Tuesday, December 16, 2014

USA and UK - Employment Insolvency Law Issues

By Gabrielle Culmer, overseas door tenant at 9 Stone Buildings, London.

In the United Kingdom, when a company goes into insolvency, it is usually when it is “unable to pay its debts as they fall due,” and is deemed to be so where it is proven to the satisfaction of the court. Also, where there is a shortfall of assets in relation to liabilities.

An official liquidator is appointed, and an application is made to the court to wind up the company by a petition presented whether by the company, or the directors, or by the creditors.

Employment Contracts in Administration and Receiverships

In an administrative receivership, the receiver acts as the agent of the company and acts as manager while being personally liable on any contract entered into by him/her in the carrying out of functions, but has an indemnity out of the assets of the company. In an administration, the administrator rescues the company as a going concern, and achieves a better result for the creditors than if it were wound up, or makes a distribution to one or more secured or preferential creditors.

Furthermore, the administrator has a duty to the general body of creditors and powers are given on behalf of the general body of creditors. The administrator is not generally liable for the contracts in which he enters or for the employment contracts adopted.


There is relief awarded to employees of companies in the U. K. In a liquidation, the pari passu principle is the order the creditors are to receive funds, and starts with secured creditors. Usually, the insolvency practitioner can keep the employee contracts where there is a viable company, however, if it is not feasible, can be liable for fraudulent trading if contracts are kept which cannot be covered financially.

Statutory Protection is provided as to the transfer of undertakings under the Insolvency Act 1986 where the company has been transferred. Also, a claim for arrears is preferential within the confines of the act. Under sections 257 and 258 of the Pensions Act 2004, eligibility is assessed and ensured, and the Pension Protection Fund provides compensation where the employers’ pension scheme is underfunded.

Preferential creditors have preferential debts to be paid in advance of other unsecured creditors. Schedule 6 of the Insolvency Act 1986 classifies these as PAYE , social security contributions, occupational pension scheme contributions, remuneration which includes, holiday pay, guarantee payments and any pay for the time off work if for trade union duties, ante natal care and medical supervision required by statute.

In addition, the insolvency practitioner may provide gratuitous payments to employees if they are bona fide payments to carry on the company’s business. However, a golden handshake or other terminal payments are harder to justify.

National Insurance Fund

Section 182 of the Employment Rights Act 1996 states that the Secretary of State needs to be satisfied that (a) the employer has become insolvent, (b) the employee’s employment has been terminated and (c) on the appropriate date, the employee was entitled to be paid the whole or part of any debt to which the part applies. Then subject to section 186, the Secretary of State will pay the employee out of the National Insurance Fund.

The Redundancy Payment Scheme

The insolvency provisions of the Employment Rights Act 1996 are brought into force when section 183 of the IA 1986 applies.

Under the Employment Rights Act 1996, the Redundancy Payment Scheme allows the employees who have some debts payable to them covered by the state.

The Redundancy Payment Office of the Department for Business Innovation and Skills (BIS) provides this in addition to the recourse of being able to recover some debts as creditors of the company.

In addition, employees dismissed by the administrators may look to them for claims arising during this period.

The Redundancy Payment Scheme Debts

These are to be applied for on form RP15 enclosing form RP16 and include:
1. Arrears of pay up to £464 per week (Effective since 14th April, 2014) for a maximum of eight weeks which includes commission overtime and guarantee payments.
2. Statutory payments for time off work, or suspension on medical and maternity grounds.
3. Any ‘protective award’ made by an employment tribunal if an employee has failed to inform or consult a worker’s representative about the collective redundancy.
4. Holiday pay, for unused holidays and for holidays which have been taken and not paid, up to a week’s limit of £464 for a maximum of 6 weeks. Holiday pay may include holiday carried over from the previous year if the contract permits.
5. A compensatory payment for failure to give proper statutory notice, up to a weekly limit of £464.
6. An unpaid basic award made by an employment tribunal of compensation for unfair dismissal.
7. Reasonable reimbursement of apprentices ‘or articled clerks’ fees or premiums. Unlike holiday pay and compensation, the full amounts can be recovered.
8. Statutory redundancy payments in the employee’s weekly pay (up to a current set limit of £464 per week) multiplied by a number of qualifying weeks equivalent to length of employment. 0.5week’s pay for each full year of service where the age during the year is less than 22 years. A week’s full pay for each full year of service where age during the year is 22 or above, but less than 41 years, 1.5 week’s pay for each full year of service where the age during the year is 41 years.

If such payments fail to be made, the procedure is then taken to the Employment Tribunal. The regular insolvency proceeding considers claims which are not covered by the scheme and which must be formally registered.

Recent Developments

In Gomes Viana Novo and Others v Fundode Garantia Salarial (ECJ) Case C-309/12, 372 (2014) ICR, it was held that under the second paragraph of Article 3 Directive 80/987, member states were free to determine the date from which the employees’ outstanding pay claims were to be taken over by a guarantee institution in the event of an employer’s insolvency. Under Article 4(1)(2), as amended, it is possible for the minimum guarantee period of 3 months to be after the reference date, with the member states also having the option of providing for a minimum guarantee limited to 8 weeks provided that 8 week period was within a longer reference period of at least 18 months. It was open to the member states to fix a date from which the reference period was to be calculated, as the date on which the proceedings for a declaration of the employers’ insolvency was commenced. Where a member state decided to exercise the option to limit the guarantee by setting a reference period, it could choose to limit that period to 6 months provided that it guaranteed pay for the last 3 months of the employment relationship.

U. S. A. Chapter 11 Restructuring and Employment Contracts

In the United States, the Chapter 11 bankruptcy allows for the reorganization and restructuring of the company. The Debtor in Possession can continue the contracts of employees under the code. Management is left mainly in place and the shareholders have a stake in the outcome. A cram down is imposed via a plan on the creditors.

Under Title 11 USC of the Bankruptcy Code § 1107, the debtor in possession is a fiduciary with the rights and powers of a trustee. The Automatic stay is placed on the business dealings of the company where the claims arising before the filing of the bankruptcy petition may not be pursued. The Code states that, “A stay of creditors’ actions against the Chapter 11 debtor automatically goes into effect when the bankruptcy petition is filed.” (11 USC § 362(a)). However, it is noted that certain types of actions are exempt under 11 USC § 362 (b). Furthermore, secured creditors can obtain relief from the stay under specific circumstances.

Fees can be paid to professionals hired by the DIP or appointed by the court.
However, in the case of executory contracts the DIP may assume or reject any one. Should the DIP refuse an employment contract, the former employee can file an unsecured claim arising out of the date of the bankruptcy petition.

In Chapter 11 the debtor can renegotiate leases and contracts, and can repay debts and discharge them. Section 507 lists the types of priority claims against a debtor. In § 507 (a)(4), an employee claim for “unpaid wages, salary or commissions, including vacation, severance and sick pay leave, is entitled to fourth priority treatment.” The amount of the claim to be prioritized is $11,725 and earned by the employee within 180 days before the petition date and when the business ceased. If the claim goes above $11,725 or is earned prior to the 180 day window it becomes considered unsecured.

Priority is applied where the Code states that there should be priority, and the claim arose post petition. Also, where it can be applied as an administration expense under § 503(b) of the Code. The DIP usually prioritizes the employee claims that arise post petition while reducing unnecessary employee claims.