Secretary Of State For Employment v Wilson & Ors [1996] UKEAT 1072_94_2501

EAT

Secretary Of State For Employment v Wilson & Ors

[1996] UKEAT 1072_94_2501 · 1996-01-25

MR JUSTICE MUMMERY (PRESIDENT) Insolvency often results in unpublicised and uncompensated human misery for many people: for creditors, whose undisputed debts are unpaid and for employees whose jobs have vanished overnight. The insolvency of a major financial institution, such as an international bank, has even wider repercussions for thousands of customers and employees, as well as inflicting incalculable damage on public confidence in financial services generally.

These appeals arise out of disputes, still unresolved years after the spectacular crash of the Bank of Credit and Commerce International (BCCI). The general point of law in the appeals concerns the extent to which an employee, who has lost his job and is owed arrears of wages, holiday pay, notice pay and so on, is entitled to State protection in the form of guarantee payments by the Secretary of State for Employment out of the National Insurance Fund pursuant to Part VII of the Employment Protection (Consolidation) Act 1978 ("the 1978 Act").

The particular point is a novel one, stemming from the unusual fact that some BCCI employees, including the Respondent, Mrs Gillian Wilson, are alleged to owe money to BCCI. All too often in times of recession individual and corporate employers become insolvent owing money to their employees. Most employees, however, do not owe money to their employer. Banks are different. In the experience of the members of this Tribunal, confirmed by counsel for the Secretary of State and by Mrs Wilson herself, it is common for bank employees to enjoy the benefit of substantial secured loans, usually at favourable rates of interest during their employment by the bank, rising to a commercial rate after they have left employment. BCCI lent money to their employees on this basis.

How are those loans to employees affected by principles of set-off applicable on an insolvency? More particularly, what effect, if any, does the application of set-off have on the liability of the Secretary of State under the 1978 Act to make guarantee payments to former employees of an insolvent employer?

The Facts

There has never been any serious dispute about the relevant facts which appear from the documents and are summarised in the decision of the Industrial Tribunal.

(1) On 15th February 1983 Mrs Wilson started work for BCCI as a typist/clerk. With effect from 15th August 1983 she became a member of the permanent staff. She worked for BCCI in the Deposit Department of its branch in the Isle of Man where she lived.

(2) In 1986 she was granted a house loan (£27,400) by BCCI repayable by monthly instalments over 20 years. The instalments were deducted from her salary each month, starting in December 1986. In 1991 the limit of the loan was increased to cover the cost of repairs and renovation.

(3) On 5th and 6th July 1991 High Court orders were made in London and in Douglas in the Isle of Man for the appointment of a member of the firm Touche Ross as provisional liquidator of BCCI.

(4) Mrs Wilson remained an employee of BCCI until her employment was terminated with effect from 30th September 1991.

(5) on 14th January 1992, an order was made by the High Court of Justice for the compulsory winding-up of BCCI. Since then Mrs Wilson has received letters from the liquidators of BCCI about her staff loan account. The preferential rates of interest applicable to her account, while she was a member of staff, have ceased. By a letter of 11th August 1992 she was informed that £35,920 was outstanding to BCCI on various house loan, personal and other accounts.

(6) Mrs Wilson has accepted that money was advanced to her to buy a family home, but she claims against the liquidators that she was entitled to the benefit of undertakings given by BCCI in relation to staff benefit funds. She also has claims against BCCI for holiday pay, redundancy payments and so on. She contends that she stands in net credit. She has also proposed that the claim for repayment of the loan should be deferred pending resolution of court cases concerning BCCI employees. The present position is that the dispute between the liquidators of BCCI, Mrs Wilson and other employees remain unresolved. So far as the liquidators are concerned Mrs Wilson is considered to be a debtor of the Bank "at a considerable level" and interest continues to accrue on her indebtedness. The liquidators look to her for full repayment.

(7) Mrs Wilson made application to the Department of Employment (Redundancy Payments Service) for direct payment under S.122 of the 1978 Act. By letter dated 4th February 1994 the Secretary of State rejected her claim, saying

"...The liquidator has so far failed to submit a statement of the outstanding debt which appears to be owing to her under S.122(10)".

That sub-section provides that -

"Subject to sub-section (11), the Secretary of State shall not in such a case make any payment under this section in respect of any debt until he has received a statement from the relevant officer of the amount of that debt which appears to have been owed to the employee on the relevant date and to remain unpaid; and the relevant officer shall, on request by the Secretary of State, provide him, as soon as reasonably practicable, with such a statement."

Under sub-section (11), if the Secretary of State is satisfied that he does not require such a statement in order to determine the amount of the debt that was owed to the employee on the relevant date and remains unpaid, he may make a payment under this section in respect of the debt without having received such a statement.

The Secretary of State also informed Mrs Wilson that the liquidator had not resolved the debt which

"... you owe to the employer which may have to be set off against statutory claims. Until these matters have been resolved the Department is unable to calculate your payments."

(8) In these circumstances Mrs Wilson presented an Originating Application to the Industrial Tribunal on 13th February 1993, claiming payments against the Secretary of State under the 1978 Act. On a preliminary issue the Industrial Tribunal ruled, in Full Reasons notified to the parties on 1st February 1993, that Mrs Wilson and other employees did not ordinarily work outside Great Britain within the meaning of S.141(4) of the 1978 Act. They were not therefore excluded from entitlement to make claims under the 1978 Act.

The Appeal

This appeal is against the second decision of the Industrial Tribunal held at London (South) on 8th April 1994. In the Full Reasons notified to the parties on 25th July 1994 the Industrial Tribunal explained why Mrs Wilson's claim, and the claims of other employees similarly affected, succeeded and why the principles of insolvency set off were not applicable so as to reduce or eliminate claims against the Secretary of State under S.122 of the 1978 Act. The sums claimed by the employees were therefore payable in full by the Secretary of State.

By Notice of Appeal dated 5th September 1994 the Secretary of State appealed against that decision. He also appealed by a second notice of appeal dated 28th October 1994 against the refusal of the Industrial Tribunal on 14th October 1994 to review the calculation of individual entitlements, including an award of 8 weeks (instead of the statutory maximum of 6 weeks) holiday pay to Mrs Wilson. The Chairman's Notes of Evidence were requested and ordered in relation to the calculations, though they were not necessary and were not used on this hearing which was solely concerned to determine the issue of principle in Mrs Wilson's case. A decision on principle would affect the other cases. If decided against Mrs Wilson, it might make it unnecessary to hear and determine the appeals on calculations. Accordingly, those other appeals were stayed pending the determination of this appeal. A similar claim by Mr Bannan was not pursued by him, though we did hear some short submissions from another applicant, Mr Siddiqi.

The liquidators of BCCI have not taken any part in the hearing. We were, however, concerned about the time which has been taken to resolve the dispute between BCCI and the employees. We therefore asked the Treasury Solicitor to produce, by the time we give this reserved judgment, an up-to-date statement of the present situation.

In order to decide this appeal it is necessary to examine the scheme and structure of Part VII of the 1978 Act; the nature and extent of the liability of the Secretary of State to employees for the debts of the insolvent employer; the principles of set off applicable in an insolvency; and the effect of those principles on the statutory liability of the Secretary of State.

We are grateful for the assistance which we have received from Mrs Wilson, who took the trouble to travel specially from the Isle of Man to attend the hearing. We are also indebted to Mr Rabinder Singh, counsel for the Secretary of State, who presented the case of the Secretary of State with conspicuous ability and fairness. His submissions were developed with such care, clarity and courtesy that they made painless, even enjoyable, this exploration of the territory where employment law and insolvency law meet.

The Scheme and Structure of the 1978 Act

The salient features of the Secretary of State's liability are that -

(a) it is imposed by statutory provisions which are silent on the subject of set off (Part VII of the 1978 Act);

(b) it is contingent on the insolvency of the employer;

(c) it is a guarantee liability, subject to maximum statutory limits, for specified debts or parts of debts which the employee is entitled to be paid by the employer, but the employer is unable to pay them by reason of his insolvency;

(d) the employer remains the principal debtor to its employees so that, as in the case of payment by a non-statutory guarantor, the Secretary of State has subrogated rights against the employer in respect of payment which he has made to the employee. The employee's contractual rights are by statute vested in the Secretary of State.

It is only necessary to set out some of the provisions in Part VII.

Section 121 of the 1978 Act, which concerned the priority of certain debts on insolvency, has been repealed by the Insolvency Act 1985.

Section 122 provides -

"(1) If on an application made to him in writing by an employee the Secretary of State is satisfied - (a) that the employer of that employee has become insolvent; and

(aa) that the employment of the employee has been terminated; and

(b) that on the relevant date the employee was entitled to be paid the whole or part of any debt to which this section applies,

the Secretary of State shall, subject to the provisions of this section, 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 that debt."

"The relevant date" is defined in relation to the various kinds of debts and sub-section (3) provides that the section applies to the following debts -

"(a) any arrears of pay in respect of one or more (but not more than 8) weeks; (b) any amount which the employer is liable to pay the employee for the period of notice required by S.49(1) or (2) or for any failure of the employer to give the period of notice required by S.49(1); (c) any holiday pay - (i) in respect of a period or periods of holiday not exceeding 6 weeks in all;

(ii) to which the employee became entitled during the 12 months ending with the relevant date;

(d) any basic award of compensation for unfair dismissal (within the meaning of S.72); (e) [not material]."

Sub-sections (10) and (11) of S.122 relate to the machinery of the payment and have already been cited.

Section 124 enables a person, who has made an unsuccessful application to the Secretary of State for payment, to present a complaint to an Industrial Tribunal. Where the Industrial Tribunal finds that the Secretary of State ought to make a payment, it shall make a declaration to that effect and shall also declare the amount of any such payment which it finds the Secretary of State ought to make (S.124(3)).

Section 125 provides that where, in pursuance of S.122, the Secretary makes any payment to an employee in respect to any debt to which that section applies,

"(a) any rights or remedies of the employee in respect of that debt (or, if the Secretary of State has paid only part of it in respect of that part ) shall, on the making of the payment, become rights and remedies of the Secretary of State; and (b) any decision of an Industrial Tribunal requiring an employer to pay that debt to the employee shall have the effect that the debt or, as the case may be, that part of it which the Secretary of State has paid, is to be paid to the Secretary of State."

There is a reference in sub-section 125(2) to the provisions of the Insolvency Act 1986 relating to preferential debts. There are also references to the 1986 Insolvency Act in the definition in S.127 of the circumstances in which "an employer shall be taken to be insolvent." There is no express reference to insolvency set off.

Insolvency Set off

Insolvency set off has been described as a principle fashioned to achieve "substantial justice". Its essential features are -(a) It is mandatory;

(b) it is automatic or self-executing;

(d) its application affects substantive rights by the reduction or extinction of claims and the substitution of a net balance (or a nil balance) after the set off of mutual claims one against the other. See Stein v. Blake

[1995] 2 WLR 710

at 713.

The relevant legislative provision is contained in the Insolvency Rules 1986 (SI.1986 No.1925) " Rule 4.90 Mutual Credit and Set off

4.90(1) Application of Rule

This Rule applies where, before the company goes into liquidation there have been mutual credits, mutual debts or other mutual dealings between the company and any creditor of the company proving or claiming to prove for a debt in the liquidation.

4.90(2) Account of mutual dealings and set off

An account shall be taken of what is due from each party to the other in respect of the mutual dealings and the sums due from one party shall be set off against the sums due from the other.

...

4.90(4) Only balance (if any) provable etc

Only the balance (if any) of the account is provable in the liquidation. Alternatively (as the case may be) the amount shall be paid to the liquidator as part of the assets."

The Decision of the Industrial Tribunal

The critical paragraph in the Full Reasons is paragraph 8 in which the Tribunal reasons as follows:-

"It appears to this Tribunal that Parliament intended, when enacting the 1978 Consolidation Act and its predecessors, that employees who were suddenly thrown out of work by the insolvency of their employer, and who had claims upon that employer, whether in respect of arrears of wages which remained unpaid, the absence of proper statutory period of notice or notice pay in lieu, holiday pay for holiday taken, or the basic award of compensation for unfair dismissal (to deal with the principal matters) might not have to be completely out of pocket in respect of those items but could look to the State for payment, in some cases subject to arbitrary maxima. If the right given by the 1978 Act for an employee to be secure in respect of such items, up to the limit established by Parliament, by monies paid from public funds, is to be a real benefit to the employee, and provide the employee with some monies, in what, in many cases, is a difficult time financially, it would seem important that it should not be fettered, and possibly frittered out of existence, by disputes and possibly litigation relating to highly complex questions of liabilities, set offs and priorities in a winding up or bankruptcy. Any set off against the employee, or lack of priority in respect of the employee, would not go to benefit other creditors of the company for whom the law had designed such rules, but instead would enure to the benefit of the Exchequer."

The Industrial Tribunal pointed out that the definition of "debts" in S.122(3) "makes no reference to any reduction of the five classes of items included in the definition in respect of any monies owed to the employer." The Tribunal concluded in paragraph 13 of the Full Reasons that the Secretary of State ought to make a payment under S.122, "as those provisions are stated clearly and unambiguously in the 1978 Act."

Conclusion

We are grateful to the Industrial Tribunal for a fully and clearly reasoned decision, but we are unable to agree with it. In our judgment, the Industrial Tribunal erred in law in holding that the principles of insolvency set off had no application in deciding whether an employee has an entitlement within S.122 of the 1978 Act.

The legal position is as follows:-

(1) The statutory obligation of the Secretary of State under S.122(1) is to pay to the employee the amount to which, in the opinion of the Secretary of State, the employee "is entitled in respect of that debt". Under S.122(1)(b) the Secretary of State must be satisfied that, on the relevant date, the employee

"...is entitled in respect of that debt."

(2) The "debts to which this section applies" are specified debts owed by the insolvent employer to the employee for arrears of pay, notice pay, holiday pay and so on at the relevant date.

(3) The obligation of the Secretary of State is not simply to discharge or pay "that debt" to the employee. It is to pay to the employee the amount "which the employee is entitled to be paid in respect of that debt." "Entitled" means legally entitled and S.122(1)(b) expressly contemplates that the employee may only be entitled to "part of the debt".

(4) The critical question is, therefore: To what debt, or part of a debt, was the employee legally entitled to be paid by his employer on the relevant date? The answer to that question cannot be found within Part VII of the 1978 Act or in any other part of the 1978 Act. It can only be found by determining the legal position as between the employee and his employer in accordance with relevant general principles of law, such as the law of contract, and if, as S.122 predicates, the employer is insolvent, by application of the relevant provisions of insolvency law.

(5) The provisions of insolvency law include the mandatory, self-executing set off provisions of Rule 4.90 of the Insolvency Rules. That Rule has to be applied to determine what, if anything, is owed by BCCI to an employee such as Mrs Wilson. If the sum owed by Mrs Wilson to BCCI is set off against the sum owed to Mrs Wilson by BCCI, she is only legally entitled, on the termination of her employment, to a credit balance (if any) in her favour. If the result of applying the set off is a nil balance, she is entitled to nothing. What is clear is that Mrs Wilson is not entitled to claim against BCCI what is owed to her without regard to what is owed by her to BCCI This result is compatible with the provisions of the Directive No.80/987/EEC in which the scheme is that of a "guarantee" of the employees' claim against employers in insolvency..

(6) If this were not the correct position, anomalous consequences would follow. For example, if the Secretary of State paid an employee in full, without regard to set off, the Secretary of State would be entitled to prove in the liquidation of BCCI for all that he had paid. That would be unfair to other creditors whose proof of debt is subject to set off. It is clear that Rule 4.90 makes no different or special provision for set off in the case of employees or in the case of the Secretary of State. On the other hand, the application of set off is not unfair to the employee. If set off is applied, it will, it is true, reduce, possibly extinguish, the debt due to the employee from BCCI and, consequently, the sum paid by the Secretary of State on the default of BCCI. The set off will, however, also reduce the amount owed by the employee to BCCI.

(7) This approach is consistent with the general principle stated by Lord Bridge in Westwood v. Secretary of State for Employment

[1985] ICR 209

at 216C where he said that -

"... the liability of the Secretary of State cannot exceed that of the insolvent employer."

That statement was made in the context of the application of the rules of mitigation of loss, but is authority for the proposition that the Secretary of State is not under a statutory obligation to pay the whole of the sum claimed by the employee. He is only liable to the extent to which the employee is legally entitled to make a claim against his employer under the general law. The Secretary of State is not, in such cases, applying or relying on the law of set off: the application of the law of set off as between the employer and the employee determines the amount which is owed by the employer to the employee. The Secretary of State is only liable to pay that sum.

(8) It is, of course, important that, in as many cases as possible, the employee should promptly receive the sum to which he is entitled. But delay caused by genuine disputes between the employee and his employer, acting through the liquidators, is not a justification for imposing on the Secretary of State an obligation to pay the full debt, if the words which impose that liability in the statute do not have that effect. For reasons explained they do not.

(9) As to the details of the calculations of Mrs Wilson's claim under S.122, there was an error in awarding her 8 weeks' holiday pay. The statutory ceiling is 6 weeks. That is, however, an academic point if, as may be the case, the set off operates to extinguish the liability of BCCI to pay to Mrs Wilson and others in a similar situation any of the sums claimed by them for arrears of pay, notice pay and so on.

For all these reasons the appeal by the Secretary of State is allowed. Leave to appeal to the Court of Appeal is refused.