Law Lords deal £2bn blow to accountants

Accountants last night branded a controversial Law Lords ruling as a "failed fat cat's charter". as they faced potential legal claims of £2bn from employees of insolvent companies whom they have sacked.

Yesterday's judgment will make receivers and administrators liable for the severance pay and pensions contributions of employees kept on for more than 14 days following a company going bust.

The law gives them a free hand for the first fortnight after taking control of an insolvent enterprise. Employees who escape the sack during that period are deemed to have had their contracts and pension entitlements "adopted".

Emergency legislation that was brought in a year ago saved receivers from these problems. But they now face legal action from cases before March 1994.

The key ruling covers Paramount Airways, an obscure aviation company that went into administration in 1989. Two of its pilots sacked after the first fortnight fought a two-year legal action which turned accepted practice on its head. Yesterday's failure to have the decision overturned by the Law Lords was immediately attacked by the insolvency profession, which has demanded fresh emergency legislation from the Government to bail them out.

The claims could go back to 1986, when the legislation which has caused so much confusion was originally passed.

The receivers' trade body, the Society of Practitioners of Insolvency, already knows of a handful of claims where sacked employees are claiming at least £1m each.

The SPI said that potentially 20,000 cases where companies went down before last spring could prompt claims. Over 500,000 former employees are entitled to demand compensation from receivers because of yesterday's judgment.

Steve Hill, an insolvency partner with Coopers & Lybrand, which has by far Britain's biggest receivership practice, said: "If anyone is going to get a windfall, it won't be the average employee who was on £300 a week. He probably already received all he was entitled to under the Employment Protection Act.

"Rather, it will be the fat cat director with a five-year rolling contract and Bupa for life. Parliament did not intend receivers to fund ex-directors' Bupa contributions for life. It's mind-bogglingly stupid in that context."

Mr Hill said that any compensation would have to come from other creditors - often the Government, which meant the taxpayer would suffer.

Receivers now want the Department of Trade and Industry to bring in swift retrospective legislation. Michael Heseltine, President of the Board of Trade, went half-way with emergency legislation last spring, but did not make it retrospective.

The DTI said yesterday: "It's too early to say what action would be necessary or appropriate. We are studying the ruling as a matter of urgency."

Serena Tierney, a partner with London law firm Brecher & Co, warned that certain specialist classes of receivers, such as Law of Property Act receivers, were not covered by last year's emergency Bill and were now in even deeper trouble. LPA receivers are usually chartered surveyors who deal with single properties.

"There must be renewed pressure for Parliament to act," Ms Tierney said, adding that compensation would fall on other creditors, which could lead to receivers demanding money back from banks.

Conclusion by Lord Browne-Wilkinson:

"For the purposes of both section 19 and section 44 (of the Insolvency Act 1986) an employee's contract of employment is `adopted' if he is continued in employment for more than 14 days after the appointment of the administrator or receiver."

Potential claims arising from the judgment

Company Administrators/receivers Possible claimants

Olympia & York Ernst & Young: 3 ex-directors

(administration- Stephen Adamson for £10m

with £670m Nigel Hamilton

debts) Alan Bloom

Leyland Daf Arthur Andersen: 3,000

(receivership, John Talbot ex-employees

£1.1bn debts) Murdoch McKillop

Ferranti Arthur Andersen: 1,000

(receivership, John Talbot ex-employees

£100m debts) Murdoch Mckillop