Ruling sparks claims scare

The shock House of Lords ruling on Paramount, which makes administrators and receivers liable to claims from redundant company staff, will lead to increased litigation worth hundreds of millions of pounds, say top lawyers and accountants. There will also be more dissatisfied creditors, and possible bankruptcy for some insolvency practitioners (IPs).

But the only people likely to benefit would be redundant 'fat cat' company directors on rolling contracts, they say. These directors, who were unable to save their own ailing companies, automatically jump ahead of their crashed firms' creditors in current insolvencies. Where insolvencies have completed and assets divided, these directors may be seeking damages between u1 million to u6 million.

“There will be a lot of blood on the wall,” says Chris Hanson, insolvency partner at Lovell White Durrant, who predicts growing litigation. “The receivers will want to be trying to get assets back – that will be problematic but certainly worth a try. There could be lots of claims, particularly from directors who'll fight like hell.”

The Paramount ruling makes receivers and administrators liable for pay in lieu of notice and other liabilities under employment contracts for employees kept on for more than 14 days following their company's insolvency. The ruling applies to cases initiated between 1986, when the Insolvency Act came into force, and March 1994, when emergency legislation put a stop on such liabilities arising in new insolvency cases.

Now, claims would become expenses in on-going receiverships and administrations, and rank before any other creditors. Receivers in completed insolvency cases, usually appointed by debenture holders, will become personally liable for claims, although the court-appointed administrators will not.

The Society for Practitioners of Insolvency (SPI) calculates up to half a million employees from 20,000 receiverships and administrations will be affected and entitled to claims. SPI says one per cent or less of the total will have “substantial” claims. That will include “several handfuls” between u1-6 million.

“We think total liabilities for the insolvency profession will be in hundreds of millions of pounds, rather than the several billions already quoted,” says a SPI spokesman. “It may unfairly penalise a number of practitioners, probably quite significantly.”

Hanson predicts worse: “You could have a situation where the entire insolvency practice could be bankrupt.”

SPI chair Ian Bradbery says SPI is disappointed with the ruling, “which flies in the face of the amending legislation passed last year and which showed that the Government recognised the wording in the 1986 Insolvency Act lacked clarity and created problems”.

The problem arises because IPs have accepted as fact the 1987 Specialised Mouldings ruling. There, Mr Justice Harman interpreted the act as allowing IPs to avoid such liabilities if they wrote to employees in the first 14 days of the appointment to say they did not adopt the contracts. The Lords ruling throws out this interpretation.

Paramount administrator and Touche Ross partner John Powdrill says: “Many of the businesses and jobs saved over the last few years would not have been saved if we had thought for one moment that letters refusing to accept personal liability for a company's entire payroll were not effective.”

The Lords said they came to their ruling with some regret. Lord Browne-Wilkinson recognised the danger to the 'rescue culture' when he said “it is unlikely that Parliament would have intended to produce a regime as to employees' rights which renders any attempt at such rescue either extremely hazardous or impossible.”

The one hoped-for solution is that the Government will apply retrospective legislation to amend the Insolvency Act sections, universally regarded as badly drafted. SPI says the Government already has several such precedents.

Allen & Overy partner Gordon Stewart, the only elected lawyer to the SPI council who advised it on the Paramount appeal, says retrospection can be justified in the circumstances.