Secretary of State for Business Innovation and Skills v McDonagh (Secretary of State for Business Innovation and Skills v Pengelly)

Under Part XII of the Employment Rights Act 1996, an employer which enters a company voluntary arrangement becomes insolvent on approval of that arrangement. If it is later wound up without the insolvency having been relieved, there is one insolvency situation and one appropriate date, namely the date of approval of the voluntary arrangement.

The legislation does not permit a second insolvency or a fresh reference date on liquidation. The Directive permits Member States to impose limits on guarantee institutions’ liability and does not require arrears of pay or holiday pay arising after the initial insolvency date to be guaranteed. Domestic provisions therefore require no interpretative modification.

Employees of two companies entered employment, or remained employed, while the companies were subject to creditors’ voluntary arrangements. Both companies were subsequently compulsorily wound up. The employees claimed arrears of pay and holiday pay from the National Insurance Fund.

Employment Tribunals upheld the claims, treating the later winding-up as the relevant insolvency event or construing the domestic legislation in the light of Directive 2008/94/EC. The Secretary of State appealed. The central issue was whether Part XII of the Employment Rights Act 1996, read consistently with the Directive, permitted a fresh guarantee claim following liquidation after an earlier voluntary arrangement.

1. The appeals were allowed. Findings were substituted that the Secretary of State was under no obligation to pay the claimants’ arrears of pay or holiday pay through the National Insurance Fund in the circumstances.
2. Section 183(3)(c) of the Employment Rights Act 1996 provides that a company becomes insolvent when a voluntary arrangement is approved. Sections 182 and 185 then operate by reference to that insolvency and to a single appropriate date.
3. The statutory language does not permit serial insolvencies. A company already insolvent under section 183(3)(c) does not become insolvent again, or in an additional relevant sense, when later wound up. The appropriate date for arrears of pay and holiday pay is therefore fixed and certain: the date on which the voluntary arrangement was approved.
4. The interpretative obligation arising from Directive 2008/94/EC permits words to be read in or out only where that is possible without going against the grain of the legislation. No modification was required here because the domestic legislation was compatible with the Directive.
5. The Directive recognises insolvency proceedings wider than liquidation, including voluntary arrangements, and permits Member States to limit the liability of guarantee institutions. It permits reference periods and ceilings and does not require claims for arrears of pay or holiday pay arising after the specified insolvency date to be covered.
6. The perceived unfairness to employees who did not know of the voluntary arrangement could not justify adding words or concepts absent from the statute. The Employment Tribunals had therefore erred in law.

• Employment Appeal Tribunal: allowed the Secretary of State’s appeals from decisions of Employment Judge Foxwell dated 30 March 2012 and Employment Judge Baron dated 15 March 2012.
• Employment Tribunals: upheld the employees’ claims for arrears of pay and holiday pay from the National Insurance Fund.