Our news feeds over the last few weeks have been dominated by stories about the collapse of the construction and outsourcing giant, Carillion.  Given the circumstances, we thought that this might be a good time to take a brief look at the interaction between employment law and insolvency proceedings.

What happens when an employer enters ‘insolvency proceedings’?

The answer to this question very much depends on what sort of ‘insolvency proceedings’ we’re talking about.

When large companies encounter financial problems, they’re often placed in ‘administration’.  This is a form of insolvency proceedings aimed at saving the business as a going concern.  As a result, the appointment of an administrator does not automatically terminate the contracts of employment; instead, it is up to the administrator to decide whether to ‘adopt’ the employment contracts or not.  If contracts are ‘adopted’, sums due to the employees during the period of administration have to be paid ahead of other liabilities, including the administrator’s own fees and expenses!

In the case of Carillion, the company has been placed directly into ‘compulsory liquidation’; it did not have enough to pay for administration!  Liquidation normally terminates all employment contracts with immediate effect.  However, in Carillion’s case, ‘special managers’ have been put in place in order to allow the business to continue to trade for the present time.  As a result, employees are being encouraged to keep working, with the government stepping in to guarantee their wages.

What about outstanding employer liabilities?

Where employees are dismissed as a result of a company’s insolvency, they will often find themselves with unpaid wages and claims for damages for breach of contract.  However, enforcing these rights against a company in liquidation may be difficult (if not impossible), given the likely long list of creditors.  The situation may be little better if the company has been placed in administration.

If the company ultimately cannot settle its debts, employees will normally be able to claim a certain amount of compensation from the National Insurance Fund (NIF).  However, employees may still find themselves out of pocket to a greater or lesser extent, depending on the circumstances. 

Transfers to ‘new employers’?

When a company has been placed in administration, the business (or parts of the business) may be sold on to new owners.  Where a business transfers from one company to another, we would normally expect the employees to transfer with it under the TUPE regulations.  However, special rules apply in insolvency situations, which can prove very complicated. 

In summary, in the case of administration, employees will transfer to the purchaser of the business.  However, not all rights and liabilities will transfer with them; some will pass to the NIF.  The new employer may also enjoy greater freedom to change the employees’ terms and conditions, should this prove necessary in order to preserve the integrity of the business.

If the company has entered liquidation, a number of the key protections normally afforded to employees under TUPE simply don’t apply.  There is no guarantee that the employees’ employment will transfer to a company acquiring the business of the insolvent company.  Where the acquiring company chooses to take on any staff, it is likely to enjoy much greater freedom to offer new terms and conditions, should it wish to do so.

In the Carillion case, there is the prospect that a significant number of its contracts and operations will transfer to other companies.  However, we will have to wait and see whether Carillion employees transfer along with those contracts.  If they do, will their terms and conditions be preserved and will they be compensated for any losses sustained in the past?  Only time will tell!

Do you need some advice?

In cases involving insolvency proceedings, we are very well placed to advise businesses, directors and employees on such matters.  Not only do we have lawyers with considerable expertise in employment law, but we also have insolvency and corporate recovery specialists working within the firm.  So if you need any help in this area, please contact James Willis (01293 596931) or Gavin Pickering (01293 596976) to find out more.