As recent UK company closures such as Jessops, HMV and Comet have shown, business insolvency – when an employer can no longer pay their debts – can affect big as well as small businesses. For both employees and employers, the prospect of business insolvency is a nightmare they’d probably rather not think about, but it’s important for all parties to know their rights and responsibilities in case they’re faced with a worst case scenario. Let’s consider the most important facts to know if the survival of the business you own or work for starts to look untenable.
While liquidation means the closure of a business and the termination of all employment contracts, companies go into administration if there is a chance they can be kept going through restructuring, usually by transferring part or all of the business to a new buyer. Once an employer goes into administration, employees won’t be able to make any legal claim against them without the consent of the administrator or the courts.
After being appointed, an administrator has 14 days to decide whether to make any employee redundant. Any employees made redundant submit claims to the NIF (National Insurance Fund) – run by the Redundancy Payments Office. Those employees who are retained are responsible to the Administrator who acts as Agent of the company, and without any personal liability for the employees’ contracts. The Administrator will pay their wages for the period of trading only. Following a successful restructuring, usually achieved by transferring part or all of the business to a new buyer, the employees are transferred under the terms of the Transfer of Undertakings (Protection of Employment) Regulations. If there is no successful sale by the end of the Administration, the company proceeds to Liquidation, and the employees make their claim for any outstanding money through the National Insurance Fund in the usual manner.
While the bargaining position of employees may be stronger if they’re retained by the administrator, they may still be required to take a permanent pay cut or a temporary deferment of pay. In addition, there is no guarantee that the administration period will end with finding a new buyer.
If the assets of a struggling company are sold to a new buyer, the remaining employees’ rights may be transferred to the new owners, who subsequently adopt their contracts and become responsible for any outstanding money owed to them. However, if an employer cannot find any way to keep their business alive, it may be necessary to place the company into voluntary liquidation, at which point, any existing employment contracts will be terminated. At this stage, employees will be eligible to submit a claim for any money still owing to them. The IP will send out the necessary claim forms at the appropriate time, however, employees may write to them to request a form if it has not been received. If employees are unsure who has been appointed Liquidator, they should contact Companies House.
According to the terms of the Insolvency Act 1986, employees classed as preferential creditors may claim up to a maximum of eight weeks of outstanding salary, and up to a maximum of six weeks of accrued holiday pay. In addition, employees can claim for any arrears of occupational pension contributions which remain outstanding at the time of the Liquidation. However, only £800 of that claim is classed as preferential. Any additional money owed will be rank as an unsecured debt, meaning there is less chance of recovering it.
National Insurance Fund
Employees apply to the National Insurance Fund – run by the Redundancy Payments Office – in order to claim back any additional money owed to them, such as outstanding salary, holiday pay, notice and redundancy pay. This claim needs to be made within six months of the last day of employment.
If an employee’s claim is successful, there’s a limit to what the NIF will pay out, including up to a maximum of £464 a week for unpaid salary (up to 8 weeks) and a maximum of 6 weeks of holiday pay. Employees can also claim for outstanding statutory notice – one week for every year worked at the company, up to 12 weeks – but, again, the maximum that can be claimed is £464 per week. Employees may also be able to make a claim for unpaid pension contributions as well as a basic award for unfair dismissal. So, if an employee earns more than the statutory limit of £464, then any additional monies due become an unsecured claim in the Liquidation.
It’s worth checking the government’s website to confirm whether further claims – such as unpaid Statutory Sick Pay or unpaid Statutory Maternity or Paternity Pay – may also be appropriate. In addition, if an employer lays off 20 or more employees within a 90-day period without adequate prior consultation, he or she may be in breach of the Trade Union and Labour Relations (Consolidations) Act 1992. In this case, employees may be entitled to a Protective Award from an Employment Tribunal. This award may be claimed from the Redundancy Payments Office if an employer has insufficient funds to pay it.
Employers who fail to adopt proper procedures while closing their company down may well end up paying for it in subsequent claims from disgruntled employees. For example, employers must follow proper redundancy procedures – including a selection process, consultation and the need to consider an alternative position if suitable – before letting an employee go. If they do not follow these steps, they may be subject to an unfair dismissal claim.
If you’re an employee worried about your company’s current financial standing, it’s important to get informed on your rights, should you need to make a claim at a later stage. Similarly, business owners should make sure they know their responsibilities to employees by talking to a legal expert.