Receivers sack employees as insolvency crisis deepens

THE system of saving troubled companies in the UK fell deeper into crisis yesterday, as receivers started sacking employees they otherwise would have retained, because of a ruling by the Court of Appeal.

The court's decision on Paramount Airways, which has dramatically improved the status of employees' claims for money in receiverships and administrations, has also destroyed the legal basis for saving cash-strapped companies, according to insolvency specialists.

It makes a mockery of the Government's campaign for a 'rescue culture' for troubled companies. Representatives of the insolvency profession are meeting government officials this week to brief them on the crisis.

'On reflection the Paramount ruling is even more of a disaster than we first thought,' a spokesman for the Society of Practitioners of Insolvency (SPI) said.

The ruling could lead to:

The sacking of entire workforces as soon as receivers are appointed;

High street banks closing their intensive care units for troubled companies;

Greater difficulty in keeping troubled businesses trading while a new owner is sought;

Continued uncertainty until new primary legislation is introduced - which will take at least two to three years;

Receivers facing millions of claims from former employees of companies they dealt with, going back six years;

Banks reconsidering the basis of lending to businesses.

The SPI, which represents and licenses all the leading accountants and solicitors who handle insolvent companies, held a meeting on the crisis that stretched into last night, without coming up with a solution.

The problem stems from a fundamental flaw in the Insolvency Act 1986 that went unchallenged until the Paramount Airways case. Paramount went into administration in 1990. It centres on the status of employees' contracts of employment in an administration.

In essence receivers and subsequently administrators assumed that they could keep employees on without taking over all the liabilities stemming from their employment contracts, such as notice payments, pensions contributions and the like. They assumed this because of a previous ruling in 1987 related to Specialist Mouldings, a company that went into receivership.

Last week Lord Justice Dillon attacked the Specialist Mouldings precedent, thereby undermining the whole of the UK's corporate rescue system. Bizarrely for such an important ruling, no written copy of the judgment has yet been made available. But Britain's banks and insolvency specialists are having to assume that employees' claims now have top priority in receiverships, even before the receivers' own costs.

An important effect of the Paramount ruling is to improve the chances of employees who are claiming money from administrators or receivers in relation to their terms of employment.

This is the case with three former directors of Olympia & York, the giant Canadian property developer that built Canary Wharf in London's Docklands. The trio lodged claims against Canary Wharf's administrators last year totalling a maximum of pounds 12m. The former directors claim they were not given proper notice by the administrators, Ernst & Young.

Providing the first part of their claim succeeds, the three are claiming the bonuses promised to them by O&Y's founders, the Reichmann brothers.