If an employee’s employer enters an insolvency process this does not necessarily mean the employment will end. The possible outcomes will depend on the type of insolvency process.
Employees may be kept on in employment, they might be made redundant, or it is possible that employees may transfer to a new employer under TUPE (for example if a buyer is found for some or all of the insolvent business and TUPE applies to the purchase) or even if TUPE does not apply, employees may be offered new employment with the buyer.
The potential impact on an employee’s employment if their employer is insolvent will depend on the precise situation and the type of insolvency proceedings that the employer is facing.
There are three main types of insolvency proceedings – liquidation (compulsory or voluntary), administration or a company voluntary arrangement.
Claiming from the National Insurance Fund
When an employer becomes insolvent, which means cannot pay its debts as and when they fall due or where liabilities exceed assets, and the employment has been terminated the National Insurance Fund guarantees payment of certain employment debts.
This includes up to eight weeks’ arrears of pay (up to the current maximum statutory limit as referred to below)
Arrears of pay
Employees can claim up to a maximum limit of eight weeks’ arrears of pay from the National Insurance Fund.
This is capped at the statutory limit on a week’s pay (currently £571 in 2022) and is then subject to tax and national insurance.
However, arrears of pay are not limited to unpaid wages.
It also includes:
- Statutory guarantee payments.
- Payment for time off work for public duties, to look for work arrange training, antenatal care or adoption, dependents, employee representatives, pension trustees and other examples, or time off for union duties and activities.
- Remuneration on suspension on medical or maternity
- Remuneration under a protective award
If more than one of the above types of payment are claimed the cap applies to the overall amount.
For example, if the employee is owed six weeks’ wages plus a protective award of 90 days’ pay, the NIF will only cover a total of eight weeks’ pay capped at the statutory rate.
So, the maximum awards are:
| Tax Year | Maximum |
| 6 April 2022-5 April 2023 | £4,568 (£571 x 8) |
| 6 April 2021-5 April 2022 | £4,352 |
Statutory Notice Pay
An employee can recover a debt in relation to statutory notice pay from the National Insurance Fund.
The maximum statutory notice period is 12 weeks and is subject to the current maximum statutory limit on a week’s pay, as referred to above.
So, the maximum amounts are:
| Tax Year | Maximum |
| 6 April 2022-5 April 2023 | £6,852 (£571 x 12) |
| 6 April 2021-5 April 2022 | £6,528 |
Holiday pay
An employee can recover a debt in relation to holiday pay from the National Insurance Fund, subject to a maximum of six weeks’ pay. One week’s pay is subject to the current maximum statutory limit on a week’s pay.
So, the maximum holiday pay which can be claimed is:
| Tax Year | Maximum |
| 6 April 2022-5 April 2023 | £3,426 |
| 6 April 2021-5 April 2022 | £3,264 |
Basic award or statutory redundancy pay
An employee can recover a debt in relation to a basic award, subject to the current maximum limit on the basic award.
Where the whole or part of a statutory redundancy payment remains outstanding the employee can claim the outstanding payment from the National Insurance Fund.
The amount of the payment will be subject to the current limit on statutory redundancy payments.
How does an Employee get a CN number?
Employees can apply as soon as you’ve been made redundant. The person dealing with the insolvency (the ‘insolvency practitioner’ or ‘official receiver’) will give the employee a ‘CN’ (case reference) number.
Employees cannot claim without the CN number.
Employees must apply for redundancy pay within 6 months of being dismissed.
Claims are only accepted from employees and not from self-employed individuals, so employees will need to check your employment status.
Payment from the NIF does not prejudice an employee’s right to claim from the insolvent estate as well (and vice versa).
For example, where funds permit, employees may be able to recover from the insolvent estate debts which are not guaranteed by the NIF or debts of more than the amounts guaranteed by the NIF.
Employees should therefore make claims from both the NIF and the insolvent estate to maximise the chances of recovering some of the debts owed.
Claiming other statutory payments
Where the employer becomes insolvent, liability passes to (HMRC) (from the date of the formal insolvency) for:
- Statutory sick pay
- Statutory maternity pay
- Statutory paternity pay
- Statutory adoption pay
- Statutory shared parental leave pay
The Pension Protection Fund (PPF) may also pay out compensation to members of a defined benefit pension scheme where such pensions have been affected by a participating employer’s insolvency.
Practical issues for employees
Litigation is expensive and judgment debts are difficult and may be fruitless to enforce against insolvent employers
Even if their claims are 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 very small percentage of their claim (which may be a few pence in the pound) or nothing at all. Furthermore, they will generally also bear the costs of bringing the claim if legal representation is used, even if they win in the employment tribunal.
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.
Claims can be made in the insolvent estate without liability first being determined by the employment tribunal
Instead of pursuing litigation, employees 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 using a procedure under the IA 1986.
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 has been in place.
- Whether it covers claims by employees in the event of insolvency (in particular whether the relevant date is the date of the insurable act, rather than the date of the claim).
- If so, how much might be paid out.
If there is a policy in place and if it is applicable to the claim, employees may recover more than if they were to make an employment claim so it is worth checking to see if such a policy might pay out.
Serving a Statutory Demand
If the employer owes an undisputed amount to the employee of more than £750, and winding-up proceedings have not yet been commenced against the employer, the employee has the option of serving a statutory demand on the company. If the employer does not pay the amount claimed within 21 days of service of the demand, the employee can then 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 very real pressure on the employer to pay an outstanding debt promptly. However, if the employer does not pay up, taking the further step of commencing winding-up proceedings should generally be regarded as a last resort.
Legal fees to present the winding-up petition to court are expensive (more than £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, often on the indemnity basis.
If your employer is insolvent or you fear is heading for insolvency call us, we may be able to help. If your business is struggling do get in touch, we may be able to assist with restructuring or making necessary redundancies in a way which avoids insolvency.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.
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