The Impact of a Compulsory Winding up Order on Employment Contracts

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Insolvency Discourse by Kubi Udofia info@kubiudofia.com

By Dr Kubi Udofia

Background
Employees are often regarded as a company’s most valuable “asset”. Strikingly, they are also usually among the most vulnerable stakeholders in insolvencies. In Gbedu v Itie [2020] 3 NWLR (Pt 1710) 104, the Supreme Court of Nigeria (for the first time ever) considered the effect of a compulsory winding up order on employees. This discourse examines the impact of a compulsory winding up order on employment contracts, against the background of this decision and other related matters.

The Case of Gbedu v Itie
In this case, a compulsory winding up for NSG Ltd, was made on 18/3/05. The Appellants (NSG Ltd’s employees) were disengaged on 6/4/06, and paid their entitlements on 5/5/06. One of the two issues for determination by the Supreme Court, was whether the employment contracts ended upon the making of the winding up order. The Supreme Court acknowledged that, Nigeria’s Companies and Allied Matters Act, 1990 (CAMA) does not state the effect of a winding up order on employment contracts in one provision.

The Supreme Court thus, relied on English authorities such as Re General Rolling Stock Co [1866] LR 1 Eq 346 (Chapman’s Case) and Fowler v Commercial Timber Co. Ltd (1930) All ER 224. In these cases, English Courts held that, a compulsory winding up order terminates employment contracts. The Supreme Court also relied on Halsbury’s Laws of England, Volume 7, paragraph 543, where the authors expressed a similar view.
Against this background, the Supreme Court concluded that, once an order of compulsory winding up is made, “all employees of the company are dismissed, and the dismissal takes effect from the date of the winding up order was made by the court”.

Further Analysis of the Supreme Court’s decision in Gbedu v Itie
The Supreme Court rightly noted that, CAMA is silent on the impact of a compulsory winding up order on employment contracts. CAMA is a re-enactment of Nigeria’s Companies Act 1968, which was modelled after English Companies Act 1948. As is the case with CAMA, the English Companies Acts of 1948, 1929 and 1862 were silent on the effect of compulsory winding up orders on employment contracts. However, few English and Australian case law, have provided guidance in this regard.

The Supreme Court relied on English law authorities, which provide that a compulsory winding up order operates as notice of dismissal to all the company’s employees. In Re Oriental Bank Corporation [1886] 32 Ch.D 366 at 368 (which was not cited in the Supreme Court), Chitty J endorsed the decision in Chapman’s case, stating that the decision “has never been overruled or questioned”, and that it seems to be ‘founded upon good sense”.

Significantly, the Supreme Court (at page 126E-F) stated that a dismissal pursuant to a winding up order, “takes effect from the date the winding up order was made by the court”. This is consistent with the position in Chapman’s Case. Notably, Section 415(2) of CAMA provides that, compulsory winding up is deemed to commence on the date of the presentation of the winding up petition (not on the date when the winding up order is made).

This provision is a replica of Section 229(2) of the 1948 English Companies Act. English case law does not provide any explanation as to why dismissal of employees takes effect on the date of compulsory winding up orders, as opposed to relating back to the day winding up commences (i.e. the day the petition is presented).

Nevertheless, making dismissals “relate back” to the date of presentation of petitions, may produce undesirable results. First, it would result in retrospective dismissals. Second, it would create uncertainty regarding the status of employees recruited during the period between the presentation of winding up petitions, and the making of winding up orders (the “vulnerable period”). Third, it would invalidate promotion of employees effected during the vulnerable period. Fourth, employees could be required to disgorge certain official benefits received during the vulnerable period. Fifth, it would re-characterise unpaid employee entitlements during the vulnerable period, from mere unsecured debts to liquidation expenses. This would spike the cost of the liquidation process. Sixth, it could result in perverse incentives where opportunistic liquidators would seek to evade liability for failure to give notice of termination, by aggregating the vulnerable period as notice period.

Continuation of Employment after Winding up Order
A liquidator who desires to continue the company’s business after a compulsory winding up order, may retain some employees for this purpose. The liquidator may re-employ the employees under new terms. Alternatively, the liquidator may waive the dismissal which accompanies a notice of compulsory winding up order. In this case, employments will continue under existing contracts with the company.

In Re Oriental Bank Corporation [supra], Chitty J emphasised that to sustain a case of waiver of notice, the facts ought to be clear and “there must be something done in clear and unmistakable way”. In that case, a compulsory winding up order was made on 15/5/1884. A provisional liquidator was appointed on 19/6/1884. Macdowall received notice from the liquidator on 19/8/1884, that his services would no longer be required at the end of August. The notice period for termination was 3 months. Macdowall argued that the three additional days after three-month period (i.e. May 15 to August 15), was evidence that there was a contract of hiring upon the old terms. Chitty J held that, this contention could not be factually sustained. The company had closed down and ceased carrying on business, before the date of the winding up order. Chitty J explained that, Macdowall had merely been retained for the purpose of winding up the company.

A liquidator’s waiver must be clear and express. A waiver may not be inferred solely because an employee has remained in the company’s employment, after the winding up order has been made. However, compelling evidence may lead to a conclusion that employment had been “unbroken”. In the Australian case of Re Associated Dominions Assurance Society Ltd (1962) 109 CLR 516, the winding up order was made on 10/12/53. Some employees were sacked, but the services of few employees, including Hayes, were retained till September 1959. The issue in controversy, was whether the arrangement between Hayes and the liquidator resulted in the continuance of Hayes’ pre-petition employment contract, or a new contract with different rights and duties. Taylor J held that, based on evidence adduced, Hayes’ contract remained “unbroken”, notwithstanding the winding up order.
It is instructive to highlight that a renewal of an employment contract or waiver of notice of dismissal, is no guarantee of full payment of an employee’s pre-petition entitlements. Such pre-petition entitlements constitute unsecured debts, and will rank as such in the winding up process. In contrast, entitlements which accrue after the making of the winding up order, will rank as liquidation expenses.

Breach of Employment Contracts and Damages
An employment contract may be for a fixed term, or may be indefinite with a requirement of notice of termination by either the employer or employee. Where an employment is for a fixed term, a compulsory winding up order resulting in a dismissal will amount to a breach of the contract. The same consequence will apply to contracts with indefinite terms, with a requirement for termination notice. In Re RS Newman Ltd [1916] 2 Ch 309, the employee was to receive £5 a week for a minimum period of 12 months. The court held that, a compulsory winding up of the company breached the contract, and that the employee was entitled to damages for the breach.

In Re Oriental Bank Corporation [supra], the compulsory winding up order was made on May 15. A provisional liquidator was appointed on June 19. On August 19, Macdowall received notice from the liquidator that his services would no longer be required at the end of August. Macdowall claimed an amount as salary in lieu of three months’ notice, giving credit for the proportion of salary he received between August 19 and the end of that month. Chitty J held that, what transpired was that Macdowall had remained and served and was paid his salary in full for a period exceeding 3 months after notice of the winding up order. In other words, the contract was properly terminated with notice.

Two leading insolvency academics, Professor Peter Walton and Professor Andrew Keay have stated in their treatise that, a company’s liability in damages remains unchanged even though the company may have been forced into liquidation due to inability to pay its debts. However, the learned academics offered no explanation or justification as to why damages are imposed on a hapless company, which has been forced into compulsory winding up by a third party. A consequent dismissal of employees, is clearly by operation of law. This point was noted in Commercial Finance Co Ltd v Ramsingh-Mahabar [1994] 1 WLR 1297 at 1301D, where Lord Slynn stated that “termination by operation of law, following a compulsory winding up order made at the suit of a third party, is not a termination at the initiative of the employer”.

An employee who seeks to claim damages against an insolvent company, would have two hurdles to climb. First, winding up proceedings effectuate a moratorium on commencement of action against the company. Actions may only be instituted with leave of court – Section 417 of CAMA. Second, even where leave is granted, and an action for damages is successful, the employee may only submit a proof of debt in the winding up proceedings as an unsecured creditor.