Insolvent Businesses – Employee Rights

Business failures and company restructures are a common occurrence. As a result, many employees are finding themselves facing redundancy or their employers being taken over. Depending on the type of insolvency procedure, employee rights can vary, as the type of insolvency will affect what protections are available during a business transfer or takeover.

Bankruptcy

Bankruptcy affects individuals as appose to a business, but if a limited company director goes into bankruptcy, they can no longer continue in their role.

If the bankrupt director is the only one in the business, the company will be dissolved, and its assets sold; employees will not transfer to any purchasing company. If only one director is bankrupt, the company can continue trading, but they must step down. They may be entitled to insolvency and redundancy payments from the National Insurance Fund, but they need to have worked for the employer for at least two years. The amount due is based on weekly pay, age and number of years of continuous employment.

Liquidation

Similarly, where a company’s liquidated because it’s unable to pay its debts, employees will not transfer to a new employer.

Again, there are employee rights they may be entitled to insolvency and redundancy payments from the National Insurance Fund. Unfortunately, liquidation’s most likely outcome is the layoff of all employees and the closure of the company following the selling of its assets.

Importantly, once a company goes into liquidation, employees become preferential creditors. Meaning if any funds are left after creditors with secured, fixed or floating charges are paid, preferential creditors will receive monies before unsecured creditors.

Administration

The primary purpose of administration is to rescue a company, though this may not be possible. An administrator would try to get a better result for creditors than would be possible if the company was wound up. If neither of these is possible, an administrator will sell the company’s assets to make at least some payment to creditors.

If the main focus of an administrator’s actions is to rescue the business or provide a better result for creditors without winding up the company, then the employment contract is protected during a transfer or takeover. Some of the rights may be different than the protections during a standard transfer or takeover.

Voluntary arrangements with creditors

An employer who gets into financial trouble may be able to avoid liquidation or bankruptcy by entering into a formal agreement with its creditors. These arrangements need to be undertaken with the help of a licensed insolvency practitioner. If the employer is going through a voluntary arrangement, employment contracts are protected during a transfer or takeover.

In summary

If a business becomes insolvent, whether you’re entitled to redundancy pay will depend on what insolvency procedure the said business is undergoing, and how many years of service you have. If you’re unsure about your current circumstances, you should ask for the specifics of the procedure either from your insolvency practitioner or your HR department.