Employees and insolvent employers

15 August 2018

I have dealt with more insolvent companies than I care to remember and can say without a shadow of a doubt that the worst part of the job is standing in front of the workforce, explaining that there is no money to continue trading, no money to pay their wages, and so they are being made redundant with no warning whatsoever. I expect no sympathy for that though, as being on the receiving end of that news is much, much worse.

But what happens to those employees? They have claims for monies due to them for wages, redundancy, etc, but so do suppliers of materials, utilities, landlords, HM Revenue & Customs, and potentially anyone else that dealt with the company. The insolvency system has two procedures in place to assist them – the Government’s Redundancy Payments Service (“RPS”) and the ranking of claims in insolvency proceedings.

The RPS is a Government department that is entirely independent of the insolvency practitioner. As part of the commencement of the liquidation, the insolvency practitioner will inform the RPS of the matter, and they will provide a case number. That case number is provided to employees that are made redundant by the insolvency practitioner, and they go online to the Government’s RPS portal and make their claims which fall into four main brackets; arrears of pay, holiday pay, redundancy pay and pay in lieu of notice.

The first three of those claims are relatively straightforward to identify:

  • Up to the point the employee was made redundant, they will be entitled to be paid wages for work done.
  • Holiday entitlement is calculated pro rata from the start of the holiday year until the date of redundancy, and any holidays already taken are then deducted, to leave the amount claimable.
  • Redundancy pay is based on a table which measures length of service in the employment against the employee’s age at the time of redundancy, to give the number of weeks’ pay that the employee is entitled to receive.

The fourth claim, pay in lieu of notice, is not quite as straightforward as the RPS scheme is a “guarantee” scheme – it will pay out once the notice period is over (which again is determined by length of service in the employment) but only up to amounts that have not been received and not been replaced by some other income, for example a new job or benefits to which the employee is entitled.

All of the RPS schemes are subject to a weekly cap which is reviewed annually. At the time of writing, the cap is £508 per week.

Once the RPS have received the claim from the employee and considered it in conjunction with company payroll records (provided by the insolvency practitioner), they will make any eligible payment direct to the employee with no further involvement of the insolvency practitioner. Once all claims have been dealt with, the RPS will advise the insolvency practitioner of the amounts paid, which then fall to be claims against the company in the insolvency process.

The RPS claim, together with any of the employees’ claims that have not been paid by the RPS (eg they are over the weekly cap that the RPS uses) will then be dealt with by the insolvency practitioner, and paid if there are funds available. Elements of these claims are classified as “preferential” and are paid before other claims, and so there is a better chance of these claims being paid, but as ever each case will be decided on its own merits. My blog on the ranking of claims (available HERE) goes into this process in more detail.

There are also provisions to allow the insolvency practitioner to liaise with the insolvency company’s pension provider to claim for pension contributions which have not been paid into the employees’ pension pots. Any accepted claims for such pension contributions are then paid directly to the pension provider for the benefit of affected employees.

In short, the RPS process is in place to try and get some element of the employees’ claims paid out as quickly as possible to assist in what is always a stressful time, and to try and lessen the undoubted financial impact that losing your job brings. Certain elements of claims, even if they are not paid by the RPS, can be paid before other creditor claims, albeit that will often take some time before the insolvency practitioner can make those payments, if funds allow.

For more information contact Neil Dempsey, Restructuring & Recovery Director (neil.dempsey@aab.uk) or your usual AAB contact.

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