Secretary of State for Business, Innovation & Skills v McDonagh & Anor UKEAT/0287/12/LA; Secretary of State for Business, Innovation & Skills v Pengelly & Anor UKEAT/0312/12/LA

Appeal against the rulings of two EJ’s that the claimants could claim arrears of pay and holiday from the National Insurance Fund following the insolvency of their employers. Appeal allowed.

This was an appeal by the Secretary of State for Business Innovation & Skills against decisions in two different cases which ruled that the claimant could claim from the National Insurance Fund. In the first case the claimant joined her employer but did not know at the time she joined that the company was subject to a CVA. In the second case, the claimants' employer entered into a CVA but none of the employees were aware of this and they were still being paid. Both employers were subsequently wound up, and the claimants made claims of arrears and unpaid holiday pay to the National Insurance Fund. Those claims were refused, the Fund saying that the claimants were not entitled because, although none had known it at the time, the companies were already insolvent. Each company had become insolvent on the date the CVA was approved, this was the appropriate date in respect of arrears and holiday pay and accordingly, because the claimants were owed nothing at that date, they were not entitled, even though arrears and holiday pay had built up after this date. The ET in both cases ruled that they were entitled. The first EJ interpreted the ERA by reference to what he assumed to have been Parliament's intention. The second EJ said that, for the purposes of the EC Directive 2008/94, the company became insolvent on the date of the final winding up of the company, not the date the CVA was approved. BIS appealed.

The EAT allowed the appeal. The first Judge had introduced concepts which were not present in Part XII of the ERA 96; the second relied on a view of the meaning of the EC Directive 2008/94 which was shown by the appellant to be mistaken.  The parties agreed that unless modified by reference to the Directive the domestic legislation precluded the claims; the EAT held that the Directive did not require any such modification, nor any different interpretation. 

Appeal No. UKEAT/0287/12/LA, UKEAT/0312/12/LA



At the Tribunal

On 14 February 2013









Transcript of Proceedings



For the Secretary of State for BIS

Instructed by:
Treasury Solicitors Department
Employment Group
One Kemble Street

For Miss J Pengelly and Mr M V McDonagh & Others
MS ANNA MACEY (of Counsel)

Free Representation Unit

For Briman DBS Ltd (In Liquidation)
No Representations

For Woolston Manor Golf & Country Club Ltd (the Company)
No Representations



Two separate Employment Tribunals decided that Claimants who had been employed (without knowing it) by a company which had entered a CVA were entitled to claim arrears of pay and holiday pay from the National Insurance Fund when subsequently the company went into liquidation. In each case, the reasoning was flawed: the first Judge introduced concepts which were not present in Part XII of the ERA 96; the second relied on a view of the meaning of the EC Directive 2008/94 which was shown by the Appellant to be mistaken. The parties agreed that unless modified by reference to the Directive the domestic legislation precluded the claims; the EAT held that the Directive did not require any such modification, nor any different interpretation.

  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.
  1. 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.
  1. 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.
  1. 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.
  1. 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**
  1. 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."

  1. 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.
  1. 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."

  1. 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.
  1. The second criterion was that the employee's employment had been terminated; that was so in the case of each of the 12 Claimants.
  1. 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."

  1. 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.
  1. 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."

  1. 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.
  1. 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.
  1. 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."

  1. 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."

  1. 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)."

  1. 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."

  1. 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**
  1. 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."

  1. 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.
  1. 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.
  1. 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.
  1. 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.
  1. 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."

  1. 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.
  1. 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."

  1. 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."

  1. 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.

  1. 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**
  1. 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.
  1. 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.
  1. 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.
  1. 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.
  1. 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.
  1. 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.
  1. 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**
  1. 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.
  1. 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."

  1. 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."

  1. 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.
  1. Accordingly, within the meaning of the Regulation the approval of a CVA is an insolvency proceeding.
  1. 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.
  1. 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.
  1. 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.
  1. 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."

  1. 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.
  1. 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.
  1. 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.
  1. 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.
  1. 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.
  1. 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.
  1. 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.
  1. 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.
  1. 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.
  1. 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.
  1. 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**
  1. 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.
  1. 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.
  1. 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.
  1. 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.
  1. 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.

Published: 03/05/2013 15:14

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