Paramount was forced into administration in August 1989. The administrators sent out letters promising that employees' salaries would still be paid - but adding at the end, in a deliberate form of words, that they did not adopt or assume liability for their contracts of employment. Sadly, the rescue failed and the firm's entire workforce was later laid off. The two then sued for holiday pay and salary in lieu of notice.
Upholding a lower judge, the Court of Appeal said last month that the formula the administrators had relied on was a dud. No matter what form of words they put in correspondence, the administrators had implicitly adopted the workers' employment contracts by continuing to pay them.
That judgment opened the way for people sacked from thousands of busted companies to sue for redundancy or holiday pay. More ominously, it sent such a shockwave around the offices of receivers and administrators that, until yesterday, many were making a policy of sacking all the workers of insolvent companies in order to avoid putting themselves at legal risk. This may have been too hasty. By being precise about agreements with workers at bankrupt firms, both receivers and administrators might possibly have found a way to avoid liability without wholesale sackings. But these are uncharted legal waters.
But given the panic caused by the judgment, it was wise of Michael Heseltine yesterday to announce his intention to legislate. With effect from yesterday, he said, an amendment to the law will allow administrators to take responsibility only for workers' salaries and pensions, and receivers to avoid personal liability when they keep workers on. Workers may still lose their jobs when a company goes bust, therefore; but there will no longer be a perverse incentive for creditors and administrators to close down a business that could be saved.
Mr Heseltine's action will do nothing to help the specialists who may now face millions of pounds in legal claims. But it will help to remind the wider public that the rescue procedures of receivership and administration established under the 1986 Insolvency Act are to companies what intensive care is to human beings. They may often fail. They usually bring with them a great deal of pain. But they mark the beginning of a new lease of life.Reuse content