In the current economic climate, many companies are facing significant challenges with regard to cashflow, liquidity and solvency, with many companies facing the prospect of insolvency. When a company becomes insolvent, it can be an extremely anxious and worrying time for its employees. Any type of insolvency situation can have a far-reaching impact on the employee/ employer relationship.
The question for most employees is whether they will be remunerated for arrears of pay, holiday pay, pay in lieu of statutory notice, in the event that their employer has insufficient funds to discharge monies owing to them. The rights and obligations owing to employees depend on (1) the nature of the insolvency and (2) the terms of the contract of employment.
The Protection of Employees (Employers Insolvency) Act 1984-2012 (the “Act”) gives effect to Directive 80/987/EEC which has been replaced by Directive 2008/94/EC. The Act provides that payments of certain debts to employees under contracts or under the provisions of protective legislation arising from employers’ insolvencies are guaranteed out of the Redundancy and Employers’ Insolvency Fund.
How does a company’s liquidation affect employee’s contract of employment?
The effect of a company becoming insolvent, on employees may be dealt with in the employee’s contract of employment. If there are no such provisions, the effect will depend on the nature of the liquidation:
In a compulsory liquidation, a court order for the winding up of a company usually constitutes a notice of dismissal of the company’s employees, to commence on the date of the order, and has the effect of terminating employment contracts. However, if the liquidator retains employees on the same terms and conditions as the original contract, the effect of the court order can be waived so that the original contract is deemed to continue. A liquidator may require certain contracts of employment to continue for a limited period or may decide to operate and sell the business as a going concern (transfer of business’ is considered separately below).
By contrast, employment contracts are not automatically terminated where a liquidator is appointed in a creditors’ voluntary liquidation or in a members voluntary winding up. However, it often involves fairly prompt redundancies, as it is unusual for the company to continue trading.
Employees are afforded Preferential Status
Employees whose employers become insolvent are protected as a class of unsecured creditors by virtue of being accorded preferential status in relation to some of their claims in a winding-up.
Preferential creditors’ claims are paid out of the realised assets of a company in liquidation after the costs, charges and expenses of the liquidation have been paid out. Preferential creditors’ claims rank higher in priority than claims of creditors secured by registered floating charges and the unsecured creditors. Upon distribution in a winding-up, preferential debts rank equally. If there are insufficient funds with which to pay all preferential creditors, claims are to abate in equal proportions.
The justification for giving employees preferential creditor status is based on the fact employees are usually wholly financially dependent on their employers. This preferential status affords employees a level of financial protection.
Insolvency Payments Scheme
The Act affords protection to certain outstanding entitlements of employees in the event of their employer becoming insolvent. The Social Insurance Fund (the “Fund”) is in place to deal with situations where an employer is insolvent. The Fund includes the government funded Insolvency Payments Scheme (the “Scheme”) to protect employees of companies that have become insolvent. The Scheme, which is operated by the Department of Employment Affairs and Social Protection, provides for the payment of certain outstanding entitlements to employees where their employment has ceased as a result of the insolvency of their employer. The Scheme also applies to employees working in Ireland where an employer becomes insolvent under the laws of another EU State.
Where an employer is insolvent, the Scheme permits eligible employees to claim, normally through an employer representative i.e. the Liquidator, for:
If an employer is unable to pay these amounts, the employee through the Liquidator (the “Applicant”) can claim such payments from the Fund. For the purposes of administration of payment, the Applicant must arrange for the submission of statements of claim on prescribed forms to the Fund which is administered by the Department of Social Protection. Where any payment out has been made by the Fund to employees, the Minister for Social Protection is subrogated to those employees’ preferential rights as creditors in the winding up of the company. The Fund is then entitled to claim in the liquidation for all amounts paid to employees and will rank as a preferential creditor in the liquidation.
The Scheme does not operate in circumstances where an employer shuts down without becoming legally insolvent. Legally insolvent means for the purposes of the Scheme, the business is in liquidation and a liquidator has been formally appointed. If an employer is not legally insolvent, the employer remains responsible for the payment of employees’ entitlements and employees face a vista of not being protected to any degree.
Limitations under the Scheme
Some limitations and conditions apply to the payments under the Scheme:
Redundancy Payments Scheme
The Redundancy Payments Scheme is separate from the Insolvency Payments Scheme, although both are funded by the Social Insurance Fund. The Insolvency Payments Scheme does not affect an employee’s statutory redundancy entitlement. The Redundancy Payments Scheme applies where an employer is unable to pay the statutory lump sum redundancy payments to its employees. If an employer is unable to pay the statutory redundancy payment an application can be submitted to the Department for the redundancy payment to be made through this scheme.
Continuity/ Transfer of employment
Where a transfer is effected or proposed to be effected of the business of the company in liquidation, the employees and the employers’ liabilities to its employees may under the European Communities (Protection of Employees on Transfer of Undertakings) Regulations 2003 SI 131/2003 (“TUPE”) automatically transfer to the purchaser. TUPE does not apply to a business transfer where the Transferor employer is insolvent, on the date of the transfer. There is an anti-avoidance measure, where the reason for entering an insolvency process is to evade the employer’s legal obligations under TUPE, TUPE will continue to apply.
Other difficulties for employees
It can take a significant length of time for winding up proceedings to be finalised and for payments to be made to employees.
About the author: Emer Murphy, Solicitor on the Employment Team
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