Insolvency of Employer (Rights of employees)

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Add a note hereKey points
§  Add a note hereFor many years, wages or salaries owed to employees by an insolvent employer have been treated in law as 'preferential debts'. However, that preference is accorded only to the first £800 of any claim in respect of wages earned during the four months preceding the date of the receiving order or of the appointment of the provisional liquidator. Amounts in excess of £800 (or for periods longer than four months), and other monies owed to an employee at the time his employer became insolvent, rank as ordinary debts (per Insolvency Act 1986, Schedule 6).
§  Add a note hereIn recognition of the fact that it could take years for employees to recover unpaid wages or salaries, let alone any other monies owed by an insolvent employer, sections 182 to 190 of the Employment Rights Act 1996 empower the Secretary of State for Trade & Industry to borrow from the National Insurance Fund and to pay some or all of those monies on the employer's behalf. The Secretary of State would then assume the role of preferred and ordinary creditor in an attempt to recover part at least of that money from the employer's remaining assets.
Note 
Add a note hereThe Secretary of State will not normally pay monies from the National Insurance Fund, in respect of an amount owed by an insolvent employer, until the relevant liquidator, receiver, manager or trustee in bankruptcy confirms in writing that the employee in question is entitled to that amount. If that information is not forthcoming within six months of an employee's application to him, the Secretary of State may decide to pay the employee out of the Fund if he is satisfied that a further delay appears likely and that the employee's claims are genuine.
Add a note hereEligible debts and upper limits
§  Add a note hereThere are limits on the amounts payable from the National Insurance Fund and the debts to which they relate. Section 184 of the 1996 Act empowers the Secretary of State (in practice, the Employment Department) to pay an employee:
a.     Add a note herearrears of pay (see Note below) for a period not exceeding eight weeks at a maximum £260 per week;
b.    Add a note hereunpaid pay in lieu of the statutory minimum period of notice due (again subject to a maximum of £260 per week);
c.     Add a note hereup to six weeks' holiday pay in respect of a period or periods of holidays to which the employee became entitled during the 12 months ending with the date on which the employer became insolvent (at a maximum £260 per week); and
d.    Add a note hereany basic award of compensation for unfair dismissal or so much of an award under a designated dismissal procedures agreement as does not exceed any basic award of compensation for unfair dismissal to which the employee would be entitled but for the agreement;
e.     Add a note herewhere appropriate, any reasonable sum by way of reimbursement of the whole or part of any fee or premium paid by an apprentice or articled clerk.
Note 
Add a note hereFor these purposes, the expression arrears of pay (see paragraph (a) above) includes not only unpaid wages, salaries, overtime earnings, commissions, and the like, but also statutory guarantee payments, remuneration on suspension on medical or maternity grounds, payment for time off work, statutory sick pay, and remuneration under a protective award made by an employment tribunal in consequence of an employer's failure to consult trade union representatives about his redundancy proposals (ibid. section 184(2)). These matters are dealt with elsewhere in this handbook under the relevant subject heads.
§  Add a note hereThe current (2003/04) upper limit of £260 on the amount of a week's pay for these purposes will in future be increased (or reduced) by order of the Secretary of State, in line with the September-on-September rise or fall in the retail prices index.
§  Add a note hereStatutory Maternity Pay (SMP) owed to an employee at the time her employer became insolvent is the responsibility of the Department for Work & Pensions. SMP due and payable after that date becomes the responsibility of the Secretary of State.
§  Add a note hereIf an employee is denied the whole or part of any statutory redundancy payment due to him (or her) because of his employer's insolvency, the Secretary of State will pay the amount due out of the National Insurance Fund (ibid. section 189).
Add a note hereProcedure
§  Add a note hereTo set matters in motion, an employee owed money by his (or her) insolvent employer on the termination of his employment should complete Form IP1 – available from the employer's representative or relevant officer (see Note below) – and return it to him as soon as possible.
Add a note hereIf he wishes to apply for a payment to compensate him for not receiving the correct statutory notice of the termination of his employment, he will also need to complete and return Form IP2. The relevant officer will deal directly with the Department for Work & Pensions (DfWP) on the employee's behalf.
Note 
Add a note hereThe relevant officer is a person appointed in connection with an employer's insolvency, that is to say, a trustee in bankruptcy, a liquidator, administrator, a receiver or manager, or a trustee under a composition or arrangement between the employer and his creditors or under a trust deed for his creditors executed by the employer. In this connection, trustee, in relation to a composition or arrangement, includes the supervisor of a voluntary arrangement proposed for the purposes of, and approved under, Part I or VIII of the Insolvency Act 1986.
Add a note hereUnpaid contributions to a pension scheme
§  Add a note hereThe trustees of an occupational pension scheme may apply in writing to the Secretary of State for Employment claiming that an insolvent employer has failed to pay pension contributions (either on his own account or on behalf of the employee) into the scheme during the 12 months preceding the date on which he became insolvent (per section 124, Pension Schemes Act 1993).
§  Add a note hereSubject to certain conditions (that are not explored here), and once satisfied that there are unpaid contributions, the Secretary of State will withdraw the money from the National Insurance Fund and pay it into the resources of the occupational pension scheme.
Add a note hereComplaints
§  Add a note hereShould the Secretary of State decline or fail to pay any of the amounts referred to in the preceding paragraphs, the affected employee may refer the matter to an employment tribunal for determination. Any such complaint must be lodged within three months of the alleged failure to pay.
§  Add a note hereIf an employment tribunal finds that the Secretary of State ought to have made those payments, it will make a declaration to that effect and will also declare the amount of any such payment that it finds the Secretary of State ought to make (ibid. section 188).

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