Employee issues on insolvency

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Introduction

When a company becomes insolvent, the position of the employees can be key. If the business is being rescued as a going concern then it is hoped that jobs will be saved.

For that to be possible, employees may need some reassurance on their position to avoid them jumping ship, which for some businesses may have the consequence that there is then no longer any company or business of substance to be rescued. The need to get key employees on side early on must be balanced with the need to maintain confidentiality when negotiating a rescue and not causing panic in the company and amongst creditors if word of a potential deal spreads.

If the business continues in some format then the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE 2006), SI 2006/246 will apply to transferring employees. If there is no hope of a rescue deal and an employee transfer, then it is important that employees' arrears are dealt with in accordance with statutory considerations.

The position of an employee on a company's insolvency

The general rule is that a contract of employment

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Directors’ liability for company’s debts under section 217 of the Insolvency Act 1986 and rule 22.17 of the Insolvency Rules 2016 (Maxima v Fealy and Barrett)

Restructuring & Insolvency analysis: The High Court has dismissed a claim brought by an assignee of creditors' debts against individuals who were directors of a company in liquidation and a second company which was operating under a prohibited name pursuant to section 216 of the Insolvency Act 1986 (IA 1986). The defendants successfully argued that the second company fell within ‘The Third Excepted Case’ under the Insolvency Rules 2016 (IR 2016), SI 2016/1024, r 22.7, and that the second company had been known by its name for the entire 12 months prior to the first company's liquidation and had not at any time in those 12 months been dormant. The case is thought to be the only reported case on the true meaning and effect of the second of the two elements of The Third Excepted Case and demonstrates that the principles of corporate accounting law on non-dormancy cannot be translated from an accounting to an insolvency scenario. The concept of phoenix syndrome and the principle against doubtful penalisation were also considered. Written by Laura Newbery, legal director at Addleshaw Goddard LLP.

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Restructuring & Insolvency weekly highlights—21 November 2024

This week's edition of Restructuring & Insolvency weekly highlights includes: confirmation by the Supreme Court of the immovables rule to English property (Kireeva v Bedzhamov), the publication by the Insolvency Service of its monthly insolvency statistics for October 2024, an analysis on the interface between property law and financial remedy in the context of bankruptcy (DDR v BDR), plus a round-up of other news and cases for restructuring and insolvency professionals.

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