The government body has begun criminal proceedings against three directors at City Link, the courier company that collapsed last Christmas Day, and the chief executive of Sports Direct over the failure of its fashion retailer USC in January, reports The Times.
All four executives have been charged with failing to give sufficient notice to the business secretary about plans to lay off staff.
In the case of City Link, more than 3,000 employees discovered that they would lose their jobs after the company called in administrators. About 200 USC warehouse staff in Scotland were given only 15 minutes’ notice of their redundancies.
It is the first time since the 1992 Trade Union and Labour Relations (Consolidation) Act was passed that criminal charges of this kind have been brought against directors.
The move by the service comes after a tough few years for the retail sector, where the taxpayer has been forced to pay millions in compensation to employees not properly consulted when companies such as Woolworths, Comet and City Link collapsed.
It also comes in a year when there has been a high degree of scrutiny by the government of the circumstances surrounding the collapse of City Link.
Under employment law, if 20-99 staff are to be made redundant, 30 days’ notice should be given to the business secretary and employees. If 100 or more people are to lose their jobs, 45 days’ notice is required. Failure to do so can result in a criminal conviction and a fine of up to £5,000.
However, critics of insolvency law say that company directors trying to save a business would only hasten its collapse if they consulted employees in advance.
Jon Moulton, the founder of Better Capital, the private equity group that owned the failed courier, has said that his company did its best to revive City Link and blamed “idiotic” laws on employee consultation for aggravating the “nightmare” failure.
The government is consulting on whether changes to the insolvency laws should be made.
Simon Kerr-Davis, an employment lawyer at Linklaters, said: “The Insolvency Service is currently formulating its thoughts as to how to proceed in this very tricky area, where there is a clear tension between employment law and insolvency law.
“The risk of early notification of a potential business failure is that it may accelerate the failure, and therefore reduces the likelihood of saving jobs or rescuing the business but, of course, the risk of a late notification is that employees’ rights to participate actively in a consultation process are undermined.”
One insolvency expert said that consulting employees was “effectively an EU directive”.
Andrew Tate, vice-president of R3, the insolvency trade body, said: “We have been surprised at these charges. This is something that has been causing concern for some time as it can be a grey area. We are encouraged that the government is looking at this issue.”
The Insolvency Service confirmed yesterday that David Smith, the former managing director of City Link, Robert Peto, the former finance director, and Thomas Wright, another executive, had been charged with an offence relating to Section 194 of the act.
Separately, David Forsey, the chief executive of Sports Direct, has been charged with the same offence.
Mick Cash, general secretary of the RMT, said: “ This was bandit capitalism in the raw and should have no place in British industry.”
