This article sets out the law in relation to the various forms of insolvency and the impact they might have on employment status.


Introduction

In an insolvency situation, much confusion surrounds the continuing employment of the Company’s employees. Whether their jobs will be affected by the Company’s insolvency depends on the type of insolvency process.
In basic terms, a company is insolvent if it cannot pay its debts as they fall due and/or its liabilities are greater than its assets.
There are several types of insolvency proceedings and the effect they have on the continuing employment of a Company’s employees is described briefly below:

1. Administration

The purpose of administration is to achieve one of the following objectives:

(a) Primarily, rescuing the company as a going concern, or failing that
(b) Achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first being in Administration), or finally
(c) Realising property in order to make a distribution to one or more secured or preferential creditors.

The appointment of an administrator over a company does not constitute a change of employer and the employee contracts of employment remain in place.

If employees are still in the employment of the company in administration 14 days after appointment their employment contracts are adopted. However, the administrator is responsible only for the employees “qualifying liabilities” such as payment of wages or salary and is not responsible for termination costs.

The continued employment of the company employees will ultimately depend on the outcome of the administration i.e. if the administrators can secure a going concern sale of the company/business and assets including TUPE transfer of employees, then continued employment may be preserved. However if a sale is unachievable cessation of trade may be the only viable option.

2. Liquidation

The liquidator assumes the powers of the directors/management of the company to wind up the business and realise the assets for the benefit of the creditors. A liquidation can take the form of either a compulsory or a creditors’ voluntary liquidation.

In a compulsory liquidation, employees will be subject to automatic dismissal. Their contracts will terminate with immediate effect on the date of the winding up order. Unless the termination has been made in accordance with the employee’s contractual rights (i.e. with service of and payment for any notice periods) they may be able to pursue a claim for wrongful dismissal. Claims for unfair dismissal are less likely as the termination is brought about by operation of law.

In a creditors’ voluntary liquidation the business of the company does not automatically cease. Accordingly, the employment contracts will not automatically cease. However the powers of the liquidator are limited to carrying on the business such as is necessary to facilitate the winding up of the company. Typically, the business of the company will cease shortly after the commencement of the liquidation and the liquidator will terminate the contacts of employment at that point.

3. Administrative Receivership

The holder of a qualifying floating charge dated before 27 March 2006 can place the company into administrative receivership by appointing an administrative receiver. The role of the administrative receiver is to obtain the best result for the floating charge holder.

Similar to the administration process, if employees are still in the employment of the company in administrative receivership 14 days after appointment, their employment contracts are adopted. The continued employment of the company employees will ultimately depend on the outcome of the administrative receivership and whether a going concern sale of business and assets is achievable.

4. Fixed Charge/LPA Receivership

The holder of a fixed charge has the option to appoint a fixed charge / LPA receiver over a specific company asset. The receiver is not appointed over the Company therefore there is no automatic termination of employment contracts on foot of this appointment and a fixed charge / LPA receiver has no “power” to deal with employees of the company.

5. Court Appointed Receivers

A receiver can be appointed by the Court, most commonly to enforce charges in favour of mortgagees or other secured creditors or to control assets pending the outcome of litigation. The order or appointment made by the Court will define the powers of the receiver. The company may not necessarily be insolvent and has the ability to continue to trade – this will determine the status of the employees of the company.


6. Company Voluntary Arrangements (CVA)

A CVA is a compromise between a company and its creditors which, subject to approval by a majority of members and creditors, will be binding upon them all. The directors retain control of the company’s affairs, with an insolvency practitioner appointed to supervise the company’s compliance with the terms of the CVA. There is no immediate effect on the employees as the primary purpose of this procedure is to continue trading as a going concern.


7. Conclusion

This is a complex area of law and one in which it is advised to obtain specialist legal input prior to making any changes to employee headcount or to their terms and conditions of employment, whether you are an insolvency practitioner implementing the changes, or the company itself outside of an insolvency mechanism.

In the event that the insolvent company is unable to pay employees outstanding wages, holiday pay or redundancy payments and statutory notice payments at the point when they become insolvent, as preferential and unsecured creditors the employees may apply to the Redundancy Payments Service via the Department for Employment and Learning (DELNI).