What is Insolvency?
If your employer is insolvent, depending on the circumstances, your employment contract will terminate. The National Insurance Fund (NIF) guarantees a basic minimum payment of specific debts owed to employees by their insolvent employers, provided certain conditions are met. Anything not covered by NIF must be claimed in the insolvency.
Section 183 ERA 1996 describes the circumstances under which an employer is deemed to be insolvent for the purposes of employment law. A company or limited liability partnership (LLP) can be put into insolvency if its in debt and can’t pay the money it owes. Insolvency means administration, compulsory liquidation (winding up), or receivership. If your employer is an individual insolvency is a voluntary arrangement with creditors. Insolvencies are dealt with by a court appointed insolvency practitioner or by the official receiver who will act as the administrator, liquidator, receiver or trustee in bankruptcy (where your employer is an individual).
Insolvency affects the contract of employment because the contract is a personal one between you and your employer. This means that if your situation changes or your employer’s situation changes the contract in its current form will terminate. Basically, if an employee dies, the contract terminates, and if your employer becomes insolvent, the same should occur. Employment contracts however, operate differently depending on the type of insolvency.
Some payments such as salary, holiday pay and wages are preferential debts when your employers assets are shared out, meaning they must be paid before certain other debts. There are also special arrangements with the Insolvency Service for you to recover a basic minimum of the debts owed to you from the National Insurance Fund. You can also claim unpaid statutory maternity pay, statutory paternity pay, statutory adoption pay and statutory sick pay from HMRC. You can make a claim to the Employment Tribunal for compensation or monies owed if the Insolvency Service has not paid you or paid less than what you are claiming.
What is Administration?
Administration is a process for gaining control of a company when it is insolvent and facing threats from creditors. The Court may appoint a licensed insolvency practitioner as administrator to oversee the transition. The administrator acts as the company’s agent (IA 1986, Sch BI para 69) and so contracts of employment will continue as the company would not have changed its identity. The administrator can terminate contracts of employment on behalf of the company as its agent and this can amount to wrongful or unfair dismissal. Alternatively they can carry on the business of the company and continue to employee the employees. Any employee who wants to make a claim against the company for unfair or wrongful dismissal will be subject to the moratorium against claims whilst the administrator is in office, and must apply to the court to have the moratorium lifted – IA 1986 Sch B1 para 43.
What is Compulsory Liquidation?
Compulsory liquidation (or winding up by the court) is a procedure by which the assets of a company are sold, and the proceeds are distributed to the company’s creditors. A court order is required to put a company into compulsory liquidation. At the end of the liquidation, the company is dissolved. The procedure is set out in the Insolvency Act 1986 (IA 1986) and the Insolvency Rules 1986.
When a winding-up order has been made, the Official Receiver is appointed by the court as liquidator –s136 IA 1986. The liquidators job is to collect in and realise the company’s assets, and to distribute the proceeds to the company’s creditors and, if there is a surplus, to any people who are entitled to it – s143(1) IA 1986.
All employees of a company are automatically dismissed if a winding-up order is made. As a former employee, you may be entitled to a redundancy payment, and may have a claim for damages on the grounds of wrongful dismissal. This is because if there is no trading employer, there can be no ongoing contract. However, if a liquidator taking over office decides to trade the company in liquidation and wishes to retain you (on your agreement) then your employment will continue. This situation is distinct from the liquidator retaining you just to help him wind up the company. Here, it is more likely that the liquidator is employing you on a temporary basis to help with winding up.
Voluntary Winding-up
If the terms of the employment contract are that the passing of a resolution for winding-up by the company automatically terminates the employment contract, then the contract terminates on the resolution for winding-up. Otherwise, the contract will terminate if the liquidator decides to cease trading. As with compulsory winding-up, this will be a wrongful dismissal.
Receivership
Court Appointed Receiver
When the court appoints a receiver, control of the company is given to the receiver or manager. The receiver takes control of the company and its business. The status of the company changes and this fundamentally affects the contract of employment. The employment contract will terminate and you will have a claim in damages against the company for breach of contract.
Administrative Receiver
An administrative receiver is an agent of the company and so their appointment does not automatically terminate the contract of employment. If the administrative receiver continues the business with the employees then there is no change in employees’ status.
Voluntary Arrangement with Creditors
A Company Voluntary Arrangement (CVA) is a procedure that allows a company to settle debts by paying only a proportion of the amount that it owes to creditors, and come to an arrangement with its creditors over the payment of its debts. The CVA allows the company to remain in control of the business and continue to trade. This means that employee’s contracts remain the same and employees can continue to work in the organisation as before. It does not mean that employees are automatically made redundant.
What You Can Claim in the Employment Tribunal
Section 184 of the Employment Rights Act 1996 (ERA 1996) allows you to claim the following;
- Arrears of pay for a maximum of 8 weeks
- Up to 12 weeks notice pay, capped at the statutory limit on a week’s pay – section 86(1) or (2) ERA 1996
- Failure to give statutory notice
- A maximum of 6 weeks accrued holiday pay
- Any basic award of compensation for unfair dismissal
- Reimbursement of any fee or premium paid by an apprentice or articled clerk.
Claiming Arrears of Pay
Under section 184(1)(a) ERA 1996, you can claim a maximum of eight weeks arrears of pay from the NIF. This is subject to tax and national insurance contributions, and is capped at the statutory maximum for a weeks pay.
Arrears of pay is not only for unpaid wages, and includes the following;
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Statutory guarantee payments.
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Payment for time off work – sections 50 to 63C ERA 1996Time off for union duties and activities – section 169 Trade Union and Labour Relations(Consolidation)Act 1992 (TULR(C)A 1992)
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Payment for suspension on medical or maternity grounds – sections 64 & 68 ERA 1996
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Payment under a protective award – section 189 TULR(C)A 1992
Last Updated: [02/08/2022]
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