With a recession looming at the end of summer beginning of winter, there are serious concerns that over 500,000 business will go bust.

In this article Irina Polyakova, an Associate at Eaton Smith LLP, gives her advice to employees on claiming against an insolvent employer.

Corporate Insolvency

An employer is insolvent if it cannot pay its debts as they fall due and / or its liabilities exceed its assets.

The restructuring of a business in an attempt to overcome financial difficulties is likely to result in redundancies to save costs, often without full individual or collective redundancy consultation with affected employees. In these circumstances, employees can pursue various claims, including claims for:

• Unpaid salary, benefits and notice pay.

• Statutory redundancy pay.

• Unfair dismissal.

• Protective award where collective redundancies have been made without the required statutory information being given or consultation taking place.

• Award for failure to inform and consult under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (SI 2006/246) (TUPE).

Most liabilities of an employer to an employee (including judgment debts) will rank as unsecured claims in a formal insolvency process and rank second to last in the order of priority. Unsecured creditors (such as employees) generally receive, at best, a few pence of every pound owed to them. However, certain limited employment debts (known as preferential debts) have preferential status and rank third in priority after secured creditors and the expenses of the solvent estate and should therefore be easier to recover.

Further, former employees of an insolvent employer will be able to claim certain debts from the National Insurance Fund (NIF). Other statutory payments can also be claimed from HM Revenue and Customs or the Pension Protection Fund.

Is it worthwhile to litigate against an insolvent employer?

An employee can pursue legal proceedings against an insolvent employer in the normal way, unless the employer is protected by a “stay” or moratorium on legal proceedings but is it worthwhile to litigate against an insolvent employer?

Litigation is expensive and judgment debts are very difficult to enforce against insolvent employers. Even if your claim is successful, with the exception of claims for protective awards (which are preferential debts up to a capped amount), other Tribunal awards will rank as unsecured debts Ultimately, employees may only recover a percentage of their claim or nothing at all. Furthermore, they will generally also bear the costs of bringing the claim.

However, the NIF will not guarantee payment of a protective award (up to the statutory cap) or a basic award unless liability has first been assessed by a Tribunal. As the amount recoverable from the NIF for a protective award exceeds the amount that can be recovered from the company as a preferential debt, employees may consider bringing Employment Tribunal claims for protective awards so that they are able to claim the amount of the award from the NIF.

However, claims can be made in the insolvent estate without liability first being determined by the Employment Tribunal. The High Court’s decision in Nortel illustrates another option for employees. Instead of pursuing litigation, they can simply submit details of their claim to the insolvency practitioner. These claims will be provable in the employer’s insolvent estate even though no liability has been determined. If employees are unhappy with the insolvency practitioner’s evaluation of their claim, they may challenge it.

Employer’s liability insurance schemes

Another alternative which may be open to employees is a claim under an employer’s liability insurance scheme. Employees will need to find out:

• Whether such a policy exists. Where such a policy exists and is applicable to the claim, employees may recover more than if they were to make an employment claim.
  
• Whether it covers claim by employees in the event of insolvency.
  
• If so, how much can be paid out.
  

Serving a statutory demand

If the employer owes an undisputed amount to the employee in excess of £750, and winding-up proceedings have not yet been commenced against the employer, the employee has the option of serving a statutory demand on it. If the employer does not pay the amount claimed within 21 days of service of the demand, the employee could commence winding-up proceedings.

Serving a statutory demand can be a quick, inexpensive and effective option, as the threat of winding-up proceedings can put considerable pressure on the employer to pay an outstanding debt promptly. However, if the employer does not pay, taking a further step of commencing winding-up proceedings should generally be regarded as a last resort. The fees to present the winding-up petition to court are expensive (in excess of £1,000) and, if the employee commences winding-up proceedings on the basis of a debt which is genuinely disputed by the employer, the court will regard this as an abuse of process, dismiss the petition and order the employee to pay the employer’s costs. So, before commencing this course of action, please obtain professional legal advice.

If you would like to discuss whether you have a case or instruct us to pursue proceedings on your behalf, you can email irinapolyakova@eatonsmith.co.uk or alternatively, give Irina Polyakova a call on 01484 821344.