St Philips Chambers Employment INSOLVENCY AND EMPLOYMENT LAW Statutory framework 1.

. This talk concerns the following instruments: Transfer of Undertakings (Protection of Employment) Regulations 2006 (Tupe); and Insolvency Act 1986 (IA 1986).

Insolvency 2. An employer is insolvent if it cannot pay its debts as they fall due and/or if its liabilities are greater than its assets. This may result in the insolvency process with an insolvency practitioner to manage its affairs. Such a process may be: terminal cases, designed to where the aim of the proceedings is to close down the company; or non-terminal cases, where the aim of the proceedings is to rescue the company. 3. Liquidation is where the liquidator assumes the powers of the directors and management of a company to wind up the business and realise the assets for the benefit of all the creditors in the order provided by IA 1986. This may be done compulsorily or voluntarily (i.e. by CVL). 4. Court-appointed receivership is where a receiver is appointed to recover a debt owed to a secured creditor. Insolvency is not necessary but liquidation may follow. The receivers powers are set out in the order appointing him and may authorise his conduct of the business, sale of assets etc. 5. Administration is where an administrator is appointed to reorganise the company or realise its assets. The administrator may seek to preserve the company or sell it, indeed, he may even have agreed to do so before his appointment (pre-pack). 6. Each process results a moratorium on any claims against the company: para 43(6), Schedule B1, IA 1986). Where an employer has entered into compulsory liquidation, only the permission of the court will be sufficient (s. 130(2), IA 1986).
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St Philips Chambers Employment Employment contracts 7. In cases of compulsory liquidation and court-appointed receivership, contracts terminate automatically on the date of the order or appointment. There can be no claim for unfair dismissal as the termination is by operation of law. 8. Claims for wrongful dismissal may be brought, once the moratorium is lifted or with permission. Employees rights to damages rank as unsecured claims. 9. 10. Liquidators or Receivers may re-engage staff afresh if they need staff. In cases of a CVL: Contracts to not terminate however, a Liquidator will only conduct the business only so far as it is necessary to wind it up, meaning that practically these contracts will terminate in the short term. 11. In Administration, the administrator is the agent of the company, their appointment does not amount to a change of employer and so employment contracts do not automatically terminate on the appointment of an administrator: para 69, Schedule B1, IA 1986. 12. In the appointment of an administrative receiver, there is no automatic termination subject to the three exceptions set out in Griffiths v Secretary of State for Social Services [1974] QB 468, which would result in automatic termination if: the appointment is accompanied by an immediate sale of the business; simultaneously or soon after the appointment, the administrative receiver and employees enter into a new contract which is inconsistent with the old contract; or the continuation of the employment of a particular employee would be inconsistent with the role and functions of the administrative receiver (for example, in certain cases, the managing director). Employment relationship 13. Subject to the following exception, the IP acts as the agent of the company. However, in court-appointed receiverships over the undertaking of a company, the
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St Philips Chambers Employment receiver is the principal of the company and so will become the employer of any employees that they choose to retain. 14. Where the company is to be carried on in some shape or form, the administrator, administrative receiver or LPA receiver must choose to adopt or dismiss the current employees within 14 days. 15. Nothing done or omitted within 14 days of their appointment will cause contracts of employment to be taken as adopted (para 99, Schedule B1, IA 1986 and s. 44 IA 1986 and s. 37 IA 1986). This provision is intended to give a breathing space. 16. An administrator adopts contracts of employment if, in substance, they continue after the statutory 14 days to employ staff and pay them in accordance with their previous contracts, unless the contracts are re-negotiated and this is not a sham. This applies equally to administrative receivers: Re Paramount Airways Ltd (No 3) [1995] 2 AC 394 17. An employee may rely on a notification from the administrator that the contract will be adopted even if made within the first 14 days, but clearly intended to be final and to apply after the 14-day period has ended. 18. Adoption is important: For the employee as it determines how employees claims rank against other debts of the insolvent company or who has liability to pay them. For administrator/administrative receiver as the rules allow them to dismiss employees within the first 14 days of their appointment without incurring personal liability or creating a super priority. Administrators 19. If an administrator adopts any employment contracts in carrying out their duties, qualifying liabilities under those contracts incurred after the adoption will be paid in priority to outstanding claims for the administrators fees and expenses, if unpaid when they leave office: para 99(5)(c) and 99(6), Schedule B1, IA 1986 and ahead of the distribution of assets to holders of floating charges and unsecured creditors. 20. This clearly gives an administrator an incentive to discharge such liabilities while they are in office.
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St Philips Chambers Employment 21. Qualifying liabilities are wages and salary and include holiday pay, sick pay, payments in lieu of holiday and contributions to occupational pension schemes: paragraph 99(5), IA 1986. 22. Therefore, if an administrator does not dismiss employees within 14 days of appointment, any wages or salary due to employees after that date rank as an expense of the administration. Meaning that they are paid ahead of the distribution of assets to holders of floating charges and unsecured creditors. 23. However, qualifying liabilities do not include: Statutory redundancy payments and payments for unfair dismissal: Re Allders Department Stores Ltd & Ors [2005] EWHC 172 (Ch); Payments in lieu of notice or protective awards: Krasner v McMath [2005] EWCA Civ 1072; or Damages for wrongful dismissal: Re Leeds United Association Football Club Ltd [2007] EWHC 1761 (Ch). 24. Unlike administrative receivers, administrators do not incur personal liability for qualifying liabilities in relation to contracts adopted by them. However, they may be liable for discrimination: Spencer v Lehman Brothers Ltd (in administration) and others ET/3201700/2009. Administrative receivers 25. Administrative receivers are personally liable for any contract entered into in by them in carrying out their functions and for any contract of employment they adopt in carrying out those functions to the extent of the qualifying liabilities: s. 44, IA 1986. 26. Therefore, employees not dismissed within 14 days of the administrative receivers appointment will be able to look to them for payment of any wages or salary that fall due after that date. 27. LPA Receivers are personally liable for all contracts of employment adopted by them in the performance of their functions to the same extent as if their appointment was made by the court: s. 37, IA 1986. Liability is not limited to qualifying liabilities, but applies to all amounts outstanding under any adopted contract of employment.
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St Philips Chambers Employment 28. However, LPA receivers are entitled to an indemnity from the assets in relation to such liabilities or to call on any other indemnity: s. 37(1), (3) IA 1986. Liabilities 29. The following liabilities should be considered: Exceptionally, IPs are liable for all PAYE and NIC from wages of employees for the period that they are appointed. This will be the case whether they have personal liability for the employment contracts or not: Income Tax (PAYE) Regulations 2003 and Social Security (Contributions) Regulations 2001. Unless they become qualifying liabilities in respect of administrative receivers, debts owed to the employee are the liability of the insolvent employer. Such debts include: unpaid wages or notice pay, damages for breach of contract on termination of employment, statutory redundancy payments, protective awards, and awards under TUPE and judgement debts. 30. The majority of debts owed to employees are unsecured and rank second to last in the order of priority on a realisation of assets along with other unsecured creditors, e.g. suppliers. 31. The order of debts payable on insolvency is as follows: Order of payment of debts on Insolvency 32. Super priority debts in employment contracts adopted by the administrator; Insolvency expenses of liquidator/administrator; Secured claims; Preferential debts; Claims secured by floating charge; and Unsecured claims.

Preferential debts under sch. 6, IA 1986, are:

St Philips Chambers Employment Remuneration for up to 4 months (to the date of appointment or order) under s. 386 and Sch. 6 IA 1986, including wages, protective awards under s. 189 TULR(C)A 1992, sick pay, time of pay, maternity pay, guaranteed pay, medical or maternity suspension to a maximum of 800 in total. 33. 34. Accrued holiday pay; Pension contributions; PAYE and NI;

This applies to employees only and all other employment debts are unsecured. However, employees do have recourse to the National Insurance Fund to claim a minimum guaranteed payment such as capped arrears of pay and statutory notice pay etc. The details and extent of such claims are outside the scope of this seminar.

35.

But note that payment from the Fund extinguishes any claim against the insolvent employer up to the same amount with the state having a subrogated claim against the instead: s. 189, ERA 1996.

Tupe 36. Tupe is designed to protect the rights of employees on or before transfer. It is constructed widely and purposively. The Insolvency Act is designed to assist in the sale of businesses as a going concern or to best realise the assets of an insolvent business. 37. The interplay between the two is addressed in detail in a short and illuminating judgement by Briggs LJ in Crystal Palace v Kavanagh [2013] EWCA Civ 1410. 38. Tupe contains specific derogations where the transferor is insolvent which are intended to aid the rescue of insolvent businesses. 39. In the case of insolvent businesses which are subject to relevant insolvency proceedings under regulation 8(6): transferees will not inherit all of the insolvent transferors debts. Certain debts will be payable by the Secretary of State out of the Fund.

St Philips Chambers Employment there will be greater scope to vary the terms of employment of transferring employees than is otherwise permitted in relation to Tupe transfers: regulation 9. 40. In the case of insolvent businesses which are subject to bankruptcy proceedings or any analogous proceedings under regulation 8(7) certain protections do not apply: 41. Regulation 4: automatic transfer; Regulation 7: special protection against dismissal;

Meaning that: employees will not automatically transfer to the transferee and dismissals will not be automatically unfair (although normal unfair dismissal rules apply); the transferee is free to change terms if it takes on former employees. However, continuity of employment is likely to be preserved under s. 218, ERA 1996: Oakland v Wellswood (Yorkshire) Ltd EWCA Civ 1094. collective agreements and trade union recognition transfer under regulation 5 and regulation 6 respectively even if the employees do not automatically transfer.

42.

There are no specific concessions for insolvent businesses from the obligations to inform and consult. Insolvent transferors may try and rely on the general defence that special circumstances make information and consultation not reasonably practicable under regulation 13(9), however, this is unlikely to succeed where it depends on common incidences of insolvency, such as making the business attractive for sale: GMB v Rankin & Harrison [1992] IRLR 514.

43.

The penalty for failure to comply with the duty to inform and consult is up to 13 weeks gross uncapped pay for each affected employee and liability is joint and several between the buyer and the seller. In assessing the award, insolvency is a relevant factor: AEI Cables Ltd v GMB and others [2013] UKEAT/0375/12.

44.

Dismissals by administrators prior to transfer must be for an economic, technical or organisational reason within the meaning of the regulations. Consider: Spaceright Europe Ltd v Baillavoine [2012] ICR 520: For an ETO reason to be available there must be an intention to change the workforce and to continue to conduct the business, as distinct from the purpose of selling it. It is not available
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St Philips Chambers Employment in the case of dismissing an employee to enable the administrators to make the business of the company a more attractive proposition to prospective transferees of a going concern per Mummery LJ at 43. Crystal Palace v Kavanagh [2013] EWCA Civ 1410: Office holders conducting an administration with a view to a sale of the business will almost always have a transfer of the undertaking as their ultimate objective. Everything they do will be tailored to its achievement. If that objective is applied without more as the sole or principal reason for the dismissal then the ETO exception to the operation of reg. 7(1) will never, or hardly ever, apply in the context of this common type of insolvency process per Briggs LJ at 28. 45. Briggs LJ confined Spaceright by interpreting it paragraph 47 of Mummery LJs judgment in the context of its facts. There the dismissal of the CEO was not because the money to pay him had run out, but solely or principally because it would make the business more attractive to a purchaser, who would naturally wish to put a person of his own choice into the top job. In the present case by contrast, these dismissals made the business of the club not a whit more attractive to a purchaser. It was only because negotiations for the parallel sale of the stadium dragged on beyond the time during which the administrators could continue to pay all the staff that these employees had, most unfortunately, to be dismissed. 46. The former was not a dismissal for an ETO reason while the latter was.

Collective redundancies 47. As agents of the insolvent employer, IPs are obliged to collectively consult where they propose to dismiss as redundant 20 or more employees at [one establishment] within a period of 90 days or less under s. 188(1), TULRCA. 48. This may include compulsory liquidation which automatically terminates contracts: Claes and others v Landsbanki Luxembourg SA (in liquidation) C-235/10. In this case the ECJ held that the obligations to inform and consult under the European Collective Redundancies Directive (98/59/EC) applied where there is a winding up order which results in the automatic termination of employment contracts. 49. Failure to comply with the obligation to inform and consult exposes the insolvent employer to pay affected employees a protective award of up to 90 days uncapped pay.
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St Philips Chambers Employment 50. Insolvency practitioners are also under an obligation to notify the Secretary of State within the requisite time limits where collective redundancies are proposed. Failure to provide the notification is a criminal offence for which the insolvency practitioner may be personally liable under s. 194(3), TULRCA. 51. Protective awards do not qualify for super priority in an administration and so are not paid in priority to an administrator's expenses. However, protective awards in relation to the period prior to the insolvency are preferential debts and so can be claimed from the insolvent estate in priority to most employment debts.

IQBAL MOHAMMED 28 November 2013