Employment Guide to Insolvency
This article assumes that an employer is a limited company unless otherwise specified. It is also recommended that this article be read in conjunction with ACLF’s short guide to corporate insolvency. If your employer is an LLP, partnership or employs another structure, it is advised that you seek specific advice as to your employment rights.
The main law that governs corporate insolvency and employment rights in England and Wales can be found in the following, non-exhaustive, statutes:
- Insolvency Act 1986;
- The Insolvency (England and Wales) Rules 2016;
- Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE);
- Trade Union and Labour Relations (Consolidation) Act 1992 (TULRCA); and
- Employment Rights Act 1996.
Will my employment contract terminate automatically if my employer becomes insolvent?
This will depend on the type of insolvency procedure used by the employer.
No automatic termination. As the business of the company does not automatically cease upon voluntary liquidation, neither does the employment contracts of its employees. However, as the liquidators that get involved have very limited powers in which to carry on the company’s business, it is, in practice, likely that after only a short time the business will cease. At this point so to will the employment contracts for the company.
During this time, employers are not able to manipulate a break in the continuity of their employee’s employment (i.e. in the attempt to avoid unfair dismissal claims), by moving their employees to a different company. If you work for a company who is in voluntary liquidation who subsequently moves, you to a different company (which they own) then both employments count as one continuous employment.
No automatic termination. Administrators are appointed to attempt the rescue of the company as a going concern. Because they are an agent of the company, their appointment does not amount to a change of employer and so employment contracts do not automatically terminate at this stage.
No automatic termination (usually). Generally, employees are not immediately affected by the appointment of an administrative receiver. Unless one of the following applies:
- The appointment comes with the immediate sale of the business. In this case, the automatic transfer provisions of TUPE may apply;
- The employees enter into new contracts with the administrative receiver shortly after they are appointed, that are inconsistent with their old ones;
- The continuation of the employment of an employee is inconsistent with the role of the administrative receiver (i.e. a managing director)
Fixed charge receivership
No automatic termination. If a fixed charge receiver causes the company to retain an employee, the receiver will become personally liable for all liabilities that the company owes to that employee, such as redundancy payments and payments for unfair or wrongful dismissal.
Company voluntary arrangements
No automatic termination. The aim of a CVA is to enable the company to continue as a going concern, therefore employment contracts will not be automatically terminated at this time.
Compulsory liquidation and court-appointed receivers
Automatic termination. The effect of compulsory liquidation will usually mean that the employee’s contract is immediately terminated from the date of the winding-up order. The employee will usually be able to bring a claim for wrongful dismissal. Please note that unfair dismissal is not likely to be a solid basis for complaint as the liquidation will be made by operation of law.
It is also worth noting that these claims will not be able to be issued before the moratorium (if applicable) has been lifted. An employee’s right to damages will also rank as unsecured so it may be difficult to recover damages owed in full.
If a liquidator or a receiver wishes to retain any staff, then new employment contracts will have to be entered into. It is usually good practice to agree that no termination has taken place if keeping on existing staff as it will reduce the amount of damages payable by the company.
Debts owed to employees
Usually, the debts owed to an employee by a company will be the liability of the insolvent employer and not of the insolvency practitioner.
- Relevant debts may include;
- Unpaid wages;
- Awards for failure to consult and inform under TUPE/TULRCA;
- Statutory redundancy pay;
- Damages owed for breach of contract (on termination);
- Court judgment debts.
Most debts owed to an employee are unsecured and therefore rank penultimately in order of priority on a realisation of the company’s assets. Unsecured creditors will share all available assets equally in a proportion owed to them. Unfortunately, this usually only yields a few pence for every pound owed.
However, employee’s “remuneration” (up to a certain amount) will rank as a preferential debt. This debt will rank 3rd in priority and will, usually, be paid in full.
National Insurance Fund
Under EU law the UK has a guarantee institution to aid in the payment of employees when a company becomes insolvent, the National Insurance Fund (NIF). The Government confirmed that, after Brexit, EU and UK employees who live and work in the UK will continue to be protected in the same way as the EU law protected them.
Minimum employment debts guaranteed
Where the employer is insolvent, the NIF guarantees a basic minimum payment of specific debts owed to employees by their employers, provided certain conditions are met. This guarantee applies regardless of the type of insolvency procedure or whether the debt is unsecured or preferential.
The guaranteed debts include employee debts such as arrears of pay (capped), statutory notice pay and unpaid pension contributions.
Conditions for payment
In order to qualify for payment of employee debts, the following must occur:
- The employee's employer must have become insolvent;
- The employee's employment must have been terminated (see above).
Only employees can claim and the above does not apply to self-employed individuals. If an insolvent employer fails to pay all or part of the debts it is liable to make to an employee, the employee may apply to the Secretary of State for the payment (or any outstanding balance) to be paid.
Employees attempting to get payment from the NIF must complete an online form (RP1). An appointed insolvency practitioner will usually supply employees with more information on how this can be done. Once the NIF has paid the debt, the employee cannot claim against the company, instead, the NIF will have a subrogated claim against them. However, if the whole of the employee’s claim cannot be settled by the NIF then the employee will still have the right to claim the balance against the company. It is therefore advised that an employee claims through every available channel in order to maximise the chances of receiving money owed to them.