EMPLOYMENT LAW AND INSOLVENCY PROCEEDINGS

PART 2

December 2013 

EMPLOYMENT LAW AND INSOLVENCY PROCEEDINGS 

76.37 Employment law and insolvency proceedings – scope of this Part

This Part of the chapter considers the interaction of employment law and insolvency law.  It focuses on compulsory liquidation and bankruptcy and does not give detailed guidance in relation to other forms of insolvency such as voluntary liquidation or administration.

In particular, the Part gives advice in relation to the following: 

 

76.38 Practical aspects of dealing with the employees of an insolvent

Certain practical aspects of dealing with the employees of an insolvents business are covered elsewhere in the Technical Manual, as follows: 

 

76.39 Practical aspects arising from the bankrupt’s employment

Certain practical aspects of dealing with matters arising from the bankrupt’s employment are covered elsewhere in the Technical Manual, as follows: 

 

76.40 Effect of formal insolvency of an employer on a contract of employment

Where an employer is subject to a compulsory liquidation the employment contracts of the company’s employees are automatically terminated [note 1].

Where an employer is made bankrupt, there is no automatic termination of the employees’ contracts [note 2].  The non-payment of wages resulting from the cessation of trade is, however, likely to be a breach of contract (see paragraph 76.5) allowing the employee to bring the contract to an end and seek damages for (constructive) wrongful dismissal (see paragraph 76.30) or redundancy (see paragraph 76.42).

 

76.41 Effect on an employment contract of a bankruptcy order against the employee

It is a general legal principle that an employment contract (one that requires the bankrupt to provide his/her skill and/or labour) cannot vest in the trustee in bankruptcy.  The official receiver, as trustee cannot carry out the role of the bankrupt, nor can he/she force the bankrupt to remain in the job [note 3].

In essence, the only benefit that can be derived for the bankruptcy estate from an employment contract would be through an IPA/IPO (see Chapter 31.7), or in respect of a claim in relation to an employment contract that has come to an end (for wrongful dismissal – see paragraph 76.30 – for example) (see Chapter 31.9, Part 8).

 

76.42 Dismissal of employees engaged by an insolvent business

Generally speaking, unless in the very rare circumstances that the business is to be continued (see paragraphs 62.19 to 62.20), the official receiver, as liquidator or trustee will be required to dismiss the insolvent’s employees (see paragraph 8.67).

Such a dismissal is likely to lead to a monetary claim by the employees (see paragraph 76.43), in particular a claim for redundancy (see paragraph 76.55) since the termination of an employment contract as a result of insolvency is automatically considered to be redundancy (see paragraph 76.32).

 

76.43 An employee’s claim for monies owed - general

Following the insolvency of his/her employer, an employee can make a claim in the insolvency for monies due to him, some of which will be treated as a preferential claim (see Chapter 40, Part 4).  No priority is, however, given to monies due under a claim for wrongful dismissal (see paragraph 76.30) [note 4]. 

The employee can also make a claim for outstanding monies to be paid to him/her from the National Insurance Fund (see paragraph 76.44).

 

76.44 Claims to the National Insurance Fund – general

The legislation [note 5] provides that, if an employer becomes insolvent (see paragraph 76.51), certain debts [note 6] (see paragraph 76.53) owing to employees, and a redundancy payment (see paragraph 76.55) may be paid by the Secretary of State from the National Insurance Fund.

Wages, holiday pay, notice pay, a basic award for unfair dismissal and protective awards for an employer’s failure to consult representatives about proposed redundancies (a protective award – see paragraph 76.35) are payable only if the employer is insolvent (see paragraph 76.51). However, insolvency is not a pre-requisite for the Redundancy Payments Service (see paragraph 76.45) to make a payment in respect of statutory redundancy (see paragraph 76.55).

The amount payable can also be off-set against a debt owed by the employee to the employer [note 7].

Paragraphs 76.46 to 76.54 to give advice regarding claims in respect of outstanding wages, etc. and paragraph 76.55 give advice regarding redundancy claims.  

 

76.45  The Redundancy Payments Service

The Redundancy Payments Service (RPS) administers the redundancy and insolvency provisions of the Employment Rights Act 1996, acting on behalf of the Secretary of State.

The main function of the RPS is to make payments from the National Insurance Fund (see paragraph 76.44), on behalf of the Secretary of State, to employees who have been made redundant and whose employers are unwilling or unable to pay the statutory and contractual debts owed to the employees.  .

Detailed guidance on the system of payments out of the National Insurance Fund operated by the Redundancy Payments Service (RPS), which is a directorate of The Insolvency Service, is available in the RPS Handbook/Manual.

 

76.46 Claims to the National Insurance Fund. – practicalities – employee claims

To make a claim to the National Insurance Fund, the employee needs to complete form RP1, which should be made available to employees by the official receiver on request or during an inspection (see paragraph 8.68).

 

76.47 Claims to the National Insurance Fund – provision of information to RPS

The RPS will normally [note 8] ask the official receiver to complete and return a form RP14, which seeks information regarding the employees of the company and their wages, holiday pay, etc.  The official receiver should complete this form as fully as possible from the information available in the insolvent’s employee and accounting records [note 9] [note 10].  Wilful failure to provide the requested information is an offence [note 11] [note 12].

There is space for information similar to that requested by the RP14 to be entered into the PIQ, which should be of assistance to the official receiver in dealing with the RPS.

The official receiver should be aware of the possibility of fraudulent claims being made to the RPS and should pass on any concerns in that regard to the RPS as appropriate.

 

76.48 Claims to the National Insurance Fund – insolvency practitioner appointed

Where an insolvency practitioner has been appointed liquidator or trustee, the official receiver should pass all details held regarding the employees and employee claims to the insolvency practitioner as part of the handover (see Chapter 17 Part 7 particularly paragraph 17.78) and also notify the employees of the appointment.

 

76.49 Definition of employee for the purposes of employee claims to the National Insurance Fund

The types of employment arrangement that can lead to a claim to the National Insurance Fund are limited.

In summary, self-employed persons and members of a partnership, in particular, will not qualify (not being considered to be employees), and there are certain categories of employee that also do not qualify, such as merchant seamen and share fishermen [note 13].  Such non-qualifying persons may lodge a claim in the insolvency as an unsecured creditor.

The official receiver need not get too involved in establishing whether a person’s claim qualifies or not and, where there is doubt, should simply provide the employee with the standard claim forms (see paragraph 76.46) stating that any decision will be made by the RPS.

 

76.50 Limitations in respect of payment from the National Insurance Fund for outstanding wages, and similar (but not redundancy)

There are certain legislative limitations that apply in respect of claims to the National Insurance Fund for outstanding wages, holiday pay, notice pay, unfair dismissal and protective awards.  In particular, claims may only be made in relation to situations where; 

Additionally, only those debts specified in the legislation [ERA 1996] may be paid, subject to financial limitation (see paragraph 76.54). 

Insolvency is not a prerequisite where the claim is for redundancy (see paragraph 76.55).

 

76.51 Definition of insolvency for the purposes of claims to the National Insurance Fund 

Where insolvency is a requirement for a successful claim (see paragraph 76.44), the legislation [note 14] defines it in terms of formal insolvency proceedings and does not extend to those employers who have simply ceased trading or, in the case of a company been dissolved without any preceding liquidation (see paragraph 76.52 for other circumstances not considered ‘insolvency’ for these purposes).  In particular, insolvency is defined as: 

  • Where the employer is a company: 
    • A winding-up order has been made, or a resolution for voluntary winding-up (see Chapter 56, Part 3) has been passed. 
    • If the company is in administration (see Chapter 56.1) under the Act. 
    • If a receiver or manager of the company’s undertaking has been appointed or if possession has been taken on behalf of or by the holders of any debentures secured by a floating charge (see Chapter 56, Part 2). 
    • If a company voluntary arrangement (CVA) (see Chapter 56, Part 5) has been approved.

 

  • Where the employer is an individual: 
    • He/she has been adjudged bankrupt. 
    • He/she has made an arrangement or composition with creditors (see Chapter 57, Part 2). 
    • If an individual voluntary arrangement (IVA) (see Chapter 57, Part 1) has been approved by creditors. 
    • He/she has died and his/her estate falls to be dealt with in relation to the provisions for deceased insolvents (see Chapter 54).

 

76.52 Circumstances not considered to be ‘insolvency’ for the purposes of claims to the National Insurance Fund

In addition to cessation of trade and dissolution (see paragraph 76.51), the following circumstances are not considered to be insolvency for the purposes of deciding an employee’s qualification (see paragraph 76.44) to make a claim to the National Insurance Fund: 

  • Receivers appointed under an express term under a fixed charge. 
  • Winding up of a partnership (see Chapter 53), where no bankruptcy orders have been made against the individual members – the employers – see paragraph 53.100). 
  • Receivership under the Law of Property Act 1925 (see Chapter 69). 
  • Appointment of a provisional liquidator (see Chapter 2). 
  • Appointment of an interim receiver (see Chapter 2A). 
  • Receivership under the Agricultural Credits Act 1928.

 

76.53 Debts payable from the National Insurance Fund

The following is a brief list of those debts guaranteed and payable from the National Insurance Fund where the employment has been terminated due to the formal insolvency of the employer [note 15]: 

  • Arrears of pay up to a maximum of eight weeks. 
  • Protective awards (see paragraph 76.35). 
  • Notice payments in compensation of an employer’s failure to give the correct period of notice (see paragraph 76.25). 
  • Holiday pay up to a maximum of six weeks during the last 12 months preceding the award date.
  • Any basic award for unfair dismissal (see paragraph 76.29). 
  • Reimbursement of a fee or premium paid by an apprentice or articled clerk.
  • Pension scheme contributions (see paragraph 76.56). 
  • Maternity pay [note 16]. 

See paragraph 76.55 for information regarding the payment of redundancy.

 

76.54 Claims for outstanding wages, holiday pay, notice pay capped

A payment in respect of a claim in respect of arrears of wages and holiday pay is capped.  The cap relates to the amount payable per qualifying week, and is reviewed each year [note 17] [note 18].

Where the employee is claiming for a notice payment in compensation for the an employer’s failure to give the correct period of notice (see paragraph 76.25),  [note 19], the amount payable will depend on whether he/she was dismissed unlawfully without notice or worked the notice period.  In the latter case, there will be a deduction to take account of earnings or state benefits received in the period [note 20] [note 21].

 

76.55 Claims for a redundancy payment

Whether or not the employer is formally insolvent and the employer has failed to make a statutory redundancy payment (see paragraph 76.34), the employee may make a claim to the National Insurance Fund for payment of the sum due [note 22].

This will be equally relevant for those employees made redundant as a result of the insolvency (which, for the relevant provisions is defined in the same way as for claims in relation to outstanding wages, etc., - see paragraph 76.51) – in relation to which the two year period necessary to qualify for a redundancy payment will not apply.

 

76.56 Claims for outstanding pension scheme contributions

The trustee, or similar (see paragraph 61.5), of an occupational pension scheme (see paragraph 61.74) can make application to the National Insurance Fund for outstanding employer’s pension contributions, as follows [note 23]: 

  • Arrears accrued over the 12 months prior to insolvency, 
  • arrears certified by an actuary (a pensions expert) to be necessary to pay the employees’ benefits on dissolution of the scheme, or 
  • 10% of the last 12 months’ payroll for the employees covered by the scheme. 

Where the scheme is a money purchase scheme (see paragraph 61.5), the amount payable is the lower [note 24] of the three options and the payable amount is limited to those contributions deducted from employees but not actually paid into the scheme [note 25]. 

See also paragraph 61.93 regarding the official receiver’s duty to provide information regarding the scheme.

 

76.57 Disputes to be resolved by Employment Tribunal

Where there is a dispute regarding the (non) payment of a claim to the National Insurance Fund, the matter may be referred by the claimant to an Employment Tribunal (see paragraph 76.15) to decide [note 26] [note 27] [note 28].

 

76.58 Time limit for claims to the National Insurance Fund

Except for holiday pay (which must have been owed in the 12 months leading up to the date of insolvency or the date of termination – whichever is the later), there is no specific legislative time limit for a claim to the National Insurance Fund for claims in respect of outstanding wages, etc., though such a claim may become statute-barred, which would happen 12 years from the date of the insolvency for this type of claim (see paragraph 31.9.143). 

Similarly, there is no time limit for a redundancy claim to be made, but if the time has passed in which a claim for redundancy can be made to the employer (see paragraph 76.34) [note 29], there can be no payment from the National Insurance Fund [note 30].

 

76.59 No minimum requirements regarding length of service, age or hours worked in respect of a claim to the National Insurance Fund

To qualify to make a claim to the National Insurance Fund, the claimant is not required to have worked for the employer for a minimum period of time (except to qualify for notice pay – see paragraph 76.25 or redundancy pay – see paragraph 76.34), nor for a minimum number of hours per day/week/month.  There is no minimum or maximum age limit to a claim and, where the potential claimant is deceased, the claim may be made by his/her personal representative (see Chapter 54, Part 3).

 

76.60 EU Cross-border claims to National Insurance Fund

Where an employer is declared insolvent in one country of the EU (except Denmark), that declaration of insolvency is effective throughout the EU (except Denmark) (see Chapter 41).

Further, where an employer has its registered office in one member state of the EU but has ‘activities’ in which it employs people in another member state, it is the payments guarantee organisation of the country in which the employees are employed which must make payments in the event of insolvency [note 31].

‘Activities’ have been held to be a stable economic presence, featuring human resources allowing it to perform its activities there [note 32].

This would mean, in summary, that employees may make a claim to the National Insurance Fund despite there being no insolvency order made in the UK.

 

76.61 Claims by directors of the insolvent company

As outlined in paragraph 76.7, a director of a company can be an employee of that company and, that being the case, will not be barred from making a claim to the National Insurance Fund.  The fact that the director had considerable control over an insolvent company will not, of itself, disqualify him/her from making a claim to the national insurance fund (see paragraph 76.44) [note 33].

Similarly, a director may make a claim for a redundancy payment [note 34].

 

76.62 Subrogation of claims to the Secretary of State

Where the Secretary of State has made a payment out of the National Insurance Fund to an employee, he/she will take the employee’s creditor rights in the insolvency in relation to those claims settled from the Fund [note 35] [note 36] [note 37].  This is known as subrogation of the claim.  Further guidance on this is in paragraph 40.93.

Subrogation can also apply to other third parties in respect of payments made by them relating to employee’s remuneration and holiday pay (see paragraph 40.23).

 

76.63 A claim with an Employment Tribunal at the date of the order

Where the official receiver, liquidator or trustee, receives notification of proceedings being brought in an Employment Tribunal (see paragraph 76.15) against the insolvent by an employee, the Tribunal and the claimant should be informed of the insolvency proceedings and reminded that proceedings may not be brought or continued without the leave of the bankruptcy court  [note 38] [note 39].

It may be the case that the employee is bringing a claim in order to establish a liability that may be claimed from the National Insurance Fund (in respect of a claim for unfair dismissal, for example) (see paragraph 76.44).  In such a case, the official receiver should not object to such a claim proceeding providing that no order is made against the property of the insolvent or against the official receiver personally, and should write to all parties in these terms. 

Where the bankrupt is bringing a claim before an Employment Tribunal, the guidance in Chapter 31.9, Part 8 should be followed.

 

[Back to Part 1 – Employment law – general background]