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Law for Business

Knowhow - guidance - precedents

15 APR 2014

Insolvency and Employment - What You Need To Know

Pam Loch

Managing Partner

@LochLaw

Insolvency and Employment - What You Need To Know

Q. What is an insolvent company?

A. ‘Insolvency' simply means that a business is no longer able to pay its debts. However, there are different types of insolvency:

  • Liquidation - where an order has been issued by a court to wind up the company;
  • Administration - where an administration order has been issued;
  • Voluntary arrangement - where a repayment agreement has been entered into with the company's creditors; and
  • Receivership - where a receiver takes over the company in order to meet the debts of that sole creditor (i.e. a bank)

Q. What employment rights do employees have after insolvency?

A. Insolvency will not automatically terminate contracts of employment and the legal position of employees will depend on the type of insolvency involved. For example, if a winding up order has been issued the employee's, employment will end on the date of the order. If, however, employers are trying to rescue the business through administration or by entering into a voluntary arrangement with creditors, certain employment rights may still be protected. Responsibility for those employment rights will depend on whether or not the business is being transferred to another owner or whether it will cease trading completely.

Q. What happens to any money that is owed to employees?

A. There is no guarantee that employees will receive all of the monies owed to them following insolvency. The National Insurance Fund (NIF) was set up to help UK employees reclaim at least some of what was owed to them and in a much faster way than trying to pursue a company that has limited or no assets at all.

Q. Who is responsible for paying any money owed to the employees?

A. Insolvency practitioners are responsible for providing employees with the necessary details of how to claim any monies owed to them. All payments are processed by the Redundancy Payments Service (RPS) and the following can be paid out of the NIF:-

  • Arrears of wages - up to a maximum of 8 weeks, capped at £450 per week
  • Holiday pay - up to a maximum of 6 weeks, capped at £450 per week
  • Notice pay - compensatory pay for the statutory minimum notice period
  • Statutory Redundancy Payment - subject to satisfying eligibility criteria
  • A basic award ordered by an Employment Tribunal as a result of an Unfair Dismissal claim.

Q. Can an employee still claim money from the insolvent company?

A. Yes. As the amount that can be claimed from the NIF is capped, employees can choose to claim the remainder from their insolvent employer. However, given the poor state of the financial affairs of the business, employees are extremely unlikely to receive their payments in full as they will be treated in the same way as other creditors.

Q. What happens if the business is sold or transferred to another owner?

A. In normal circumstances, if a business simply changes ownership, the employment rights of employees are protected by the Transfer of Undertakings (Protection of Employment) Regulations 2006 ("TUPE"). In an insolvency situation however, the type of insolvency proceedings will determine whether TUPE applies.

  • TUPE will not apply if a business is wound up and the proceeds are distributed to creditors.
  • TUPE will apply where the intention is to rescue the business. In this scenario, the NIF can compensate employees up to the maximum limits set out above and any shortfall can be claimed from the new owner.

Redundancy Payments and notice pay cannot be claimed as the employee will not have been dismissed and their continuity of employment will have been preserved. The new owner will however be liable for any accrued but unpaid holiday entitlement.

Q. Can employees issue an Employment Tribunal claim for unfair dismissal?

A. If an employee is dismissed as a result of a transfer and the reason for their dismissal is a genuine redundancy, the NIF will pay their notice pay and Redundancy Payment. However, if the dismissal is due to the transfer itself, this may be treated as an unfair dismissal and the employee could claim compensation for unfair dismissal at an Employment Tribunal against the new owner.

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