Home' Trinidad and Tobago Guardian : April 14th 2016 Contents APRIL 14 • 2016 www.guardian.co.tt BUSINESS GUARDIAN
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ArcelorMittal s recent decision
to wind up its operations in
T&T and terminate its entire
workforce has led to
increased scrutiny and debate
about whether companies that close down
their businesses have---or ought to have---
any obligation to pay severance to their
To many, the idea that a company would
be required to pay severance if it downsized
its operations and terminated some of its
employees, but have no such obligation if
it closed down altogether and terminated
all of them, seems a bit illogical. This is,
however, the widely accepted view among
many in the field of industrial relations and
To understand how this came to be, we
need to examine a case that was decided
by the Privy Council over 20 years ago. But
first, we need to clarify some important
legal terms and definitions.
Severance, redundancy and
Although it is often used colloquially to
refer to any payment made to a terminated
employee, "severance" actually has a very
specific legal meaning and refers to a very
specific type of payment---one made to an
employee who is terminated for redundancy
Severance, redundancy and retrenchment
are defined in the Retrenchment and Sev-
erance Benefits Act. This act defines "redun-
dancy" as the existence of a surplus of labour
and "retrenchment" as the termination of
a worker s employment at the initiative of
the employer for the reason of redundancy.
(Pay close attention to these definitions, they
will become important when we get to our
Privy Council case).
Interestingly, Section 24 of the act provides
that when a company is wound up, any
severance payments due to a retrenched
worker should enjoy the same priority of
payment granted to wages and salary under
the Companies Ordinance and later the
Companies Act 1.
Under Section 435 of the Companies Act,
wages, salary and severance---albeit capped
at a maximum of two months basic salary---
are ranked only behind taxes and other debts
to the State in the priority of payments to
be made when a company is wound up.
Given the explicit reference in both the
Retrenchment and Severance Benefits Act
and the Companies Act to the priority that
severance payments should enjoy when a
company is wound up, it seems strange that
such a company would have no actual legal
obligation to make any severance payments.
This apparent paradox stems from the
very specific and narrow definitions of "sev-
erance", "retrenchment" and "redundancy"
that were adopted and applied by the Privy
Council in the 1994 case of Commercial
Finance Company Limited (In Liquidation)
v Indira Ramsingh Mahabir.
The Commercial Finance case
The worker, Ms Ramsingh-Mahabir, was
employed by Commercial Finance as a clerk
typist. The Inspector of Banks, acting on
directions from the Central Bank, applied
for and obtained a court order winding up
the company and appointing a liquidator.
The liquidator refused to pay any severance to the
worker, arguing that she had not been "retrenched"
within the meaning of the Retrenchment and Sev-
erance Benefit Act. The Industrial Court and then
the Court of Appeal both found in favour of the
worker. The liquidator then appealed to the Privy
Council. The Privy Council reversed the decision of
the Court of Appeal, finding that the worker was not
entitled to severance.
The rationale for the Privy Council s decision was
The act defined "redundancy" as the exis-
tence of a surplus of labour. The court took
the view that a "surplus of labour" referred
to a situation in which a company had more workers
than it needed to carry on its business. The definition
was premised on the assumption that the company
would continue to operate.
The worker had been terminated, not because she
was "surplus" to the company s business, but because
the company had simply ceased to exist. She was
not terminated for redundancy.
The act defined "retrenchment" as the ter-
mination of a worker s employment at the
initiative of the employer. The worker s
employment had automatically terminated by oper-
ation of law once the court order winding up the
company was made. She had been terminated by
court order made at the suit of a third party, the
Inspector of Banks, and not "at the initiative of the
employer." She had not been "retrenched" within
the meaning of the Act.
In these circumstances, the worker was not entitled
Effect of the Commercial Finance case
Even if you disagree with the Privy Council s rea-
soning, you could see how it might make sense within
the specific factual context of the Commercial Finance
case. That company was wound up, not by its own
initiative or choice, but by the intervention of a third
Would the Privy Council s decision have been any
different if the company had been wound up volun-
tarily? It is worth noting that, as a matter of law, a
voluntary winding up, including a creditors voluntary
winding up, does not have the same effect as a court
ordered compulsory winding up when it comes to
automatically terminating a worker s employment.
Would it have made any difference whether the
company was solvent or insolvent?
What if the company had decided to wind up purely
for commercial reasons or for the purposes of reor-
ganisation or reconstitution under a different name?
It is impossible to say for certain whether these or
any other factors would have produced a different
Unfortunately, the Commercial Finance case has
come to be widely accepted and regarded as binding
authority for a broad general principle---that where
a company closes its business it is not obligated to
pay severance to its employees.
There may be some room for legal argument or
debate as to whether the principles set out in the
Commercial Finance case can apply equally to vol-
untary winding ups, especially those in which the
company in question is solvent. There have been no
reported or published judgements in which that par-
ticular question was ventilated before the courts.
In any event, however, the general public concern
and consternation over ArcelorMittal s decision sug-
gests that the time may have come to revisit and
reform the law in this area. Both employers and
employees would benefit from greater clarity sur-
rounding their legal obligations and entitlements in
so far as business closures and severance are con-
Catherine Ramnarine is a partner,
employment law team at
M Hamel-Smith & Company
Business closures and severance
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