minutiae of its contents and the implications of the same, but that Mr McFadden uses the term 'rescue.' The Minister notes:
"Although I believe that the current insolvency framework is well aligned to the interests of employees, in that it seeks to promote company and business rescue and therefore preserve jobs where possible..."

This ministerial re-statement of the nature and purpose of English insolvency law is very positive and focuses on the main purpose of Administration in the main. The IOD and Conservative Party may see Mr McFadden's letter as a response to their unsupported claims that Administration is not working. Rescuing viable companies is a key aim of English insolvency law and practice and has been since 1986 and the seminal Cork Report.

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