The Court of Appeal ruling in the Paramount Airways case barely two weeks ago would have made it much more likely that a struggling company's workforce would be sacked within a fortnight of administrators being brought in.
It would have made the rescue of companies such as Leyland Daf impossible, and is currently causing problems for receivers at Ferranti and Swan Hunter, who are trying to keep the businesses alive. The judgment turned on whether administrators have to take over the employment contracts of workers in the companies if those workers are kept on for more than 14 days.
The judges shocked insolvency practitioners by ruling that if the employees were eventually dismissed, pay in lieu of notice, redundancy payments and unfair dismissal compensation would all rank first in the queue for payouts by the administrator.
The only way not to risk becoming personally liable for potentially vast costs was to fire everyone within the two weeks. Former directors of Olympia & York, which built Canary Wharf in the London Docklands, have lodged claims against O&Y's administrators for pounds 12m.
Michael Heseltine, President of the Board of Trade, told MPs in a Commons statement: 'Administrators will feel that they have little alternative but to dismiss the workforce within the first 14 days and either close down the business or look to new terms of contract. . . . companies considering administration may conclude that it does not offer a rescue route and simply move to liquidation, termination of the business, dismissal of employees and a break-up sale of the assets which will not be in the interests of anybody.' In nearly half of the 3,000 receiverships each year, all or part of the business is saved. 'This practice will be placed in jeopardy,' Mr Heseltine said.
The new legislation, effective in relation to any employment contract adopted from midnight yesterday, will mean 'business as usual' for administrators, administrative receivers and, in Scotland, receivers. Following intensive work by DTI lawyers over the weekend, a Bill will be published within the next fortnight and pushed, with all-party support, through all its stages in 24 hours.
There may also be an appeal to the House of Lords against the judgment.
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