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What does insolvency mean for your employees?

With Covid-19 forcing a significant number of travel companies to face insolvency, Fox Williams LLP’s Joanna Chatterton and Olwen Mair discuss a travel business’s duty to its employees in the event of liquidation

TRFBLIWA

International travel bans, quarantine requirements and general fears of travelling abroad continue to place great strain on travel businesses, as is evident from the many reports of redundancies and businesses in the sector folding.


The continuing impact of Covid-19 on businesses will mean many more having to face the prospect of insolvency in the coming months. But what does that mean for your staff and what are your obligations?


The rules differ depending on the type of insolvency but below are some key considerations to bear in mind if you are facing this prospect.

Joanna Chatterton, Fox Williams
Joanna Chatterton, Fox Williams

Directors’ duties

A company’s directors owe duties to shareholders, which entail monitoring the company’s financial position closely and actively raising concerns about its finances at board meetings. They fail in this duty if they sweep mounting concerns about financial stability under the carpet and could be exposed to claims for damages against them personally.


Continuing to trade when a director knows or ought to have concluded that there was no reasonable prospect of the company avoiding liquidation or insolvency amounts to wrongful trading and will be a breach of directors’ duties to the company, its employees and its creditors, leaving directors liable to disqualification and even criminal prosecution.


Wrongful trading rules were suspended temporarily as a response to the Covid crisis but are now back in place.
Directors therefore need to take active steps to take professional advice from accountants, lawyers and insolvency practitioners about their liabilities and recovery options as soon as it becomes clear that a business is in difficulties that could lead to insolvency.

What happens to employment contracts?

If a company is compulsorily wound up or liquidated, this will automatically terminate employment contracts with immediate effect when the winding-up order is published or when a receiver is appointed.


In a voluntary winding up or liquidation, employers should check the employment contract to see if any provision provides for automatic termination when a resolution to wind up the company is passed.


If there is no such provision, then the contract will terminate when the liquidator decides to stop trading but will continue until that point. Some businesses may want to set up a new company to employ former employees, however that change of employer won’t break continuity of employment so the new business will acquire employees with existing length of service, and therefore rights to redundancy payments and to claim unfair dismissal (both of which require two years’ employment) will remain intact.


In an administration or where an administrative receiver is appointed, the administrator or receiver will effectively take the place of the employer and the employment contract will continue as normal with the employer, but with day-to-day management of employees effectively done under the administrator’s direction.


In some cases the insolvency practitioner may decide to carry on the insolvent business and therefore to keep some employees. They have a 14-day window from appointment to decide if any employment contracts will be adopted. This gives the insolvency practitioner a chance to carry out due diligence on the business so that decisions can be made about who to retain, but also to dismiss employees in the first two weeks after their appointment without creating a liability to continue to pay wages to retained staff.

What about employees’ salaries?

Employers will be liable for debts owed to their employees. This means the company remains liable to pay unpaid wages, notice pay, any money owed under contract such as unaccrued holiday or bonus (where the employee has been employed for more than two years) a statutory redundancy payment, and protective awards for failing to inform and consult employees before making them redundant (see below).


Certain debts owed to employees up to a fixed amount are regarded as “preferential debts” which rank third after the company pays out its secured creditors and expenses of the insolvent estate.


Preferential debts include renumeration owed for the four months prior to insolvency proceedings (up to a limit of £800 per employee), accrued holiday and certain pension contributions. Otherwise any sums owed to employees fall to be settled alongside other unsecured creditors and that is likely to mean that a small amount, if any, of the total sum owed will be paid.


It may be possible for employees who lose their jobs when a business becomes insolvent to claim payment for unpaid arrears of pay and notice monies and for statutory redundancy pay from the National Insurance Fund if these cannot be covered by the employer. The insolvency practitioner should provide affected staff with details of how to claim.


How should employers carry out redundancies?

A redundancy situation will arise where there is a business closure, a workplace closure, or a reduced need for employees to carry out work of a particular kind. In addition to any contractual redundancy policy, employers and insolvency practitioners must follow the correct process to avoid possible liability for unfair dismissal and protective awards of up to 90 days’ full pay per employee. These are ranked as preferential debts only if they relate to redundancies that took place before an insolvency practitioner has been appointed.


If 20 or more employees are to be made redundant collective consultation needs to be carried out. This involves electing employee representatives, providing certain information to them about the redundancy proposals and consulting with them about options for avoiding or reducing the number of redundancies.


An exception to the need to conduct collective consultation arises where there are “special circumstances” but it has been established by the courts that insolvency is not regarded as such.


Challenging as it may seem, the default is that there must be collective consultation if the numbers necessitate this, although it’s possible that protective awards made for failing to inform and consult would be reduced from 90 days to reflect the fact of an imminent insolvency.


Employers must also carry out individual consultation with those selected for redundancy (whether as part of a collective exercise or not) to ensure that the dismissal is regarded as fair.


Many travel businesses will have employees located abroad and working from home, which makes consultation a challenge, but given that consultation meetings can take place via telephone or virtually over videoconferencing, a scattered workforce is not a legitimate excuse for not doing it properly.


Where more than 20 employees are being made redundant, employers or the insolvency practitioner must notify the Department for Business, Energy and Industrial Strategy on a prescribed form. The employer and its officers will commit a criminal offence if they fail to notify.

Can employees bring claims against the company?

If proper procedures are not followed, employees may have various claims against an insolvent employer, including claims for unpaid salary, statutory redundancy pay, unfair dismissal, wrongful dismissal and for protective awards.

 

Some liabilities need to be determined by a court or employment tribunal before employees can get compensation. For example, the court or tribunal will need to make a finding of unfair dismissal before employees can claim a basic award.

 

Likewise, in a redundancy situation it is only once the employer is found to have failed to consult that an employee can claim the protective award. Another example is that a court or tribunal must find that an employer has breached the employment contract, for example by failing to pay notice pay, before damages will be awarded to an employee.

 

As set out above, employees may not be able to recover sums awarded in compensation in full in an insolvency situation.


When a company enters administration or compulsory liquidation, all claims and proceedings against the company will be stayed for a period of time and employees will not be able to bring claims until the moratorium on proceedings against the company has been lifted.

 

Once lifted, employees will have recourse to the Employment Tribunal for their claims, although the amount actually recoverable may not be the full liability. Otherwise, for other types of insolvency there is no stay and you may find employees putting in claims quickly to mark that there is a possible debt owed.


It’s trite to say this will be an anxious and uncertain time for employees, especially with the end of the furlough scheme this month. Employees will tend to fare worse financially under an insolvency than if made redundant while in employment, but it may be too costly for you to dismiss them before that happens.

TRFBLIWA
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