How should insolvent SMEs handle redundancy?

What are your obligations to your staff if you’ve gone insolvent? How should insolvent SMEs handle redundancy?

What should you do about making staff redundant if your company cannot trade any longer? How should insolvent SMEs handle redundancy?

Can employees keep working for my business if it’s being sold?

The sale of a business during insolvency ordinarily only arises when appointed administrators realise its assets through, in most cases, the sale of the business and/or assets to a third party.

In such circumstances Transfer of Undertakings (Protection of Employment) regulations (TUPE) generally apply, so that employees will automatically transfer to the new owner and their terms and conditions will be maintained.

In some cases, TUPE will permit changes to the contract of employment, provided the changes have the aim of safeguarding the survival of the business.

The application of TUPE is complex; there are specific rules in TUPE where a business is bought out of administration, and legal advice should always be obtained.

>See also: How to approach insolvency

What happens if I’m being wound up?

Although employment contracts do not necessarily terminate automatically where the employer company is placed into voluntary liquidation (members or creditors), they are likely to terminate shortly after winding up is commenced. And where the company is subject to a winding-up order and is placed into compulsory liquidation or a court-appointed receiver is appointed, the employment immediately ceases and takes effect on the date of publication of the winding up order or the date when the order is made or the receiver appointed.

Could I face legal action if I cannot pay wages?

For the simple matter of unpaid wages, generally employees can only pursue their contractual employer and not a director of the employer company. It is only where a director who does not act in good faith and within the scope of their authority may, in very limited circumstances, be found to be personally liable.

What staff can do to claim unpaid wages

If an employee is not paid their wages, there are various actions that could be taken, but this will also depend on the type of insolvency process that the company is subject to.

If the employer isn’t yet subject to an insolvency process, provided that an employee is owed more than £750, as an alternative to pursuing a claim through the Employment Tribunal, the employee could serve a statutory demand on the company, prior to winding-up proceedings commencing.

If the sum demanded isn’t paid within 21 days, the employee can then start winding up proceedings, by petitioning for the company to be wound-up. This is a formal legal process, and one which can be costly. It also may, in the event the employer company is hopelessly insolvent, yield no return to the employee due to their ranking as an unsecured creditor (see below).

If a company is in administration…

Where the employer company is in administration or compulsory liquidation, due to the automatic stay on proceedings in these proceedings, no legal action can be taken against the company without the consent of the administrator or the court where the company is in administration, and where the company has entered compulsory liquidation, permission of the court is required. This legal stay is not applicable in voluntary liquidation.

In the event of a TUPE transfer, generally employment liabilities transfer to the transferee (the purchasing company) so the employee may have a claim against the transferee for outstanding wages.

In a TUPE consultation the transferor has obligations to inform representatives and consult. Either or both of the transferee and transferor can be held liable to pay compensation for a failure to inform and consult, depending on the circumstances. Each employee affected is able to be awarded up to 13 weeks’ gross uncapped pay.

However, where the business has been sold in administration, whilst the requirement to inform and consult still applies, TUPE provides that certain liabilities (or part thereof) will not transfer to the purchaser, such as outstanding wages, holiday pay; in which case the employee will need to make a claim (see below).

If an employee is made redundant, the employee is entitled to a redundancy payment, statutory notice pay and any other payments, including unpaid wages, which they could pursue.

Non-payment of wages could result in a claim being brought for constructive wrongful dismissal in the employment tribunal. If an employee has at least two years’ continuous service, they could bring a claim for unfair dismissal. However, the employer may be able to justify the dismissal due to the insolvency.

>See also: How do I make someone redundant? – Small business redundancy guide

Unsecured debts

Most of the sums likely to be claimed (except for a protective award, which is compensation for an employer’s failure to consult before making an employee redundant) constitute unsecured debts, which, given the employer’s insolvency, are likely to result in little to no sums being recovered.

Unsecured debts include payment in lieu of notice, statutory redundancy pay, unfair dismissal pay and damages for wrongful dismissal. It is only the employee’s “remuneration” (which is capped) which ranks as a “preferential” debt in an insolvent estate, and which may be paid in full, after secured creditors and the expenses of the insolvent estate.

What is the National Insurance Fund?

Employees may therefore choose not to bring a claim to recover these sums, due to the difficulties with recovering an unsecured debt, especially if they are able to secure sums from the National Insurance Fund (NIF), unless a formal award is a perquisite for advancing a claim to the NIF.

If a business is insolvent and the employee’s employment has been terminated, employees can make a redundancy claim to the NIF for various sums, where the Redundancy Payments Service will apply a prescribed criteria to determine the claimant’s eligibility to claim from the NIF.

The NIF guarantees a basic minimum payment of certain debts owed to employees, including a statutory redundancy payment (provided that the employee has been made redundant), eight weeks’ arrears of pay capped at £571 a week, holiday pay, statutory notice pay and unpaid pension contributions. For statutory sick, maternity, paternity, adoption and shared parental leave pay, the employee will need to lodge a claim with HMRC.

If an employee has a defined benefit pension scheme, a potential claim for compensation can be made to the Pension Protection Fund, if a pension has been impacted as a result of the employer’s insolvency.

What support is available if I cannot afford to pay wages?

In the event you cannot afford to pay wages, you should seek insolvency advice immediately. Seeking and acting on advice sooner will enable, where possible, a rescue plan to be pursued thus ensuring the recovery of the company in the long run, and, should that not be possible, acting swiftly will enable directors to minimise the risks of facing claims for misfeasance, breach of fiduciary duties and wrongful trading in the event of the company’s liquidation.

What other employment laws must be followed during insolvency?

TUPE is the key legislation applicable. In some circumstances, certain TUPE protections will not apply, such that any dismissals will not be deemed automatically unfair (but normal unfair dismissal rules still apply). Generally, however, insolvent businesses are not subject to any specific exception to the obligations within TUPE, such as to inform and consult, so an employer will need to ensure that they are complying with these requirements. Transferees are also obliged to provide the relevant employee liability information to employees, where applicable.

Stephen Moore is partner and head of employment at Ashfords LLP. Nicola Brastock, senior associate at Ashfords LLP, co-wrote the piece, with contributions from trainee solicitor Jessica Mann

Further reading

Redundancy letter

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Stephen Moore

Stephen Moore is partner and head of employment at Ashfords LLP.

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