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Insolvency - what it means for staff

In the current difficult times, there will inevitably be some businesses that fail to weather the economic storms, and face insolvency.

So what will be the consequences of insolvency proceedings on contracts with staff in England, Wales and Scotland?

Independent contractors

A company’s insolvency will not automatically affect contracts with self-employed contractors. However, the administrator or liquidator can decide whether the contracts with these individuals will be honoured; it may be considered better for the company if the contract is terminated.

Any claims for outstanding contractual payments will rank as unsecured claims against the company – meaning they will only be paid after the company’s higher ranking creditors (such as a secured lender) have been paid in full. They will only receive the same proportion of the outstanding sum as any other unsecured creditor.

Employees – liquidation/receivership

In the case of compulsory liquidation, or the appointment of a receiver, any employees will usually be automatically dismissed. An employee will usually have a claim for damages for wrongful dismissal (generally restricted to notice monies), but not unfair dismissal, against the company.

Employees – other arrangements on insolvency

Administrations, company voluntary arrangements, administrative receiverships and creditors’ voluntary liquidations (CVL) have no automatic effect on employment contracts. In the case of a CVL, however, it is likely that the business will cease to trade shortly after the liquidator’s appointment, and that the liquidator will terminate all contracts of employment.

Where an administrative receiver is appointed, there are three exceptions to this general rule, which would result in automatic termination:

  • Where there is an immediate sale of the business
  • Where the administrative receiver and the employee enter into a new contract simultaneously with the appointment that is not consistent with the existing employment contract
  • Where continuing to employ a particular individual would be inconsistent with the role and functions of the administrative receiver (for example, where an employee has a role that is similar to that of the receiver, such as a managing director)

Certain employee claims are paid ahead of other creditors; wages and pension contributions that relate to the period shortly before the company’s insolvency (up to a maximum of £800), and unlimited accrued holiday pay. Other employee claims will rank as unsecured claims.  The National Insurance Fund will pay employees up to eight weeks’ unpaid salary, subject to a statutory maximum weekly amount, currently £380.

In an administration, if the administrators do not dismiss the employees in the first 14 days, they are deemed to have adopted the employment contracts. In such cases, wages and salary (including holiday pay and pension contributions, but excluding redundancy pay, unfair dismissal compensation or protective awards) will be payable as an expense of the administration. This is ahead of the company’s creditors and ahead of the administrators’ own remuneration.

Hannah Drozdz is a solicitor in the corporate recovery team and Mark Haworth an associate in the employment team of HBJ Gateley Wareing