A company is insolvent if it cannot pay its debts as they fall due.
There are distinct types of corporate insolvency:
• Company Voluntary Arrangement
As a director, you are under a duty to act in the best interests of your company and its shareholders. However, the moment your company is deemed to become insolvent, you are under a legal duty to protect the interests of your creditors.
When a company enters an insolvency event, the employee can apply to the Redundancy Payments Service (“RPS”), a government agency, for certain payments set out below, which the company is unable to pay.
2. Employer’s Duty
You must act with skill, care and diligence in safeguarding the interests of your employees. You are required to ensure that they are dealt with in a professional manner and to be aware of their rights and entitlements.
Employment law is a complex and constantly changing area of legislation and this article is intended as a guide only. You should take independent legal advice regarding your duties as an employer when considering insolvency. It is also important that you take such advice where there is the possibility of transferring staff to another business as, in this scenario, the Transfer of Undertakings (Protection of Employment) Regulations (TUPE) will likely apply (see below).
As an employer you have a duty to consult with the employees in a likely redundancy scenario. There are specific rules when making 20 or more employees redundant at a single establishment within a 90-day period and this is known as collective consultation. While there are no specific rules when making less than 20 employees redundant it is still good practice to consult as an Employment Tribunal could rule that employees have been unfairly dismissed if you do not.
Collective Consultation requires that you:
• Notify the RPS prior to commencement of consultation by submitting a form “HR1” either 30 days prior to the first redundancy in the case of 20 to 99 proposed redundancies or 45 days prior to the first redundancy if more than 99 redundancies are proposed. Failure to submit this form is an offence which may result in prosecution and an unlimited fine for the company and/or officers of the company.
• Consult with trade union representatives or elected employee representative (or directly with employees if there are no representatives). There is no time limit to the length of the consultation period, but it must be a minimum of 30 days in the case of 20 to 99 proposed redundancies or 45 days if more than 99 redundancies are proposed.
• Provide information about the proposed redundancies, giving the representatives or employees enough time to consider them. This must include (in writing)
The reasons for the redundancies
The numbers and categories of employees involved, and the number of employees in each category
How you plan to select employees for redundancy and how you will carry out the redundancies
How you will work out their redundancy payments
• Respond to any requests for further information
• Provide affected employees with termination notices showing their leaving date
• Issue affected employees with a notice of redundancy once the consultation is complete
For further information, the Advisory, Conciliation and Arbitration Service (ACAS) provide a booklet entitled “handling Large Scale Redundancies” which can be accessed at:
Clearly, in an insolvency scenario the above may be difficult, especially regarding timing, but the rules still apply. Should an Employment Tribunal deem that there has been no “meaningful consultation” then the employees may be awarded what is known as a Protective Award of up to 90 days’ pay and, as mentioned above, there are penalties if no HR1 form is submitted at the earliest opportunity.
3. Employee’s Rights
Employees have different rights depending on whether the employer and/or the Insolvency Practitioner:
• makes employees redundant (dismissal)
• asks employees to keep working
• transfers employees to a new employer (if the business has been sold)
If an employee is made redundant
An employee is made redundant if dismissed from their job. Employees can apply to the RPS for:
• a redundancy payment
• holiday pay
• outstanding payments like unpaid wages, overtime and commission
• money an employee would have earned working their notice period
They may be eligible for unemployment benefits if they lose their job. It is, therefore, imperative that they sign-on as soon as possible. Failure to do so, may have a detrimental impact on the compensation for loss of notice pay awarded by the RPS.
Thomson Cooper, as the Insolvency Practitioners dealing with the administration of the company’s affairs, will guide the employees through the claims application process.
Compensation for unfair dismissal
Employees can also apply to the court for compensation if they think they were unfairly dismissed or not properly consulted.
They can make a claim to an employment tribunal if:
• they were dismissed unfairly (‘basic award’)
• there was no proper consultation about their redundancy (‘protective award’) explaining why redundancy is necessary and any alternatives to redundancy (see above).
Their claim would be against the Secretary of State for Business, Energy and Industrial Strategy and their former employer. We would advise employees to seek guidance from a suitably qualified employment solicitor to discuss their individual circumstances.
If employees continue working after the insolvency
Employees might be asked to continue working for their employer after the company becomes insolvent.
They will still be eligible to claim for redundancy pay and other money owed if made redundant at a later date. Employees cannot claim holiday pay, wages, bonuses or commission owed between the day of the insolvency and the day of dismissal, as this will be the responsibility of the insolvency practitioner.
If the employee is transferred to a new employer
Employees may not be able to claim any money from the government if transferred from the former employer to another business. In such circumstances the new business may be deemed to have adopted their employment contracts. If a transfer is to be done under the TUPE regulations (see 2 above), then you should seek the appropriate legal advice.
4. What are the entitlements?
The money that an employee is entitled to depends on:
• how long they were employed by the insolvent company
• what was stated in their employment contract
• their age
Payments are capped
Wages and other money owed
Employees can apply for unpaid wages and other money they are owed by the employer, e.g. bonuses, overtime and commission. They are only entitled to money in accordance with their employment contract.
They can claim up to a maximum of 8 weeks money owed, regardless if they work only 2 days per week or 5 days per week. Payments for wages and other money owed are currently capped at £538 per week.
The employee’s claim will be subject to income tax and National Insurance. They might be able to claim a tax refund if an overpayment has occurred.
Employees can get paid for:
• holiday days owed that they did not take (‘holiday pay accrued’)
• holiday days they took but were not paid for (‘holiday pay taken’)
They are only paid for holidays taken or accrued in the 12 months before the employer became insolvent. Holiday pay claims can be submitted for a period up to 6 weeks. Holiday pay is currently capped at £538 per week. The employee’s claim will be subject to income tax and National Insurance. Again, they might be able to claim a tax refund if an overpayment has occurred.
Statutory notice pay
Employees are entitled to a paid notice period when they are made redundant, even if a notice period is not detailed in their contract of employment. They can claim for statutory notice pay if they:
• did not work a notice period
• worked some of their notice period
• worked an unpaid notice period
The statutory notice pay is worked out as one week’s notice for every year employed, up to a maximum of 12 weeks. Statutory notice pay is again currently capped at £538 per week.
Employees are normally entitled to redundancy pay if:
• they have been made redundant
• they were an employee
• they were continuously employed by the now insolvent business for 2 years or more
We shall provide the employees with a Ready Reckoner, which will give them an indication of their entitlements in accordance with years of service. There is a payment limitation of a maximum of 20 years’ service with the insolvent company.
Redundancy payments are capped at £538 a week as of 6th April 2020 and the maximum statutory redundancy pay you can get is £16,140. If you were made redundant before 6 April 2020, these amounts will be lower. This amount is subject to change and up-to-date details of the current weekly rate of pay are available on the Gov.UK website at www.gov.uk
Redundancy pay qualifies for special tax treatment, as up to £30,000 is tax free. But other elements of the package – holiday pay and statutory notice pay – will be taxed in the same way as any normal pay.
Employees should contact us if they are missing contributions to their pension. In certain circumstances, the RPS will make payment to the pension provider for unpaid contributions.
5. Applying for the money due
Employees are eligible to apply if:
• they were an employee
• they are a UK or EEA national (or a foreign national with permission to work in the UK)
Initially once the insolvency practitioner is formally appointed, it is a requirement to upload employee details to the RPS and therefore Directors need to provide this for us. This allows the RPS to issue a claim reference number.
It should be noted that when an employee submits their on-line claim to the RPS for redundancy, unpaid wages and holiday pay, it must be within 6 months of their dismissal, otherwise their claim will be rejected.
Claiming for Statutory Notice Pay
The on-line claim form will specifically ask if the employee wants to claim for Compensation for Loss of Notice – Statutory Notice Pay. If they claim, they will be allocated a ‘LN’ reference number, which will be issued to them after their notice period would have ended. It will be sent after their notice period would have ended. This is usually no more than 12 weeks after they were dismissed.
Employees at the same business can have different notice periods. Once they have the ‘LN’ reference number, they can claim online for loss of notice. Any money they receive (or could have received) by claiming benefits will be deducted from the payment.
6. After employees have applied
It usually takes around 14 days to get a payment. It can sometimes take longer but most claims are generally processed within 6 weeks. The information supplied will be checked against the employer’s records, for example how much holiday had been accrued. The employee will only get a payment if the insolvent company’s records verify that they are owed money.
If the application is rejected
Contact the Redundancy Payments Service in the first instance if you need help (see details below). Have your case reference number or National Insurance number to hand.
They will explain why the claim was rejected. Employees can make a claim to an employment tribunal if they disagree with the decision.
Redundancy Payments Service
Tel: 0330 331 0020
Monday and Tuesday, 9am to 5pm
Wednesday, 10:30am to 5pm
Thursday and Friday, 9am to 5pm
Further contact details for assistance:
Richard Gardiner, Partner
George Dale, Director of Business Recovery and Insolvency
3 Castle Court, Carnegie Campus
Tel 01383 628800
This leaflet is intended solely as a guide for directors as to the potential implications for both employer and employees in an insolvency scenario. It is not a definitive guide to what is a complex and constantly evolving area of law, the impact and application of which can vary widely based on the specific facts involved. Given such constant evolution of this area of legislation, there may be omissions or inaccuracies in the information provided.
Accordingly, the information is provided on the understanding that Thomson Cooper are not being engaged to provide professional advice and this information should not be used as a substitute for independent legal advice. Directors should not make any decision or take any action based on this leaflet without consulting a professional employment advisor.