MccArtney & Ors v Unite The Union & Anor

Nortel Networks UK Limited (“the Company”) entered administration by order of Mr Justice Blackburne dated 14 January 2009. On 12 January 2010 the court ordered that the administration of the Company (and its associated companies) should be extended for a period of 24 months.

The Company is part of the Nortel Group. The Nortel Group is headed by the Nortel Networks Corporation (the ultimate holding company). On 14 January 2009 that company (together with some of its Canadian subsidiaries) sought protection under the Canadian bankruptcy law in order to facilitate a reorganisation of the Nortel Group for the benefit of its creditors. On the same day Nortel Networks Inc. (a private company incorporated in the United States and the primary US operating company) and associated companies filed voluntary petitions in the Delaware Bankruptcy Court seeking the protection of Chapter 11 of the United States Bankruptcy Code. The Nortel Group is a global supplier of networking solutions, its business being based upon the development, licensing and maintenance of intellectual property, and upon the marketing of telecommunications, computer networks and software products and services based on that intellectual property. It operates on a highly integrated basis across multiple jurisdictions. It was for that reason that there were co-ordinated insolvency filings. The order of Mr Justice Blackburne extended not only to the Company but to eighteen associated companies operating in separate European jurisdictions (but who had their COMI within the jurisdiction of the English and Welsh courts).

The object of the administration is to rescue the business of the Company as a going concern. This requires participation in a series of co-ordinated asset sales involving a reorganisation of the various individual global business lines of the Nortel Group. This of itself involves the maintenance of the various businesses pending sale and the provision of transitional services following any sale. The administration of the Company is therefore a true trading administration. Many of the Company’s employees were retained to maintain the current business, to participate in a reorganisation of the global business lines prior to sale, and to provide the requisite transitional services to purchasers of businesses. Although the jobs of many employees were thereby preserved, there had to be some redundancies.

On 30 March 2009 the Joint Administrators of the Company gave notice terminating the employment of some people employed at the Company’s premises in Monkstown, Newtonabbey, Northern Ireland. 37 such employees wished to make claims arising out of the termination of their employment, and commenced proceedings in the Industrial Tribunal under the Employment Rights (Northern Ireland) Order 1996 (“the 1996 Order”). They, together with Unite the union, are the present applicants. (Other people employed at other of the Company’s sites were also made redundant, and some of them have brought claims before the Employment Tribunals in England and Wales). Including the present applicants there is a total of approximately 240 employment related claims.

By paragraph 43(6) of Schedule B1 to the Insolvency Act 1986 no legal proceedings may be instituted against a company in administration otherwise than with the consent of the administrator or with the permission of the Court. On 14 May 2009 solicitors for the Northern Irish claimants sought the consent of the Joint Administrators to the commencement of proceedings in the Industrial Tribunal: but this was refused. The various claimants then commenced their claims in the Industrial Tribunal without consent and without the permission of the Court. The Joint Administrators do not assert that the proceedings so instituted are a nullity. Unite (the union) and the 37 other claimants issued an application in England on 30 October 2009 seeking the permission of the Court to continue the proceedings before the Industrial Tribunal in Northern Ireland: that application is now before me for decision.

The claims to which the application relates may be divided into five categories:-

On 11 November 2009 (and so within a fortnight of the commencement of the present application) the Joint Administrators gave consent for the pursuit of the protective award. They took the same view in relation to the parallel claims before the Employment Tribunal in England. The reason for granting permission to continue these claims was that if the claims were successful (and they are being defended) then the claimants would be entitled to apply to the Government for immediate payment of the statutory element of any award (thereby enabling the employees to receive money relatively quickly but without recourse to assets in the administration). No consent was given in respect of the continuation of the other claims: and the application for permission from the Court has been pursued in relation to the unfair dismissal, breach of contract and discrimination claims. It has not been suggested in correspondence or before me that the rationale which underlay consent to the pursuit of the protective award applies to any of these remaining claims. But Mr Khan submits that I should grant permission because the claims have a real prospect of success and it would be inequitable not to allow them to proceed.

I do not agree that this the correct test. The claims with which I am concerned are all monetary claims. The Company has gone into administration because the monetary claims it faces far exceed the assets available for their payment. The object of the administration is to exploit and deploy those assets “in the interests of the Company’s creditors as a whole” i.e. in the interests of all those who have monetary claims. To enable the Administrators to discharge that function paragraph 43(6) imposes a general rule that those with monetary claims against the Company may not pursue them. The Administrator is thereby enabled to dispose of the assets and so to realise a sum for distribution either within the administration, or through a scheme of arrangement or company voluntary arrangement, or by exit into a liquidation. As Patten J observed in AES Barry Ltd v TXU Europe Energy [2004] EWHC 1757 (Ch) [2005] 2 BCLC 22 (to which Mr Khan referred me) at paragraph 24:-

“…it will be in exceptional cases that the Court gives a creditor whose claim is simply a monetary one, a right by the taking of proceedings to override and pre-empt that statutory machinery”.

In my judgment the question is whether the claims of Unite and of the Northern Irish employees are “exceptional” in some respect.

Mr Khan argued that this was not a correct reading of the test in AES Barry. He submitted that the correct test was whether the applicant had a seriously arguable case which it would be inequitable to prevent him pursuing. He relied on the concluding sentence of Re Atlantic Computers [1992] Ch 505 at 544C. The passage cited is not authority for the proposition advanced by Mr Khan. Re Atlantic Computers was not concerned with how administrators should deal with the various monetary claims made by creditors in the administration. It was concerned with how the administrators should deal with third parties seeking to exercise existing proprietary rights (including security rights) against the company in administration. At the conclusion of its guidance the Court of Appeal noted that in some cases there would be a dispute over the existence, validity or nature of the security which the third party was seeking to enforce. In that context Nicholls LJ (giving the judgment of the court) said that it was not for the court (on the application for permission to lift the moratorium) to seek to adjudicate upon that issue “unless…the issue raises a short point of law”. Otherwise (i.e. wherever the issue about the validity or nature of the security did not raise a short point of law) the Court needed to be satisfied only that the applicant for permission to enforce the proprietary right had a seriously arguable case. None of that bears on the issue before me.

Mr Khan then submitted that if it was necessary to demonstrate an exceptional case, then that test was satisfied because the employment claims sought to be advanced were not provable in a future liquidation or in the current administration, and that it was necessary to obtain permission to bring them and to pursue them to judgment before any provable claim could arise. For the Joint Administrators Mr Allison submitted that it was unnecessary to consider this argument because such was the nature of the administration and such the likely level of return to creditors that it was plain that the court should not give permission: but that if the issue did arise for decision, and notwithstanding the unwillingness of the Joint Administrators to enter into a legal debate when they were neutral on the question and in practice intended to recognise the surviving employees claims as capable of proof, they would (to assist the Court by contrary argument) argue that these employees’ claims were in law to be recognised in the administration and would be provable in a liquidation (judgment or not). I entered a Wonderland in which the Unite the union argued vigorously that its members had no rights and that the Joint Administrators could not be made to pay them anything; whereas the Joint Administrators assumed the role of arguing that they were obliged to recognise the employees’ claims.

Mr Khan’s case is founded on the terms of Insolvency Rule 12.3(1): this provides:-

“…in administration…all claims by creditors are provable as debts against the Company…whether they are present or future, certain or contingent, ascertained or sounding only in damages”.

This must be read in the light of the authorities and of the other rules. As to authority, it was held in Re William Hockley Ltd [1962] 1WLR 555 at 558 that

“the expression “contingent creditor” … must … denote a person towards whom under an existing obligation, the company may or will become subject to a present liability upon the happening of some future event or at some future date.”

As to other Rules, IR 13.12 says that the term “debt” in relation to the winding up or administration of a company means any of the following:-

“(a)

any debt or liability to which the company is subject at the date on which it goes into liquidation; [and]

(b)

any debt or liability to which the company may become subject after that date by reason of any obligation incurred before that date”.

Mr Khan’s argument is that the claims in respect of which the claimants seek permission do not fall within any of these provisions, and so are not debts or liabilities for the purposes of the administration. But if they were to be pursued to judgment then he says they would be provable in a liquidation (if that were to be the exit route from the administration). That, he submits, makes the case sufficiently exceptional to warrant the grant of permission.

The broad argument breaks down into four separate steps:-

Mr Allison argues that it unnecessary to address these questions because, however they are to be answered, it is apparent that addressing them will hinder the course of the administration for a number of reasons. I will address each of the suggested reasons in turn.

First, if the Northern Ireland claims are to be continued then permission must likewise be given in relation to the English cases ( both on grounds of fairness and because it is more efficient to deal with all cases together). Dealing with 240 cases will provide a serious distraction. There is a measure of truth in this. But the argument is not compelling. The Joint Administrators are already contesting the protective awards so they are already obliged to put in place a means of dealing with employee claims.

Second, dealing with employment claims would require significant resources because of the need to gather and submit evidence, and respond to each case individually. There is a measure of truth in this but the argument is not compelling. It is true that in relation to the protective awards it may be possible to isolate test cases; but that seems an equal possibility in relation to the other heads of claim. The fact specific individual defences are really confined to the discrimination claims and the expenses claim. They are hardly more than routine, and could be dealt with by solicitors of the standing of those retained by the Joint Administrators without close supervision by the officeholders themselves (though clearly one of them would have to take the strategic decisions).

Third, defending the employment claims will incur significant litigation costs (considerably in excess of the costs incurred by the process of proof in the administration). Since these will be recoverable as administration expenses there is effectively a “top slicing” of the return to the general body of creditors. This is a sound point. But it must be seen in context. According to the directors’ statement of affairs (and I readily accept that this is a very imperfect guide) the estimated total assets available for preferential creditors the Company exceed £485 million. If the employment claims are properly conducted the reduction in that sum by reason of legal fees and the staff costs of the Joint Administrators will be a very small proportion; and (given the level of deficiency) would have a tiny impact upon the ultimate dividend.

Fourth, the commercial judgment of the joint administrators is that the expenditure of time and resources on the defence of the employment claims is not in the best interests of the creditors as a whole, and does not assist in the achievement of the statutory purpose of the administration. The employment claims constitute at most less than 1% of the total unsecured claims: the applicants themselves say they amount to about 0.1%. There is no justification for singling out such a small fraction of the general body of creditors for special treatment. This is a serious point: it is a concrete example of the point of principle identified by Patten J in AES Barry. However, it seems to me that the correct question to ask is not whether permitting continuation of the employment claims assists the administration; it is whether taking that course hinders the administration. It does so (by the diversion of effort and the increase in the expenses of administration) to a degree.

Fifth, the dividend expectation for the general body of unsecured creditors is not high. Looking at the directors’ Statement of Affairs (and recognising its shortcomings), the deficiency as regards creditors appears to be £874 million. But this assumes a liability to the pension fund of some £829 million, whereas the emerging figure for that liability is £3.2 billion. This would suggest a deficiency as regards creditors of £3.3 billion and the dividend of some £0.12 in the pound (ignoring administration expenses). At this level of return litigation is not really economic. The court should address what the practical consequence for the claimants of permitting the claims to be litigated would be: and compare that with the practical consequence for the general body of creditors of permitting the claims to be litigated. This last submission is a powerful point. But it is a restatement at an abstract level of the first, second and third arguments: and it is here applied to somewhat speculative material, since the Joint Administrators have been at pains in their reports to creditors not to give any estimate of the dividend.

Sixth, the court should also address what the legal consequence of permitting claims to be litigated would be. If Mr Khan is right and employee claims of this type are not provable in the administration then this will remain the case even if they are pursued to judgment. A post-administration judgment will not alter the nature of the claim as at the date of administration. The strategy of Unite and the 37 claimants is to obtain judgment so that if a liquidation follows the administration then in the liquidation they can prove upon the judgment rather than the claim. But in this administration there is no real likelihood of it ever being followed by a liquidation. The litigation is without any real legal consequence. There is certainly force in this point. But once again the Joint Administrators have been careful in their reports to creditors not to identify the intended exit route and not to identify those which are now ruled out of consideration (save that a rescue of the business of the Company as such is now unlikely).

Mr Allison’s fourth, fifth and sixth arguments have real force. But I do not think it is possible to decide this application simply by looking at the significance of issue for the Joint Administrators and by considering their view of its significance for the claimants. Fairness requires that I take account of the claimants’ own view of the significance of the issue for them. I think I must address Mr Khan’s arguments even if I do not have to give a definitive view.

The heart of the issue lies in a consideration of whether the claims of these claimants are “exceptional” (for the reasons advanced by Mr Khan and summarised in paragraphs 12 and 13 above) so as to warrant the grant of permission for their continuation. For that purpose I will assume that the Joint Administrators will at some point decide to make a payment to creditors under paragraph 65 of schedule B1 and will operate the provisions of IR 2.72 – 2.105.

I reject the argument that because of the moratorium the claimants presently have no claims at all. Paragraph 43(6) of Schedule B1 does not address the existence of claims: it addresses the manner of their enforcement. Creditors are not allowed to initiate any form of process immediately or ultimately involving the Court or its procedures or to commence any quasi legal process or to take direct action to establish or recover under a claim. These rights are suspended. But the claim does not disappear. The suspended rights are replaced by a right under IR 2.72 to submit a claim in writing to the administrator which will be dealt with in accordance with that section of the Rules. I consider the employees will still have “claims” even if I refuse permission for their actions to continue to judgment (and would have had “claims” even if actions had not been commenced). Their position in relation to the moratorium on these claims is no different from that of any trade creditor or unsecured lender.

On the basis upon which the case has been conducted before me I also do not accept the argument that if there is “a claim” it nonetheless requires a judgment to render it provable. That is for two reasons: the nature of the claim, and the allied point of the nature of the decision on which an award depends.

First, the nature of the claim. If the Joint Administrators intend to make a distribution then any person claiming to be “a creditor” may submit a claim to recover his “debt”. In my judgment each of the present claims is either a debt or liability to which the Company is subject at the date of administration, or a debt or liability to which it becomes subject after the date of administration by reason of an obligation incurred before that date.

Before turning to the second of my reasons for rejecting the argument I must deal with the case made about the nature of the claims. Mr Khan submitted that the conclusion I have reached about the claims being debts capable of proof was inconsistent with an established line of authority from which the claims of the employees could not properly be distinguished.

In Glenister v Rowe [2000] Ch 76 Mrs Rowe began proceedings in 1985 against Mr Glenister, who was made bankrupt on 24 June 1992. Mr Glenister was discharged from this bankruptcy in June 1995: and in July 1995 Mrs Rowe obtained an order that Mr Glenister should pay the costs of the proceedings. The question was whether the costs ordered to be paid in July 1995 were “a contingent liability” of Mr Glenister at the date of his bankruptcy on 24 June 1992. The Court of Appeal held that they were not, because the discretionary nature of the court’s power to order costs under section 51 of the Senior Courts Act 1981 indicated that there was no liability, contingent or otherwise, in the absence of a court order. The Act conferred a power on the Court to make orders as to costs, but the liability to pay was created not under the Act but under the specific order made by the Court in each particular case in exercise of the general power conferred by the Act.

In Steele v Birmingham City Council [2005] EWCA Civ 1824 {2006] 1 WLR 2380Mr Steele had claimed and been paid jobseekers’ allowance from December 1999. In September 2001 he was adjudged bankrupt. In March 2002 the Secretary of State determined that Mr Steele had been overpaid between December 1999 and March 2001 and that the overpayment should be recovered. The question was whether the liability to repay benefit was “a contingent liability” at the date the bankruptcy. The Court of Appeal held that it was not, because until the Secretary of State had made his determination Mr Steele was under no obligation or liability to repay the overpaid benefit. At the date of the bankruptcy in September 2001 there was no present liability to repay: and since there was no certainty that the determination would be made, there was no future liability.

In Day v Haine [2008] EWCA Civ 626 [2008] IRLR 642 (in which Mr Khan appeared) a company (on 10 February 2006) terminated the employment of its employees without complying with its statutory consultation obligations. On the 16February 2006 it then went into administration (which was converted into a liquidation). On 13 August 2006 a protective award was made against the company, which had not filed a Defence. The question was whether that protective award was “a contingent liability” at the commencement of the insolvency process. The Court of Appeal held that it was, both because the liability stemmed from the pre-liquidation breach of obligation, and because it was unreal to describe the award as depending on the exercise of a judicial discretion.

In Casson v Law Society [2009] EWHC 1943 (Admin) [2010] BPIR 49 the appellant solicitor had ceased practise in May 2004. In February 2005 he was adjudged bankrupt, and obtained his discharge a year later. In October 2006 the Law Society ordered him to pay compensation for inadequate professional services rendered before May 2004 - following a decision by the Society to investigate a complaint, an investigation by an adjudicator, and the exercise by the adjudicator of a discretion to direct payment of compensation (rather than take any of the three other available steps). The question was whether the award of compensation was a “debt” in the bankruptcy (from which he was released on his discharge from bankruptcy). The Administrative Court held that it was not, because where a Court or tribunal had a discretion whether or not to make an award, any sum awarded in the exercise of that discretion did not exist as a debt or liability until the award was made.

Mr Khan relied on these authorities as supporting his argument that the discretionary nature of the decision in relation to the instant claims precludes any possibility of there being a liability (contingent or otherwise) until and unless judgment is given in favour of the claimants. In my judgment they do not. These cases establish only the proposition that where the imposition of the obligation under which the debtor is made liable depends upon the exercise of some prior discretion (which has itself not been exercised at the date of the insolvency) then at the date of the insolvency the debtor is not subject to any liability (future, contingent or otherwise). There needed to be a decision to make an order about costs, or a determination by the Secretary of State to seek recoverability of the overpayment, or a decision by the Law Society to investigate the complaint by means of adjudication and a decision by the adjudicator to remedy the complaint by an award of compensation before the relevant rule applied to the debtor. But the Company is liable in contract because it has entered a contract (not because someone has decided that the law of contract shall apply): and it is liable for breach of the statutory obligation to consult because it is an employer and the 1996 Order affects employers (not because someone has decided that the 1996 Order shall apply to the Company).

I consider the analysis set out in paragraph 25 to be consistent with the observations in Re Toshoku Finance UK [2002] UKHL 6 [2002] 1 WLR 671 at [25] per Lord Hoffmann and SSTI v Frid [2004] UKHL 24 [2004] 2 AC 506 at [9], [17] and [19] per Lord Hoffmann, and with the disposition of the appeals in Re Huddersfield Fine Worsteds Limited [2005] EWCA Civ 1072 [2006] 2 BCLC 160.

I am not in any doubt about the matter: but if I were, I think the court should incline towards restricting the category of claims which are not provable. The consequence of the claims not being provable in bankruptcy in Glenister, Steele and Casson was that the claims could still be pursued against the discharged bankrupt. But a company does not survive its liquidation: so if a claim is not provable in the liquidation it is completely irrecoverable. It does not seem to me desirable (especially in relation to employees) to create a category of claim which cannot be dealt with in the insolvency process and is otherwise irrecoverable.

So much for the nature of the claim: but Mr Khan also advanced a submission based on the nature of the decision. He submitted that because the Joint Administrators were intending to contest the present claims the actual existence of a provable debt would depend upon the exercise of judicial discretion. He equated “exercise of a discretion” with a determination of factual issues and legal argument. He submitted that that made the case different from Re Armstrong Whitworth [1947] Ch 763 (in which the conclusion was reached that four workmen who had suffered pre-liquidation accidents but had made post-liquidation claims had, at the date of the winding up, “contingent claims”). I reject this argument. The exercise of judicial discretion is a process entirely distinct from judicial adjudication. The point was made in Re T & N Ltd [2005] EWHC 2870 (Ch). David Richards J was invited to consider Glenister and cases like it and held (at para. [65]):-

“I accept the submission that these cases are not in point to the issue as regards future asbestos claims. There is no element of discretion as regards such claims. If the ingredients of the tort of negligence…..are established, the claimants are entitled to damages. They do not depend on an exercise of discretion by the court.”

That is sufficient to found my conclusion that the claims now advanced by Unite the union and the 37 applicants are not “exceptional” so as to warrant the grant of permission for their continuation and the lifting of the moratorium otherwise applying in the administration: and I so hold. I will therefore refuse the applications.

I received submissions on costs at the conclusion of the hearing. I have read (but need not summarise) the correspondence between solicitors. My decision is that the applicants shall pay 80% of the costs of the Joint Administrators from and including 21 November 2009.

The Joint Administrators refused to consent to the commencement of any proceedings. The claimants were obliged to bring the application in order to secure the grant of permission to continue the claims for a protective award. This they obtained by letter dated 13 November 2009. Having succeeded they might properly expect their costs (under the general rule). They were entitled to a short period to consider what to do with the litigation in the light of that success. From 21 November 2009 they chose to continue the litigation for relief which they have wholly failed to obtain. Having succeeded, the Joint Administrators might properly expect their costs from 21 November 2009 (under the general rule). That would require two assessments and a “set off”. That is undesirable and out of step with the policy embodied in CPR 44.3(7).

I consider that I can do broad justice by reducing the costs awarded to the Joint Administrators by a proportion to reflect the set-off that might otherwise have been expected. I have settled upon a discount after taking into account the material that had been produced by the claimants up to 21 November 2009 (including some pre-application correspondence but ignoring the application made by them in Northern Ireland) and considering what would be a reasonable charge for it at guideline rates; and then assessing the material produced and hearings attended by the Joint Administrators after 21 November 2009, again by reference to reasonable charges at guideline rates. I have not striven for specious exactitude but tried to make a fair assessment. I have settled upon a 20% discount, leading to the order indicated.