Industrial Tribunals Northern Ireland Decisions

1.

(i)

By claim forms presented to an industrial tribunal on 19 January 2009 and 8 May 2009 respectively, the claimants, Mr Agahi and Dr Orang Agahi, his brother, made claims for redundancy payments against the respondent Department (DEL).  In Mr Agahi’s case, an application to the Department for a payment had been rejected on 12 June 2008, and in Dr Agahi’s case, it had been rejected on 7 February 2009.

Both had been directors and shareholders in an insolvent company, Shiraz Medical Ltd, which had been compulsorily wound up by the High Court on 12 June 2008 on the petition of HM Revenue and Customs. 

The Department had rejected their claims because it did not accept that they were also employees of that company, and hence eligible for an ‘employer’s payment’ (in this case a redundancy payment) under Article 201 of the Employment Rights (Northern Ireland) Order 1996.  DEL's view was that the company was the claimant’s business which they ran effectively as such on their own account.

(ii)

As the claims arose out of similar factual situations and concern the same point of law, I have consolidated them.

(iii)

The issue for determination was therefore whether they had been employees, and in order to decide this I heard evidence from Mr Agahi and Dr Agahi, and had regard to documentary evidence placed before me by the parties.

I find the facts set out in the subsequent paragraphs.

Ms Murnaghan BL, for the respondent, helpfully indicated that if I made a finding in favour of the claimants, the Department would make the appropriate redundancy payment, and that I need therefore not concern myself with the amount of any such payment.

2.

(i)

The claimants are clearly hardworking, industrious and diligent people.  Mr Arjang Agahi has a technical background, and his brother is a medical doctor.  They decided to utilise their combined expertise and in 2003 formed a business, as partners.  Initially this was primarily a research and development business to develop and market disposable stethoscope covers.  These were to be manufactured in Singapore and, it was hoped, would be marketed in 22 countries around the world.  Some of the design work was put out to a designer who worked for them from time to time.  It was accepted by the claimants that the designer was not an employee of the business.

Both put around £9,000 of their own money into the company, to match £18,000 which had come from Invest NI.

(ii)

On 28 October 2003 a private limited company, Shiraz Medical Ltd, was formed to carry this venture forward.  The Articles of Association were signed by Mr Agahi and Dr Agahi as subscribers on 24 October 2003.

The company had 1,000,000 £1 shares.  Both brothers were directors.  According to the first annual return filed on 25 October 2004, a Mr Gerry Flanagan and a Mr Arthur Joseph McFerran had also become directors by then.  It also showed that each brother had initially taken 200 shares in the company.  It appears there were no other shareholders at that time.

In the course of time the brothers overall shareholding reduced to 73% (36.5% each) and in January 2006, following an investment in the company, to 71.43% (35.7% each).

The remaining shares were held by Mr Flanagan and by Mr McFerran, with his brother, Donal McFerran.  Mr Donal McFerran was never appointed a director, but was characterised as a ‘shadow’ director, in which capacity he attended board meetings with the other four directors.

However, both Mr Flanagan and Mr Arthur Joseph McFerran had resigned as directors by December 2005, although the former had continued as a ‘shadow’ director.  At the time the company was wound up, the claimants were its only directors.

(iii)

Some provisions of the Articles of Association can usefully be noted at this stage.

Article 18 provided in part:-

Under Paragraph 20 of the Articles, each of the brothers could vote on his own dismissal and acting together, could  have prevented the dismissal of one of them.

3.

(i)

At various times during the company’s existence, Mr Agahi and Dr Agahi invested some of their own money in the company.

Mr Agahi at one stage invested £9,000, though this amount was small in comparison with the amounts put in by other shareholders and directors.

(ii)

Both brothers also provided a personal guarantee of £50,000 to the company’s bank on a joint and several basis.  This was provided at the insistence of the other shareholders and was done to ensure the survival of the business.

There is also evidence of subsequent loans which is dealt with below.

4.

(i)

Evidence was provided in the form of a letter dated 20 January 2009 from the former accountants to Shiraz Medical Ltd and who were responsible for its payroll administration, that the claimants paid National Insurance contributions and were taxed as employees.

P60s for the tax years 2005/6 and 2006/7 were enclosed.

There are also letters from former directors stating that the claimants were employees.  The claimants did not receive directors’ fees.

(ii)

The claimants also produced contracts of employment with the company.  The job title in these contracts was joint managing director.  These contracts seem to have been issued around late April/May 2004 following a board meeting of 23 April 2004.  Apart from the reference to the post of joint managing director, the contract of employment was a proforma document.  It was not personalised, it did not refer to either claimant, and it was not dated.  Nor were these contracts of employment accompanied by any covering letters or other documents addressed to the claimants.

(iii)

Each brother was to be paid £60,000 per annum together with £12,000 per annum by way of car allowance.  Travelling expenses and subsistence were also payable.  None of these matters was referred to in the contracts of employment.

(iv)

In this claim to DEL for a redundancy payment, which was received on 17 September 2008, Mr Arjang Agahi was asked at Paragraph 1 of the form to provide any written contract of employment.

His reply was as follows:-

This is inconsistent with the evidence which he gave to the tribunal, where the proforma document was adduced in evidence as his actual contract of employment.

At this point it is convenient to note that at Paragraph 2 of the same form, Mr Agahi denied any association with Shiraz Medical Ltd before it became a limited company.  Again this answer is not consistent with his involvement in the partnership business which preceded it, albeit that that business was primarily concerned with research and development.

(v)

When Mr Agahi worked for the company, he was very much in control of his day-to-day work as joint managing director with responsibility for research and development.  He did not need the approval of the Board of Directors for his activities.  However, this would not be an unusual situation where a highly educated employee with specialist skills and knowledge was concerned, so nothing turns on this.

(vi)

Mr Agahi also gave evidence that he worked substantial periods outside normal working hours ie in the evenings and at weekends.

For this he claimed to be entitled to time-off in lieu, which meant that he still retained his annual leave entitlement of 20 days a year plus public holidays.

He also had claimed holiday pay in his application to DEL.

However, the proforma contract of employment contained no provision for time-off in lieu or carrying over holidays.

5.

(i)

There were two substantial periods, from March 2005 to December 2005, and from September 2006 to June 2008 when both brothers worked for the company without any salary.

It is clear from the management accounts that during these periods the company did not have the money to pay their salaries.

Working without salary during these periods was a condition imposed by the other directors and shareholders if they were to put funding into the company.  This arrangement was to continue at least until further finance was forthcoming.

(ii)

There is some evidence of other employees working without payment.

For example, one former employee, Reginald Clark, who was employed from 2 November 2005 until January 2007 provided a written statement on behalf of the claimants stating that he had worked without payment for the ‘last few months’ of employment.

However, his overall period of employment with the company was comparatively short, and the period for which he worked without payment was minimal in comparison to the claimants.

(iii)

During the periods of non-payment of salary the claimants took out bank loans and second mortgages.  However, it transpired in evidence that although they had made loans to the company, they were also receiving payments from the company out of loans made to it by others.

6.

(i)

Dealing specifically with Dr Orang Agahi, he too paid tax at source and National Insurance contributions.  His salary was paid by cheque.  He worked overtime, which I accept is not unusual in a small company.

As far as holidays are concerned, there is no record of the holidays which were taken by him.

He also put money into the company in February 2005.

(ii)

Perhaps more significantly in relation to Dr Agahi, he worked substantial part-time hours as a GP from 1 October 2007 in order to support himself and his family during part of the period when he was not being paid a salary by the company.  According to Dr Agahi it had always been accepted that he would do some medical work.  However, such part-time employment was not consistent with the standard form contract of employment.

So, in this respect, as the company neared the end of its corporate existence, the contract of employment had ceased to reflect the reality of the situation.

7.

(i)

In the recent case of Secretary of State for Business, Enterprise and Regulatory Reform  v  Neufeld and Another [2009] IRLR 475 the Court of Appeal in England and Wales has given new guidance on determining whether a controlling shareholder and director of a company is also an employee of the company.  According to Rimer LJ op cit 488:-

Whether a shareholder/director was an employee of the company at the time of insolvency is a question of fact in each case.  A tribunal will have to be satisfied that his putative contract with the company is a genuine one and that it amounts to a contract of employment as opposed to a contract for services.

The fact that a person’s control over the company is such that he can effectively prevent his own dismissal does not mean that he cannot be an employee.  The fact that someone has share capital invested in the company, or that he may have made loans to it, or given guarantees in respect of loans from others will not ordinarily be relevant to the issue of whether or not he is an employee.  These are factors in the instant cases, but I have disregarded them in reaching my conclusion.  I also have attached little weight to the fact that the company was incorporated following upon a business carried on in partnership by the claimants.

(ii)

As far as the contracts of employment  were concerned, these came into existence in May 2004 when the claimants, acting together, had effective control of the company, and at a time when it was facing financial difficulties.

From March 2005 until the company was wound up in June 2008 the contracts of employment did not reflect the reality of the situation or provide a true reflection of the employment relationship between the claimants and the company.  The claimants did not conduct themselves in a manner consistent with these documents.

Of particular significance is the fact that the claimants worked for substantial periods – one of 10 months and another of 22 months - without drawing any salary (which was £60,000 per annum) from the company.

Mr Agahi also took considerably reduced sums by way of salary during other periods.  It is difficult to conceive of genuine employees accepting such an arrangement on a prolonged basis.  The fact that some payments were being made to the claimants out of other loans to the company also seems to me to be inconsistent with employee status.

(iii)

The provisions relating to holidays and holiday pay again did not reflect the reality of the situation.  Mr Agahi regarded himself as entitled to time-off in lieu, for which there was no express provision. 

Dr Agahi, when he saw the writing on the wall as far as the commercial future of the company was concerned, took up part-time employment as a GP working substantial hours.

(iv)

When the company went into liquidation, the claimants were the only remaining directors, the other directors having converted to the somewhat nebulous ‘shadow director’ status some time before.