EMPLOYMENT LAW AND INSOLVENCY PROCEEDINGS
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:
Certain practical aspects of dealing with the employees of an insolvents business are covered elsewhere in the Technical Manual, as follows:
Certain practical aspects of dealing with matters arising from the bankrupt’s employment are covered elsewhere in the Technical Manual, as follows:
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).
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).
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).
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).
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].
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.
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).
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.
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.
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.
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).
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:
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:
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]:
See paragraph 76.55 for information regarding the payment of redundancy.
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].
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.
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]:
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.
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].
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].
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).
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.
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].
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).
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]