Secretary Of State For Trade & Industry v Richards & Ors [1998] UKEAT 402_98_0110

EAT

Secretary Of State For Trade & Industry v Richards & Ors

[1998] UKEAT 402_98_0110 · 1998-10-01

JUDGE JOHN BYRT QC:

This is an appeal against two related decisions promulgated on 16 January 1998 by an Employment Tribunal Chairman sitting alone at London South.

In the case of Richards and four others, all of whom are admitted to be employees of a company called Weathercombe Ltd, the Chairman held that each of them were entitled to certain payments of holiday and notice pay against the company, but owing to its insolvent state, the Secretary of State was liable to make those payments under sections 182 and 183 of the Employment Rights Act 1996 .

The discreet issue which arises in this particular case is as to whether insolvency as defined by the learned Chairman came within the meaning of those sections in the Act. The Chairman held that it did and accordingly he made an order to the effect that the Applicants, now the Respondents, were entitled to payments from the Secretary of State.

In the case of Mrs Baker, the second decision made by the Chairman, the issue was slightly more complicated by the fact that she was a director of the company. The same issue arises in her case, but in addition there was a further decision to be made, namely whether she was an employee of the company in the first place. The Chairman came to the conclusion that she was, and there is no appeal against that finding. In consequence the issue in her case remains the same as the issue in the first case. It is that decision on that issue which the Secretary of State now appeals in relation to both cases.

The Employment Tribunal Chairman found that the company, Weathercombe Ltd, was not financially viable. He related the fact that it was a small business in the building trade which had lost a major contract in the Spring of 1997. As a result its bank called in a substantial loan and the Inland Revenue, and Customs and Excise pressed their claims.

The Chairman found that the company was insolvent in the sense of having insufficient assets to pay its creditors and had no prospects of being able to do so. He found that such a situation brought the company within what he called the four corners of the principles of section 183 of the Act, even though, as he accepted, none of the formalities listed in s.183(3), had taken place. He was doubtless encouraged to take this view by the fact that Mr Baker, the managing director of the company, had given evidence to the effect that he had consulted both the Inland Revenue and Customs and Excise, the company's principal creditors and they had decided that the cost of a formal liquidation amounting to some £2,000 was not warranted in the circumstances of this case. A question arises whether the decision of a company to forgo the formalities of a liquidation means that the employees forfeit the protection afforded by the Act in the event of an insolvency.

Mr Hill, arguing the case of the Secretary of State, says that the Chairman of the Tribunal erred in his liberal construction of the section. He submitted that this section falls to be strictly construed and if one does that it is quite plain that the Secretary of State is not liable in the circumstances relevant in this case. We accept that submission.

Viewing the matter first with the common law principles of construction in mind, S183 says:

"(1) An employer has become insolvent for the purposes of this Part - (b) where the employer is a company, if (but only if) subsection (3) is satisfied."

In subsection (3), subparagraphs (a), (b) and (c), there are set out a number of formal steps which have to be taken in the ordinary insolvency procedures; and as I have already indicated the Chairman came to a finding that none of those formal steps had as yet been embarked upon by the company.

It is our view that placing the construction the Chairman did upon this section, would mean the section becomes oteose. Further, it would mean that the words "but only if" are of no effect. That is on the construction according to the national rules of construction.

The question then is whether a more liberal construction can be placed upon this section by reason of the fact that it is a section in the Act which was drafted to comply with a European Directive. In order to ascertain the answer to that question, one has to look at the relevant directive. The Directive concerned is a Council Directive 80/987/EEC of 20 October 1990, and Article 1(1) says:

"1. This Directive shall apply 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)."

So one then looks to Article 2(1). This 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 establish that the employer's undertaking or business has been definitively closed down and that the available assets are insufficient to warrant the opening of the proceedings."

These two articles have been the subject of a Common Market decision in the case of Frankovitch v The Department of Italy . In that case, it was made plain that the requirements of these two articles have to be strictly interpreted and applied, and accordingly, a liberal construction of the section is not permissible. Accordingly, there is no scope for the liberal interpretation the Chairman would seek to place on Section 183.

In those circumstances, in our judgment the Chairman, in this instance, has erred in his construction of section 182 and 183, and accordingly we must allow this appeal and set aside his decision.

In the course of his decision, the Chairman made certain findings at the beginning indicating that each of the Applicant's had claims against Weathercombe Ltd for notice pay and holiday pay. We feel that it would be helpful to these Applicants were this matter remitted to the same Chairman for a formal decision to be entered that these sums are the liability of Weathercombe Ltd. This would enable each Applicant in due course to pursue their remedies in the Employment Tribunal or alternatively through the county courts. With that purpose in mind, we remit this case to enable the Chairman to make those formal decisions.