Navigating Employment Challenges During Company Insolvencies in the UK

Recent reports from Credit Connect suggest that business insolvencies in the UK might exceed 33,000 by the end of 2024, (up from 25,158 for 2023) driven largely by companies that struggled during the COVID-19 pandemic and have not recovered. Economic fluctuations, the aftermath of global pandemics, and shifting market demands have all contributed to a rise in both company and personal insolvencies. As companies find themselves unable to meet their financial obligations, the ripple effects extend far beyond just the closure of the business. Employees, directors, and creditors all face significant challenges. Understanding the employment implications that come into play when companies become insolvent is crucial for those affected.

What happens to employees when a business becomes insolvent?

When a company becomes insolvent and enters liquidation, employees are often left in a state of uncertainty regarding their employment status and financial entitlements. One of the first aspects employees need to consider is their unpaid wages, holiday pay, and redundancy payments. Employees are entitled to claim holiday pay and unpaid wages through the National Insurance (NI) Fund, managed by the Insolvency Service. The NI Fund acts as a safety net, ensuring that employees receive their due compensation even when the company they worked for can no longer fulfil its financial obligations. The claims process involves filling out the RP1 form, which details the amounts owed. The form must be submitted within six months of the company's insolvency date. Employees may also claim redundancy pay, which is calculated based on their age, length of service, and weekly pay, up to a statutory maximum. This redundancy pay is crucial for those who find themselves suddenly unemployed, offering some financial relief as they search for new employment, but is only available after 2 years employment have been completed.

Administrators and TUPE

When administrators are appointed to handle the insolvency process, the employment landscape becomes more complex. Administrators are tasked with rescuing the company, selling its assets, or winding it down in an orderly manner. They may decide to continue trading temporarily, which can provide a brief respite for employees. However, in many cases, redundancies are inevitable.

The Transfer of Undertakings (Protection of Employment) Regulations 2006, commonly known as TUPE, can also come into play if the business or part of it is sold by the administrator. TUPE aims to protect employees' rights when a business or part of it is transferred to a new owner. If a company's assets are sold as a going concern, employees may find that their contracts are transferred to the new owner, maintaining their continuity of employment and preserving their terms and conditions of employment. However, TUPE may not apply in cases of asset stripping or liquidation, where the business ceases to trade altogether. 

Concerns for Company Directors

For company directors, insolvency brings its own set of challenges and opportunities. Many directors are also employees of their business, and as such, they may be entitled to claim redundancy pay in an insolvency situation. To be eligible, directors must demonstrate that they worked under a contract of employment and received a salary through the company's payroll. The Insolvency Service provides guidelines on how directors can claim redundancy pay, which can offer some financial relief during the difficult period of insolvency.

However, directors must also be mindful of their personal liability. Directors have a fiduciary duty to act in the best interests of the company and its creditors. If it is found that directors have engaged in wrongful or fraudulent trading, they could be held personally liable for the company’s debts. Wrongful trading occurs when directors continue to trade despite knowing that there is no reasonable prospect of avoiding insolvency. Fraudulent trading involves deliberate deceit or intent to defraud creditors. In such cases, directors could face legal action, including disqualification from acting as a director in the future, and becoming personally liable for the insolvent company’s debts.

Navigating the complexities of insolvency requires a thorough understanding of the legal and financial landscape. Employees must be proactive in claiming their entitlements through the NI Fund and understanding their rights under TUPE if their employment is transferred. Similarly, directors need to carefully assess their role and responsibilities, ensuring that they comply with legal requirements to avoid personal liability.

If you need advice and support for your business or employees in the event of insolvency, contact our employment specialist Clare Waller. Clare can help to guide you through difficult circumstances and mitigate the impact on your professional and personal