THE HONOURABLE MR JUSTICE LANGSTAFF (PRESIDENT)
1.
Jane Pengelly began work for the Woolston Manor Golf and Country Club Ltd
in August 2010. She worked for them for some six months until on 23 February
2011 she was dismissed when the company went into compulsory liquidation.
Little known to her at the time when she joined the staff, the company had been
subject to a Creditors Voluntary Arrangement (CVA) which had been approved by
the court on 17 June 2010.
2.
Mr McDonagh and ten others were employed by Briman. Briman entered a
CVA under Part 1 of the Insolvency Act on 13 April 2010. None of the 11
employees were aware of this, they were still being paid. Their employment
continued until between December and January 2010 to 2011 their employments
ended and they were owed money. On 31 March 2011 Briman was compulsorily wound
up.
3.
Jane Pengelly and each of the 11 understood that they had a claim on the
National Insurance Fund. That was set up to guarantee the payments of
outstanding liabilities to an employee in the event of the insolvency of an
employer. They thought they could claim their arrears of pay which had been
unpaid and holiday pay which had been unpaid. Each applied to the Fund. The
Fund refused to pay them. It said each was not entitled because although none
of them had known it at the time, the company was already insolvent. They
applied to an Employment Tribunal; in the case of Miss Pengelly to a Tribunal
at East London. She came before Judge Foxwell who, for Reasons delivered on 30
March 2012, upheld her claim. The other 11 brought their claim in the London
South Tribunal. On 15 March 2012, for Reasons given on that date, Employment
Judge Baron upheld their claims too.
4.
The Secretary of State for Business Innovation and Skills appeals
against those decisions. He maintains that the Fund is not obliged to pay the
arrears of pay or the holiday pay outstanding to any of the employees because
in each case the company concerned had already been insolvent.
5.
I am told by counsel that is the first time when the question has been
raised before any court, apart from the Tribunals in this case, whether upon a
proper application of the Employment Rights Act 1996, section 182 and
following, an employee in a company under a CVA is entitled to arrears of pay
and holiday pay when the company is wound up (there having been no relief of
the insolvency in between CVA and winding up).
Domestic legislation
6.
The Employment Rights Act 1996 at Part 12 deals with the
insolvency of employers. Section 182 provides as follows under the hearing: “Employees
Rights on Insolvency of Employer”:
“If, on 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.”
7.
Section 182 therefore creates a number of conditions which must be
fulfilled before an employee is entitled to consideration for such a payment.
The first is that the employer has become insolvent.
8.
Insolvency is defined by section 183 which provides:
“(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 …
(3) This subsection is satisfied in the case of an employer
which is a company -
(a) if a winding up order … has been
made, or a resolution for voluntary winding up has been passed, with respect to
the company.
(aa) if the company is in
administration for the purposes of the Insolvency Act 1986.
(b) if a receiver or (in England and
Wales only) a manager of the company’s undertaking has been duly appointed, or
(in England and Wales only) possession has been taken, by or on behalf of the
holders of any debentures secured by a floating charge, or any property of the
company comprised in or subject to the charge, or
(c) if a voluntary arrangement
proposed in the case of the company for the purposes of Part I of the Insolvency
Act 1986 has been approved under that Part of that Act.”
9.
In both of the cases before me, therefore, the insolvency occurred, per
section 183(3)(c), once the voluntary arrangement had been approved, as in each
case it was.
10.
The second criterion was that the employee’s employment had been
terminated; that was so in the case of each of the 12 Claimants.
11.
Section 182(c) refers to the employee “being entitled to be paid the
whole or part of any debt to which this part applies” on the “appropriate date”.
Section 184 deals with those debts which qualify, section 185 with the
appropriate date. Section 184 says, so far as material:
“(1) This part applies to the following debts …
(a) any arrears of pay in respect of
one or more, but not more than eight, weeks
(b) any amount which the employer is
liable to pay the employee for the period of notice required by section 86(1)
or (2) or for any failure of the employer to give the period of notice required
by section 86(1)
(c) any holiday pay…
(i) in respect of
a period or periods of holiday not exceeding six weeks in all and;
(ii) to which the employee became
entitled during the 12 months ending with the appropriate date.
(d) any basic award of compensation
for unfair dismissal or so much an award under a designated dismissal
procedures agreement as does not exceed any basic award of compensation for
unfair dismissal to which the employee would be entitled but for the agreement
and;
(e) any reasonable sum by way of
reimbursement of the whole or part of any fee or premium paid by an apprentice
or Articled clerk.”
12.
Provision is made by subsection (2) for certain amounts to be treated as
arrears of pay, in subsection (3) for the definition of holiday pay and
subsection (4) is not presently material.
13.
The appropriate date is defined in section 185 as follows:
“In this part “the appropriate date” …
(a) in relation to arrears of pay not
being remuneration under a protective award made under section 189 of the Trade
Union and Labour Relations Consolidation Act 1992 and to holiday pay means the
date on which the employer became insolvent.
(b) in relation to a basic award of
compensation for unfair dismissal and to remuneration under a protective award
so made means whichever is the latest of …
(i) The date on
which the employer became insolvent,
(ii)The date of the termination of the
employee’s employment, and
(iii) The date on which the award was made,
and
(c) In relation to any to any other
debt to which this Part applies, means whichever is the later of …
(i) the date on
which the employer became insolvent, and
(ii) the date of the termination of the
employee’s employment.”
14.
Section 186 provides that there is a limit on the amount which is
payable from the Fund under section 182 in respect of any debt. It is not currently
to exceed £430 in respect of any one week.
15.
The Secretary of State and the Fund took the view that each of the
Woolston Manor Golf and Country Club Ltd and Briman Ltd had become insolvent
when each of them had entered into a CVA, applying section 183(3)(c).
Accordingly, the appropriate date in respect of arrears of pay and holiday pay
was the date upon which that CVA was approved. In Jane Pengelly’s case that
was before she ever entered employment. She could not, therefore, for that
reason claim any arrears of pay even though the sum came, in her case, to some
£1,750. Nor could Mr McDonagh and the ten others in his claim arrears of pay
and holiday pay because in their case they had been owed nothing at the date
upon which Briman entered a CVA, although they were owed individually some sums
when each of them had their employment terminated.
16.
The legislation gives effect in the United Kingdom to a Directive of the
European Union. The latest manifestation of that Directive is 2008/94 EC made
on 22 October 2008, on the protection of employees in the event of the
insolvency of their employer. The Directive sets out its purpose in the
recitals to it. It is made under Article 137(2) of the Treaty establishing the
European Community and accordingly is focused upon protecting and improving
their rights of employees. Recital 3 provides:
“3. It is necessary to provide for the protection of employees
in the event of the insolvency of their employer and to ensure a minimum degree
of protection in particular in order to guarantee payment of their outstanding
claims while taking account of the need for balanced, economic and social
development in the Community. To this end the Member States should establish a
body which guarantees payment of the outstanding claims of the employees
concerned.
4. In order to ensure equitable protection for the employees
concerned, a state of insolvency should be defined in the light of the
legislative trends in the Member States and that concept should also include
insolvency proceedings other than liquidation. In this context Member States
should in order to determine the liability of the guarantee institution be able
to lay down that where an insolvency situation results in several insolvency
proceedings, the situation is to be treated as single insolvency procedure.”
17.
Recital 7 recognises that limitations may be set on the responsibility
of the guarantee institutions of which the National Insurance Fund in the UK is one. It says:
“Those limitations must be compatible with the social objective
of the Directive and may take into account the different levels of claims.”
18.
The scope of the Directive is set out in Article 1. That provides:
“This Directive should 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).”
19.
Article 2(1) provides:
“For the purposes of this Directive an employer shall be deemed
to be in a state of insolvency where a request has been made for the opening of
collective proceedings based on insolvency of the employer as provided for
under the laws, regulations and administrative provisions of a Member State and
involving the partial or total divestment of the employer’s assets and the
appointment of a liquidator or a person performing a similar task and the
authority which is competent pursuant to the said provisions has:
(a) either decided to open the
proceedings; or
(b) 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 the proceedings.”
20.
Under Chapter 2 of the Directive headed, “Provisions Concerning
Guarantee Institutions” come Articles 3 and 4. They read as follows:
“3. Member States shall take the measures necessary to ensure
that guarantee institutions guarantee, subject to Article 4, payment of
employees’ outstanding claims resulting from contracts of employment or
employment relationships, including, where provided for by national law,
severance pay on termination of employment relationships.
The claims taken over by the guarantee institutions shall be the
outstanding pay claims relating to a period prior to and/or, as applicable,
after a given date determined by the Member States.
4(1) Member States shall have the option to limit the liability
of the guarantee institutions referred to in Article 3.
4(2) If Member States exercise the option referred to in
paragraph 1, they shall specify the length of the period for which outstanding
claims are to be met by the guarantee institution. However, this may not be
shorter than the period covering the remuneration of the last three months’ of
the employment relationship prior to and/or after the date referred to in the
second paragraph of Article 3. Member States may include this minimum period
of three months in a reference period of a duration not less than six months,
Member States having a reference period of not less than 18 months may limit
the period for which outstanding claims are met by the guarantee institution to
8 weeks. In this case, those periods which are most favourable to the employee
shall be used for the calculation of the minimum period.
4(3) Member States may set ceilings on payments made by the
guarantee institution. These ceilings must not fall below a level which is
socially compatible with the social objective this Directive.”
The Tribunal decisions
21.
Judge Foxwell was addressed on behalf of the Secretary of State to the
effect that the domestic legislation did not permit any claim such as that
advanced by Miss Pengelly. He rejected that argument for reasons he gave in
paragraph 8:
“I can see the force of Mr Soni’s argument [he was Solicitor for the Secretary of State]
as a matter of black letter law but I simply do not agree that it can have been
Parliament’s intention to leave people like the Claimant without any remedy.
It seems unjust to me. In my Judgment the definition of insolvency, and in
particularly the appropriate date, must take account of the nature of the
insolvency; namely was it one that brought the business or the part of it in
which the employee worked to an end. In this case had there been a claim on
the Secretary of State when the CVA was entered into then all the elements of a
successful claim would have been established but there was no such claim as the
company continued as a going concern for the purposes of employment. In my
Judgment it was only when the company was subject to compulsory liquidation
that it became insolvent for the purpose of Part 12 as until shortly before
this it had been able to, and did, pay the Claimants wages. Accordingly, I
find that this is when the appropriate date arose and that the liability of the
Secretary of State crystallised.”
22.
Accordingly, he made no adverse comment on, though he did not expressly
accept the argument, that upon a straightforward construction without reference
to any European Directive, the Act did not permit the payment to be made. He
interpreted the Act not in the light of the Directive, applying any expressed
interpretative obligation, but by reference to what he assumed to have been
Parliament’s intention. He deduced what the intention was by reference to his
idea of what was just. In reconciling his view of that which justice required
with the argument, which he had not expressly rejected for any reason other
than by reference to Parliament’s intention, he construed insolvency as
necessarily being a situation which brought the business or the part of it in
which the employee worked to an end. This, in my view, is problematic; it is
reading words into the statute, adding an additional requirement which is
simply not there. Moreover, if the event is one which brings the business to
an end it is difficult to see what scope there could be for the Act regarding
as an insolvency that which it does at section 183(3)(c). The whole purpose of
a CVA is to try to resuscitate what is nearly the corpse of the company by
permitting it to continue to trade in the hope that it will trade its way out
of debt and out of insolvency. It is somewhat removed from an event which
brings the business to an end; in a sense it is the opposite. Judge Foxwell
confirmed his approach not simply by reference to bringing the business to an
end but by having regard to its ability, and the fact that it exercised the
ability, to pay the Claimant’s wages. He was indicating in those words a
definition of insolvency by reference to the ability of the company to make
actual payment to the Claimant of her wages. That is to apply a definition of
insolvency which is not to be found in the Act.
23.
It corresponds to a popular view of that which is insolvency, but it has
been pointed out to me by Mr Purnell, who appears on behalf of the Secretary of
State before me that it does not sit with established case law. Thus, he
submits, there have been hard cases before the Employment Appeal Tribunal in
which it has been recognised that there cannot be a claim made on the National
Insurance Fund unless there is an insolvency as defined in the 1996 Act. He
makes reference in particular to the case of Secretary of State for Trade
and Industry v Walden, but the principle he asserts is not challenged
by Ms Macey who appears on behalf of the Claimants.
24.
He further defined the appropriate date by reference to one or other of
two events presumably coinciding upon a fair interpretation at paragraph 8
which was the date when the business was brought to an end and/or it ceased to
be able to pay the Claimants’ wages. Neither of those two dates are expressly
provided for by the wording of the section.
25.
I cannot therefore regard the reasoning by which Judge Foxwell achieved
justice as he saw it in his case as being legally correct. There being an
error of law, the question then arises whether in any event the conclusion to
which he came was in the result plainly and obviously right.
26.
In the McDonagh case the reasoning was more developed in respect of the
relationship between domestic legislation and the Directive. Judge Baron set
out his essential reasoning in paragraphs 9 to 12:
“9. It is important … to note that the type of insolvency
referred to in the Directive in respect of which protection is to be provided
by the guarantee institution is one which involves ‘the partial or total
divestment of the employer’s assets and the appointment of a liquidator’. It
does not cover any other form of insolvency.
10. The Directive does, however, provide in Article 2(4) that
the protection may be extended by Member States to other forms of insolvency.
That has been done by the United Kingdom in section 183(3) of the 1996 Act.
None of administration, receivership or a company voluntary arrangement involve
the partial or total divestment of the employer’s assets and the appointment of
a liquidator. Indeed the primary specific purpose of administration is to
rescue the company as a going concern.
11. I find that for the purposes of the Directive Briman did not
become insolvent until the winding-up order was made on 31 March 2011 but not
at any earlier date. The Directive was clearly drafted so as to protect
certain payments due to employees in the circumstances of an insolvent
liquidation. The Claimants, and the nature of the sums claimed by them,
therefore in my judgment undoubtedly fall within the protection to be afforded
by the Directive.
12. I further find that Briman first became insolvent within
section 183 of the 1996 Act on 13 April 2010 by virtue of subsection (3)(c) of
that section. If Briman had not entered into a CVA then the making of the
winding-up order would have meant that Briman first became insolvent within
section 183 on 31 March 2011 and it appears that the Secretary of State could not
then have disputed liability. There is no suggestion to the contrary by the
Secretary of State.”
27.
He concluded that he should decide the effect of the domestic
legislation by construing it so far as possible in accordance with the
provisions and purposes of the Directive. Having set out what he thought the
Directive provided, he therefore construed the domestic legislation in order to
accord with it. He took the view at paragraph 16 that for the purposes of 1996
Act the date of insolvency was the date of the CVA, but he said it was implicit
in the argument of the Secretary of State that the word “first” should be
inserted towards the end of section 185(a) so that the appropriate date became
the “date on which the employer first became insolvent”. He saw no need to
imply that word. By doing so he would have deprived the Claimants of the
protection provided for by the Directive.
28.
He explained that including insolvency procedures other than liquidation
in the 1996 Act arose as a result of an exercise of the discretion of a Member
State to provide protection wider than required by the Directive and noted (correctly,
if his premise had been correct) that:
“The widening of the protection cannot by a side wind diminish
the protection of employees afforded by the Directive. That would be the
effect of accepting the submission by the Secretary of State that there was
only one state of insolvency which commenced in April 2010. All that is
necessary in construing the domestic legislation is to treat the entering into
of the CVA and the subsequent winding-up order as different insolvency procedures
so as to provide the employees in question with the protection intended by the
Directive to provided to them. That is what I have done.”
29.
There is no dispute before me as to the general principles which apply
where domestic legislation gives effect to obligations derived from membership
of the European Union. They were set out most clearly in the speech of Lord
Oliver of Aylmerton in the case of Litster v Forth Dry Dock Co. Ltd
[1990] 1 AC 546. At 559 (d) to (f) he said this:
“The approach to the construction of primary and subordinate
legislation enacted to give effect to the United Kingdom’s obligations under
the EEC Treaty have been the subject matter of recent authority in the House,
see Pickstone v Freemans Plc [1989] AC66) and is not in doubt.
If the legislation can reasonably be construed so as to conform with those
obligations – obligations which are to be ascertained not only from the wording
of the relevant Directive but from the interpretation placed upon it by the
European Court of Justice at Luxembourg - such a purposive construction will be
applied even though, perhaps, it may involve some departure from the strict and
literal application of the words which the legislature has elected to use.”
30.
At a later stage in his speech, see paragraph 576 (f) to (g), he
demonstrated the lengths to which a court may go in order to effect such an
interpretation. By reference to the provision which fell for his consideration
he said:
“If this provision fell to be construed by reference to the ordinary
rules of construction applicable to a purely domestic statute and without
reference to Treaty obligations it would, I think, be quite impermissible to
regard it as having the same prohibitory effect as that attributed by the
European Court at Article 4 of the Directive.”
But he went to say that what was impermissible on conventional
English construction was exactly that which was required of the Court to give
effect to the interpretation under the Directive.
31.
Accordingly providing that there is room properly to do so words may be
read into or read out of a statutory provision. The limit is only that
contained by the direction that it must be possible to do so. It must not go
against “the grain of the legislation”. In accordance with the principles expressed
in Litster (sometimes known as the Marleasing
principles derived from the case which first gave its name to them) the issue
in this case may well be, and as I shall explain is, whether the domestic
legislation can properly be construed to the effect contended for by the
Claimants.
The meaning of the domestic statute
32.
Ms Macey realistically concedes that if this case fell to be determined
by reference to the domestic legislation alone, the Claimants would fail in
their claims. She maintains however that the Directive is inconsistent with a
strict interpretation of the domestic statute and that when account is taken of
the approach to European Directives which the court is obliged to take, it is not
so impossible to read the domestic statute as providing the same as the
Directive as to disqualify the court from interpreting the domestic provision
in the light of the Directive. So interpreted, it would permit the claims.
33.
In order to resolve that submission it is necessary, in my view, to
examine two things: first the meaning and proper application of the domestic
statute, second that which the Directive requires should be achieved by a Member State. A third stage in the argument will arise only if the provisions of the
Directive are inconsistent with the domestic statute or vice versa.
34.
The domestic statute in my view permits of only one occasion during what
might be called an insolvency situation on which an employer may become
insolvent. I reject the submission that it may be possible for what might be
called “serial insolvency” to occur; that is where an employer enters into a
CVA (it is then by statute insolvent, section 183(3)(c)) and without having
relieved itself of the insolvency then enters liquidation later. The state of
liquidation is not, in my view, upon a proper reading of that statute
unaffected by European considerations, a different and separate insolvency. It
would have been, had there been no CVA, but if the issue is when the company
became insolvent (which is the relevant issue for present purposes) then it
permits only of one answer: it became insolvent in such a chain of events when
the CVA was approved.
35.
As Mr Purnell points out in his skeleton argument there are a number of
reasons for reaching this conclusion. First the appropriate date under section
185 is defined by reference to the date upon which the employer became
insolvent; this is past tense; the language does not permit the option of
alternatives. Secondly, it is incoherent to suggest that a company which is insolvent
by statute becomes insolvent again or in addition or in any additional way when
wound up. The underlying state of insolvency has not changed. Mr Purnell
submits, and I accept, that the use of the present perfect tense in section 183
is indicative. It expresses a past event, albeit with continuing
consequences. That past event is a single event.
36.
It makes no sense, in my view, to interpret each occasion upon which an
employer might become insolvent, provided for by section 183(3), as being a separate
occasion, each of which would constitute its own appropriate date. That would
mean that an employee of a company subject to a CVA would on that occasion be
able to claim any arrears of pay and holiday pay then due. If the company then
subsequently became insolvent under one of the other definitions provided for
by section 183(3), he would upon this approach be able to claim again. This
makes no sense in the context of a minimum guarantee provided to an employee in
the event of the insolvency of his employer.
37.
It seems to me next that the appropriate date is statutorily a reference
to a single date. The purpose of setting out a date is to provide a reference
point. It makes no sense that the reference point should change, because that
would deprive the provision of the certainty and predictability which is the
function of a reference point and which is an important aspect of justice.
Accordingly, untrammelled by any consideration deriving from the Directive, I
would hold that the domestic legislation provides that if a company enters into
a CVA and is subsequently liquidated the appropriate date under section 185 is,
and is only, the date upon which the CVA is approved.
38.
That conclusion, though not, I think, the whole of the reasoning is not
disputed by Ms Macey, whose argument, as I say, depends upon giving effect to
European obligations as modifying the interpretation which I have just
indicated.
The Directive
39.
Mr Purnell submits that contrary to that which Judge Baron thought, the
Directive does not provide for a type of insolvency which is different from
various types provided for by the Act. The Judge’s view was essentially that
the Directive did not recognise a CVA; that it focused only upon the winding-up
and liquidation of a company. Therefore, so understood, the obligation under
the Directive was to guarantee the payment of contractual sums due upon the
date of that event. If his premise was right, then his conclusion would follow
and the court would have to consider how best (and if) domestic legislation could
be interpreted to accord with it. But Mr Purnell argued that his premise was
wrong.
40.
The argument proceeds in this way: the Directive was not the first
incarnation of an obligation to provide protection for employees in the event
of their employer’s insolvency. By Directive 90/987/EEC the Council earlier provided,
by Article 3, that:
“1. Member States shall take the measures necessary to ensure
that guarantee institutions guarantee subject to Article 4 payment of
employees’ outstanding claims resulting from contracts of employment or
employment relationships and relating to pay for the period prior to a given
date.
2. At the choice of the Member States, the date referred to in
paragraph 1 shall be - either that at the onset of the employer’s insolvency - or
that of the notice of dismissal issued to the employee concerned on account of
the employer’s insolvency - or that of the onset of the employers insolvency or
that on which the contract of employment or the employment relationship with
the employee concerned was discontinued on account of the employer’s
insolvency.”
41.
Those provisions were changed to become the provisions which I have
recited above in respect of the Directive of 2008. In the interim, Council Regulation
1346 of 29 May 2000 on insolvency proceedings was made. Mr Purnell took me to travaux
préparatoires in respect of the new and revised version of the Directive. The
Commission’s proposal for a Directive amending Directive 80/987 proposed (see
page 3) a definition of insolvency based upon that used in the Council Regulation
on insolvency procedures. The definition in the Council Regulation on
insolvency proceedings begins in Chapter 1, Article 1 with its scope, providing:
“This Regulation shall apply to collective insolvency
proceedings which entail the partial or total divestment of a debtor and the
appointment of a liquidator.”
Article 2 provides definitions. For the purpose of the
Regulation:
“‘liquidator’ shall mean any person or body whose function is to
administer or liquidate assets of which the debtor has been divested or to
supervise the administration of his affairs. Those persons or bodies are
listed in Annex C.”
42.
It defined insolvency proceedings as meaning the collective proceedings
referred to Article 1(1) and said these proceedings were listed in Annexe A. Annexe
A lists state by state the proceedings referred to as insolvency proceedings.
For the United Kingdom five different situations are set out. Amongst them are
winding-up by, or subject to the supervision of, the court, a creditors’
voluntary winding-up with confirmation by the court, administration, and
voluntary arrangements under insolvency legislation.
43.
Accordingly, within the meaning of the Regulation the approval of a CVA
is an insolvency proceeding.
44.
Annexe C listed those who are in the position of liquidators. It does
not confine itself to “liquidator”. It adds “supervisor of a voluntary
arrangement” (it also adds administrator, official receiver, trustee and
judicial factor). The supervisor of a voluntary arrangement is a reference to
he who supervises a CVA.
45.
Accordingly, for the revision of the Directive to adopt the definition
of insolvency in the Insolvency Regulation would be for it to apply not simply
to “liquidations” but, in UK terms, to CVAs. The proposal by the Commission
set out at paragraph 4 what it saw as the need to broaden the concept of
insolvency. It argued that the concept had to be redefined, given recent
developments in insolvency law in the Member States, and noted that the social
aim of the Directive was to safeguard employees’ outstanding pay claims in the
event of the employer becoming insolvent; that aim could be jeopardised if it
were permissible to remove from the scope of that protection the outstanding
claims of employees whose insolvent employers were not subject to collective
proceedings if those proceedings were too closely defined as liquidation
proceedings.
46.
At page 5 it was even clearer; the Commission proposed the definition in
Article 1(1) of the Regulation be used. It covered more than liquidation
proceedings.
47.
Of importance for present purposes was the approach which the Commission
took to the time periods in respect of which the guarantee was to operate. It
noted that Member States should retain the ability to impose a time limit but
said this:
“In its current form the Directive refers only to pay due before
a reference date. However, practice in the Member States has shown that in
some situations the guarantee should also be able to cover claims arising after
that date, for example, once it has been initiated, the insolvency procedure
itself consists of various phases; the business operation of a firm may be
continued for a time and wages are still payable for the period concerned.”
48.
In other words, the Commission recognised that that if there was a date by
reference to which claims were to be made such that only claims for periods
before that date could be entertained, claims arising afterwards would fall
outside the scope of protection. The Commission therefore plainly contemplated
the possibility that a Member State, if it chose to retain the fixed date as it
had been in the earlier Directive, might leave unprotected claims by employees arising
after that date. When the Directive was made it did not provide that such
claims must be covered. It provided, as the words set out above
demonstrate, that it was open to the state to fix the date; see Article 3,
second paragraph.
49.
The United Kingdom, by section 185 accepted the invitation to fix a
period prior to a given date. It has not accepted the invitation to adopt a
period after the given date in respect of arrears of pay and holiday pay. The
possibility that that would expose employees to disadvantage was plainly
contemplated by the Commission. It did not recommend any specific provision in
the Directive to deal with it; the Directive leaves it to the Member State. It does not require that that situation be rectified.
50.
Accordingly, submits Mr Purnell, the Directive, as made, did not relate
only to liquidation proceedings as Judge Baron thought; his paragraph 10 was
wrong. The matters he referred to there were all matters which were expressly
envisaged by the Insolvency Regulation and hence by the 2008 Directive as being
occasions when there was an insolvency. It is plain from the recitals to the
Directive themselves that the intention was to widen the definition of
insolvency; see recital 4. The premise for Judge Baron’s conclusion being
shown to be wrong, the conclusion must also be in error.
51.
In her submissions in opposition Ms Macey argued that despite Mr
Purnell’s suggestion that there was no tension between the Directive and the
domestic legislation the purpose of the Directive was plain; it was to
guarantee certain payments. There was no exception made in European law for
circumstances such as those of these Claimants. It would be strange that
legislation supposed to protect employees when their employer became insolvent
would have the result that employees in these circumstances who, through no
fault of their own, worked without realising their employer was technically
insolvent and being under a CVA that they would have no recourse to the
National Insurance Fund. She argued that the purpose of the Directive was so
clear that the effect of Judge Foxwell and Judge Baron’s reasoning was correct,
even if details of the way in which they had reached their conclusions could
now be shown to be in error. It was possible, she submitted, to interpret the Employment
Rights Act in a manner consistent with the Directive, because there was no
provision which said that a company might not become insolvent more than once,
because a CVA and a winding-up were different types of insolvency, and the
status of a company does change in law when moving from one to the other; that,
as Judge Baron observed, the argument relied upon by the Secretary of State
might involve inserting the word “first” into section 185(a) of the 1996 Act,
and the use of the term “appropriate date” in the singular did not detract from
that upon well recognised principles of construction.
Discussion
52.
Central to Ms Macey’s argument is that there can be more than one form
of insolvency and that each form would separately qualify for a guarantee
payment. In my view, for the reasons I have already given, this is an
untenable construction of the domestic legislation. But further it does not
seem to me to accord with the European Directive, as Mr Purnell has, in my
view, correctly shown me has evolved by reference to the Insolvency
Regulation. I accept Mr Purnell’s submission that the Directive provides for
choices to be made by Member States. They have to be made within the limits
permissible within the Directive. It was conceded by Ms Macey that limits
could be placed upon a claim made under the Directive: though the Directive
says broadly that it applies to employees’ claims arising from contracts of
employment or employment relationships that does not mean, read as a whole,
that every claim to the full extent of that claim must necessarily be
accepted. It is open, again within limits, to a Member State to impose limits
upon the liability of guarantee institutions. When I asked Ms Macey if it was
open within the scope of the Directive for a Member State to identify different
types of debt and apply different limitations to each she said that it was.
Accordingly, her submission is that it is open to a Member State to impose different time limits and make provision for different categories with
different financial limits so far as different debts were concerned.
53.
Thus, the provision within the domestic legislation providing for
different classes of debt is not, on her submission, inconsistent with the
Directive. Once those different provisions have been identified it is not
inherently contrary to the purpose of the Directive for there to be different time
limits and limitations placed on each.
54.
What has concerned me most in this case is the unfairness of the
position in which each of these Claimants was placed. Essential to that is
that they simply did not know that their employer was insolvent at a time which
might have been relevant. The clearest example of this is Miss Pengelly. Ms
Macey’s submissions are that the conclusion is unfair to her. A response by Mr
Purnell, relying in part upon the very old case now of Pollard v Teako
Swiss [1967] 2 ITR 357, was to the essential effect that some
provisions do have unfair results but nonetheless must be applied. This is a
harsh doctrine. But in examining here what the domestic statute means it must
be interpreted in the same way, with the same meaning, whatever the situation
is to which it applies.
55.
The general purpose of the Directive in 2008 was to extend protection.
It did so by recognising other circumstances than liquidation, such as a CVA, as
being circumstances in which guarantee payments would be appropriate. That
general protection is not affected by adverse results in individual cases
which, as demonstrated above, were at least recognised as possible by the
Commission.
56.
The domestic implementation of those provisions cannot, in my view, be
shown to be contrary to the Directive upon the interpretation which Mr Purnell
advances and I accept. The domestic legislature has not determined to adopt
the invitation held out in Article 3, second paragraph, of the Directive to
allow claims for arrears of pay and holiday pay as applicable after a given
date. To the contrary, Parliament apparently took a deliberate decision to
treat the debts which arrears of pay and holiday pay constituted separately from
other debts arising on insolvency. Again there is a legislative history to
this. The predecessor to the 1996 Act, Mr Purnell has shown me, was the Employment
Protection Consolidation Act of 1978. At section 122 the relevant date in
relation to a debt was defined as the date on which the employer became
insolvent or the date of the termination of the employees’ employment,
whichever was later. As the 1996 Act shows those provisions were changed. They
were changed as a consequential amendment made by the Insolvency Act of
1986. Therefore Parliament quite deliberately decided that those debts set out
at section 185(1) (a) to (e) would be treated in different ways. Arrears of
pay and holiday pay would be payable only in respect of a time before the date
on which the employer became insolvent. Other debts would be payable
afterwards. A period of notice pay, for instance, to which each of these
Claimants was entitled was not excluded from guarantee.
57.
It follows that each of these Claimants was guaranteed a payment in
respect of the events which occurred. The payments were not as great as those
which would have applied had their employers not entered into a CVA at an
earlier date, but it is not that the employees were not covered by a guarantee,
it is merely that the guarantee did not extend as far as arrears of pay and
holiday pay.
58.
Accordingly, as it seems to me, the proper construction of sections 182
and following Part XII of the Employment Rights Act is such that having
proper regard to the interpretative obligation arising in respect of the
Directive there is one insolvency situation and not two; the date is a date
which is fixed and certain by reference where there is a CVA to the date upon
which the CVA is approved, and it was open to the state to pass legislation
providing for limitations upon the ability to claim in respect of it.
Parliamentary materials
59.
I have reached those conclusions without the need to refer to
Parliamentary materials. At the outset of the argument I was asked by Mr
Purnell to consider whether I would permit reference to be made to Hansard
to the debates which led to the amendment of the Employment Protection
Consolidation Act 1978 during the course of the passage of the Insolvency
Act as it became. He submitted in a skeleton argument, served only
yesterday, that it was legitimate for a court to have regard to those materials
despite the restrictions suggested in Pepper v Hart. He did so
by reference to the decision of Clark J, as he was, in Three Rivers
District Council & Ors v Bank of England No. 2 [1996] 2 All ER 363,
especially at 366 (d) to (f) and the words of Lord Hope in his speech at
paragraph 118 in Wilson v First County Trust Ltd No.2 [2004] 1 AC 816.
60.
In the event, when Ms Macey wished to refer to the materials herself in
the course of argument, though objecting generally to their admission, I
considered them de bene esse. I have great reservations about examining
Parliamentary material in order to determine the intention which lay behind the
domestic statute in order to see whether it can be interpreted in order to
achieve that which the Directive would seek to require it to do. The relevant purpose
would appear to me to be that of the Directive rather than that of Parliament.
But insofar as it goes it is plain that there is substantial support for Mr
Purnell’s argument. If I were entitled to have regard to the material I would
have found additional support for the view to which I have come. Lord Cameron
of Lochbroom explained that the reason for separating out arrears of payment of
holiday pay would be that experience had suggested that receivers and
liquidators had been able to pass on to the Redundancy Fund liabilities which
had accrued after the date of their appointment and in that way had been able
to use the Redundancy Fund to finance or underwrite their decision to continue
trading. It was to prevent that abuse that the amendment was introduced.
61.
I need say no more about that, which I have included only for the sake
of completeness, given that this is the first occasion upon which this
particular legal question has come before a court.
62.
In conclusion I have considerable sympathy with the view to which both
Employment Judges came. There is, of course, the feeling that each of the
Claimants has had a result which many might consider unfair. Judge Baron did
not have the advantage of any representative before him from the Secretary of
State. No argument was developed before him showing him that the basis upon
which he made his decision was wrong. He could not on that basis, nor could
Judge Foxwell on the basis he gave, have come to the conclusion he did. In my
view the legislation is not susceptible to the interpretation which it would
have to have if it were to accord with Ms Macey’s pleas to pay regard to the
general purpose behind it. Essentially her argument had to be that the statute
left open the possibility of an employer becoming insolvent again, though
already insolvent, and that each insolvency was a fresh insolvency for the
purpose of the application of the Directive. But in particular, the words to
which Mr Purnell took me of Advocate General Cosmas in Regeling v Bestuur
van de Bedrijfvereniging voor de Metaalnijverheid (C-125/97)
demonstrated that there were limits to claims which would be guaranteed and was
to the effect that of necessity there was one insolvency.
63.
For those reasons the appeals must be allowed, and findings substituted
that there is no obligation on the Secretary of State to pay through the
National Insurance Fund the claims of these Claimants in this situation.
