Insolvency and Employees - how are they affected and what can be claimed?

For many company directors, one of the biggest concerns when facing insolvency is what impact any process is likely to have on their employees. After all, these are the people they have worked with side-by-side throughout the company’s life.

In this article we explore how each insolvency process is likely to affect employees, and what they are entitled to claim in the event that their employment is terminated.

Company Rescue Procedures

When an Insolvency Practitioner is asked to assist the directors in understanding their options, the first consideration will be whether the company (or at least the business within it) can be rescued. This could be by way of a non-insolvency option, such as finance facilities, a general restructuring or by utilising a formal insolvency process - such as a Company Voluntary Arrangement or Company Administration.

Company Voluntary Arrangement (CVA)

A CVA is a formal agreement between a company and its creditors to pay back liabilities over a specified period of time. The general principal of a CVA is that the company continues to trade as a going concern, perhaps making a couple of improvements to the business processes on the way. The company will commit to making regular contributions into the CVA to facilitate a return to creditors.

On this basis, there is usually no impact on employees as a result of a CVA. They will continue to work as before, and their employment continues to be protected.

Company Administration

The first statutory purpose of an administration is to rescue the company. For practical purposes this could include trading the company throughout the administration to allow it to recover financially, or perhaps to seek some form of external investment to cover liabilities. If this occurs, you would expect the majority of employees’ jobs to be secure.

If it has not been possible to rescue the company, the Administrator may look to find a purchaser for the business and assets. In this situation the contracts of employment are typically transferred to the purchasing entity pursuant to the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”).

If the company ceases to trade as part of the administration, the contracts of employment will be terminated and there are various claims that can be made by the employees which are explored later on in this article.

It is also worth noting that if a company trades in the administration period, it is usual for the Administrator to pay employee wages for this period as an expense of the administration process.

Company Closure / Liquidation

If a business ceases to trade in contemplation of a liquidation all contracts of employment will be terminated. Despite employment legislation requiring the employer to give employees advanced notification of redundancy, this is often not possible when the company is insolvent. In this instance employees are likely to be made redundant without notice and advised by the Insolvency Practitioner on how to process claims for various statutory entitlements.

So what can be claimed from the Redundancy Payments Service?

Arrears of Wages

Any unpaid wages up to and including the date of redundancy can be claimed. The claim will be at the full contractual rate of pay, and can include unpaid bonuses, overtime and commissions.

The Redundancy Payments Services will cap any payments at £538 per week (correct as at 06/04/2020) and claims can only be processed for an 8 week period. Any additional arrears claim will have to be claimed as a creditor in the insolvency process.

Holiday Pay

Employees can claim for holiday days owed that they did not take, as well as holidays taken but which they were not paid.

A calculation will be made to work out the employees’ accrued holiday entitlement from the start of the company’s holiday year to the date of redundancy (plus any carried over holiday should the employment contract permit this). A maximum of 6 weeks holiday can be claimed, again capped at £538 per week.

Statutory Redundancy Entitlement

Any employee who has been continuously employed by the insolvent business for 2 years or more is entitled to statutory redundancy (despite what contractual redundancy they may or may not be entitled to). Statutory redundancy is calculated based on the employee’s age and length of service (again capped at £538 per week).

- ½ a week’s pay for each full year of employment under the age of 22.

- 1 week’s pay for each full year of employment between the ages of 22 and 40.

- 1 ½ weeks’ pay for each full year of employment aged 41 or older.

An employee can claim a maximum of 20 years employment.

Statutory Payment in Lieu of Notice

Every employee is entitled to a statutory notice period, regardless of what provisions are stipulated within their employment contract. Statutory notice entitlement is worked out as one week’s notice for every year of employment, up to a maximum of twelve weeks. This entitlement is again capped at £538 per week.

It is also worth noting that the Redundancy Payments Service will not process this element of the employee’s claim until their statutory notice period has actually expired. The statutory notice pay is designed to compensate an employee for loss of earnings for the specified statutory period if they are unable to obtain alternate employment. For example, if an employee has 8 years’ service they would be entitled to 8 weeks statutory notice pay. If they were able to secure new employment 2 weeks after the date of their redundancy, they would only be entitled to claim for the 2 week period in which they were unemployed.

Another important note – when calculating statutory notice pay, the Redundancy Payments Service will always deduct any benefits/ Job Seekers Allowance/ Universal Credit from the notice pay that the employee was entitled to, regardless of whether or not they actually claimed it! We would therefore always advice employees to talk to the Job Centre or Citizens Advice Bureau as soon as they are made redundant to maximise any benefits claims.

What other claims can be made?

Compensation for unfair dismissal

On some occasions employees may lodge a claim with the Employment Tribunal for unfair dismissal as a result of the company’s failure to consult with employees regarding the redundancies.

Whilst this sadly cannot be avoided in many instances, it does not affect the employees’ ability to claim for that additional notice/consultation period. This could result in additional claims being made to the Redundancy Payments Service. Any employee wishing to lodge such a claim should take their own independent advice.

Unpaid Pension Contributions

As all employers are now obliged to operate an occupational pension scheme for employees, it is not uncommon for an Insolvency Practitioner to be notified that contributions (both employee and employer) have not be paid over to the pension scheme provider. If this occurs, the Insolvency Practitioner will work alongside the pension scheme provider to lodge an additional claim with the Redundancy Payments Service for unpaid pension contributions.

Unpaid Expenses

Unfortunately unpaid expenses cannot be claimed from the Redundancy Payments Service. Unpaid expenses rank as an unsecured claim in the insolvency process and may not be repaid if there are insufficient funds in the insolvency process to facilitate a dividend to creditors.

Claims over and above the statutory limits

As mentioned above, the Redundancy Payments Service will cap any claim made at £538 per week (correct as at 06/04/2020). Also, whilst the Redundancy Payments Service will process claims for statutory notice pay and redundancy pay, they will not process additional claims that may exist for contractual notice pay or contractual redundancy. These, again, will rank as an unsecured claim in the insolvency process and may not be repaid if there are insufficient funds in the insolvency process to facilitate a dividend to creditors.

How we can help

When employees are made redundant as a result of, or in contemplation of an insolvency process we endeavour to guide those employees on how to lodge a claim which is processed by the Redundancy Payments Service.

We understand that being made redundant can be both confusing and an emotionally difficult situation for people to find themselves in. This is why we will always provide the employees with a letter detailing their rights as well as guidance on how to lodge claims following their dismissal. The documentation will contain a specific ‘CN’ reference number which needs to be included on any claim made.

We will work with the directors to ensure that all employee details have been obtained and passed on to the Redundancy Payments Service (separately from the employees individual claims) to expedite the payment process.

The management team at Ballard Business Recovery have advised hundreds of directors and owners of businesses in financial distress on the options available to them. If you are considering an insolvency process but are concerned regarding the effect on your employees, please contact us so that we can explore your options with you.

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