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From: Insolvency Lawyers Association [mailto:ila@ilauk.com]
Sent: 20 May 2010 10:17
To: Andrew Cawkwell
Subject: ILA Technical Bulletin: Nortel administration employee claims: to prove or not to prove
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Nortel administration employee claims: to prove or not to prove
Bulletin No 271
Case:
In the matter of Nortel Networks UK Ltd (In Administration); (1) Unite The Union (2) McCartney & Others v Nortel Networks UK Ltd (In Administration) [2010] EWHC 826 (Ch) (Mr Justice Norris)Synopsis:
Norris J decided that various employee-related claims of a statutory nature for unfair dismissal and discrimination, and of a contractual nature for enhanced redundancy terms were capable of proof in administration. Further, the claims were monetary claims and as such they were not sufficiently exceptional to warrant being given permission for their continuation and the lifting of the moratorium.Topics Covered: Moratorium; Employment claims: protective awards, redundancy selection; unfair dismissal
The Facts
In January 2009, Nortel Networks Limited (“Nortel”) and 18 associated companies operating in separate European jurisdictions but with their COMI in the UK went into administration pursuant to a court order, which was subsequently extended in January 2010 for a further 24 months. Many employees were retained to maintain the business and assist with the reorganisation. However, there were also redundancies. Approximately 240 of the redundant former employees from across EU jurisdictions wished to bring employment related claims. This case concerns 37 of them, who were formerly employed at Nortel’s premises in Monkstown, Newtonabbey, Northern Ireland.
The administrators refused consent to bring the employment claims, but the Claimants commenced their claims anyway in the Industrial Tribunal in Northern Ireland without the consent of the administrators or the Court. In October 2009, Unite (the union) and the 37 Claimants issued this application in England for permission to continue with the proceedings before the Tribunal.
The claims included:
- Protective awards: for alleged breach of Nortel’s statutory duty to consult union or employee representatives about the proposed redundancies. If the Tribunal exercises its discretion to make a protective award, then the Northern Irish Department of Employment and Learning will guarantee some of the payment, making the payment direct to the employees, and acquiring the right to make a subrogated claim in the administration.
- Unfair dismissal claims: for an alleged failure to follow a fair procedure in taking the decision to dismiss the Claimants. Any award of compensation for unfair dismissal would be calculated by reference to statutory guidance, and as such the unfair dismissal claims are statutory claims that arise out of circumstances occurring after the date of the administration.
- Breach of contract claims: for alleged breach of various contractual agreements, including for enhanced redundancy pay and pay in lieu of notice. These are claims at common law in respect of contracts entered into before the administration but where the breach occurred after the administration (when for example the contract was terminated without adequate notice).
- Expenses Claims: for unpaid work related expenses dating back to 2007. This is a common law claim for an action that had accrued before the administration.
- Discrimination claims: for alleged discrimination in the redundancy selection process (including on grounds of age, disability, race, political opinion). These claims are in respect of a statutory cause of action where the duty was owed before the administration but the breach occurred after the date of the administration.
The administrators gave consent for the pursuit of the protective award claims. If the protective award claims were successful (and they are being defended), then the Claimants would be entitled to apply to the Government for immediate payment of the statutory element of any award (thereby enabling the employees to receive money relatively quickly but without immediate recourse to assets in the administration). No consent was given in respect of the continuation of the other claims.
The Decision
The correct test
The Judge held that the relevant test for the four other claims was that set out by Patten J in AES Barry Ltd v TXU Europe Energy [2004]:
"…it will be in exceptional cases that the Court gives a creditor whose claim is simply a monetary one, a right by the taking of proceedings to override and pre-empt that statutory machinery."The question for the court to decide was whether the claims of Unite and the employees were exceptional.
Exceptional or not?
The Claimants submitted that the exceptional case test was satisfied because the employment claims sought to be advanced were not provable in a future liquidation or in the current administration and that it was necessary to obtain permission to bring them and to pursue them to judgment before any provable claim could arise.
The basis of the Claimants’ argument was that their claims did not fall within the definition of “debt” contained in r.13.12 IA 1986 and so could not be proved in the administration (r.12.3(1) IA 1986). Next they argued that the moratorium meant that the Claimants presently had no claims at all. If the moratorium were lifted, then there could be a claim, but it would only be a provable debt once there was a judgment, because for all but one of the types of claims in question, the existence of a debt depended upon the exercise of the Court’s discretion to allow the claim and grant the statutory awards. Therefore, they argued, although there could not be a claim in the administration even if judgment was given (because the exercise of the Court’s discretion giving rise to the claim would have occurred after the commencement of the administration), there could be a claim in a subsequent liquidation.
The administrators countered that the likely return to unsecured creditors (including the Claimants) was such that the Court plainly ought not to give permission, but should the point arise, the administrators intended to recognise the surviving employees’ claims as capable of proof and so pursuing the claims to judgment was unnecessary. However, in order to assist the Court by opposing argument, the administrators argued that the employees’ claims were in law to be recognised in the administration and would be provable in a liquidation (judgment or not).
The administrators asserted that permission should not be given because if it were, permission would have to be extended to all 240 employee claims, and responding to all those claims individually would hinder the progress of the administration, absorb substantial resources and incur significant litigation costs well in excess of the cost of dealing with the same claims by the process of proof in the administration. In addition, as there was unlikely to be any subsequent liquidation, pursuing the claims would be legally without consequence. The Judge agreed with these arguments to a degree but did not find them compelling, in part because they did not take account of the significance of the claims for the Claimants.
Not exceptional
The Judge held that the Claimants’ argument was wrong. It was not true that because of the moratorium the Claimants presently had no claims at all. Para 43(6) of Sched B1 does not address the existence of the claims but the manner of their enforcement. The effect of the moratorium is that any rights to initiate any form of process to recover under a claim are simply suspended. The underlying claims do not disappear. The Claimants would still have “claims” even if permission was refused, and would have had “claims” even if actions had not been commenced. Their position is the same as that of any trade creditor or unsecured lender.
The Judge also rejected the argument that a claim required a judgment to render it provable. The Judge considered that each of the present claims was either a debt or a liability to which the Company was subject at the date of administration, or a debt or liability to which it become subject after the date of the administration by reason of an obligation incurred before that date. Apart from the expenses claim which was an accrued claim at the date of the administration, Norris J decided that all the other claims (unfair dismissal, discrimination, breach of contract) were contingent liabilities to which Nortel was subject at the date of the administration by reason of a statutory or contractual obligation incurred before that date.
In doing so, Norris J distinguished a bankruptcy line of cases: Glenister v Rowe [2000] Ch 76, which held that a liability for a costs order was created not under the relevant statute, but by virtue of the costs order itself, because of the discretionary nature of the court’s power. Prior to the costs order itself, there was no liability to pay, contingent or otherwise. So if the costs order is not made before the bankruptcy, it will not give rise to a provable debt. Similar bankruptcy-related decisions can be found in Steele v Birmingham City Council [2005] EWCA Civ 1824 and Casson v Law Society [2009] EWHC 1943 (Admin) (See Bulletin #225: www.ilauk.org/docs/bulletins/bull225.pdf ).
By contrast, in Day v Haine [2008] EWCA Civ 626 (see Bulletin #157: www.ilauk.org/docs/bulletins/bull157.pdf ), the Court of Appeal held that a protective award was a contingent liability at the commencement of the insolvency process, both because the liability stemmed from a pre-liquidation breach of obligation imposed by statute and because it was unreal to describe the award as depending on the exercise of a judicial discretion, in the sense that if the criteria were satisfied, the court had no discretion whether to make an award or not.
Applying this conclusion to Nortel, Nortel’s liability in respect of the claims under consideration stemmed not from the exercise of any Court’s discretion but from the relevant contractual and statutory obligations to which it was subject by virtue of its status as an employer and the contracts it entered into before the administration.
In addition, the Judge considered that the court should incline towards restricting the category of claims that are not provable. In the Glenister, Steele and Casson cases, the consequence of the claims not being provable in bankruptcy was that the claims could still be pursued against the discharged bankrupt as a post-bankruptcy debt. But as a company does not survive its liquidation, if a claim is not provable in the liquidation it is completely irrecoverable. This outcome is not desirable, especially in relation to employees.
Having rejected all the Claimants’ arguments and decided that the claims were capable of proof in an administration (to the extent any distribution were made) or any subsequent liquidation, Norris J concluded that the claims were not “exceptional” so as to warrant the grant of permission for their continuation and the lifting of the moratorium.
Comment
This judgment is consistent with the reasoning in Day v Haine. It confirms that employee related claims for unfair dismissal (where the employee is not seeking reinstatement, which is usually the case in insolvencies), discrimination and breach of employment contractual terms are capable of proof in administration and liquidation and that claims of this nature, being purely monetary claims, are not sufficiently exceptional to warrant lifting the moratorium. They can fairly be dealt with as part of the ordinary proof of claim process in the insolvency.
IPs and their lawyers will welcome the outcome of the case because it promotes the purpose of the administration for the benefit of all creditors by keeping down the costs of dealing with claims.
The judgment is also notable because throughout, the parties both ran arguments counter-intuitive to their interests. Demonstrating a glimmer of a sense of irony, the Judge remarked that the parties’ positions resembled a “Wonderland in which [..] Unite the union argued vigorously that its members had no rights and that the Joint Administrators could not be made to pay them anything; whereas the Joint Administrators assumed the role of arguing that they were obliged to recognise the employees’ claims”.
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