View from City Road: Rescue culture goes to the wall

Click to follow
The Independent Online
It is bizarre indeed that just as the Government is considering improvements to insolvency legislation to ease company rescues, the Court of Appeal last week should lob a bombshell into the proceedings that wipes out the basis for reviving troubled businesses.

The arcane legal arguments surrounding Paramount Airways, an American airline with a British subsidiary that went into administration in 1990, have two potentially disastrous implications for receivers and for jobs.

The judgment will encourage receivers and administrators to sack the entire workforce on the day they are appointed. Hundreds of current cases are at risk.

It will also encourage thousands of former employees to consider making claims against receivers for redundancy payments, going back as far as 1988. Since receivers are covered by professional indemnity insurance, they represent a tempting target - and yet another claim on the Lloyd's reinsurance market.

It all stems from the administration order, Britain's answer to the American Chapter 11, which the UK introduced in 1986 to rescue cash-strapped companies.

Last week's judgment centres on the workforce's contracts of employment. Lord Justice Dillon ruled that administrators' letters disclaiming contracts of employment were no use, and he appears to have extended the ruling to the far more numerous receiverships.

In the blink of an eye, the rescue culture that the 1986 legislation was supposed to introduce has been killed off.

The Government, the Bank of England, the clearing banks and the receivers themselves are all deeply concerned by this unexpected upset. Representatives from all sides have been scrambling to put together a coherent response since the judgment was handed down last week.

One way ahead would be for the banks and accountants to bury their differences and fund a further appeal, this time to the House of Lords. But there are no guarantees this would succeed.

Receivers all over the country are having to adjust to this deep uncertainty about their own personal liabilities. Businesses and jobs are at risk today.

The Government should immediately declare its commitment to reversing this appeal decision, by including it in changes to the planned insolvency legislation. With a firm promise of action from ministers, it cannot be beyond the wit of the financial community to agree an interim arrangement.