Navigating an Insolvency Situation
In a nutshell, an "insolvency situation" arises where a company's liabilities exceed its assets – a company is unable to pay its debts when they fall due. An insolvency situation triggers a significant number of legal considerations and in this month's First Tuesday Q&A the Employment Team at A&L Goodbody answer key questions and highlights legal issues for employers when navigating an insolvency situation.
- What impact does an employer's insolvency have on the employment relationship?
- What happens to employees in a receivership scenario?
- What happens to employees in an examinership scenario?
- What happens to employees in a liquidation scenario?
- Does an insolvent employer have the same obligations to redundant employees?
- What happens to payments owing to employees where they are made redundant in an insolvency situation?
Q. What impact does an employer's insolvency have on the employment relationship?
The impact an insolvency situation will have on a Company's employees will largely depend on the type of insolvency situation that arises: (i) receivership; (ii) examinership; or (iii) liquidation – whether court ordered or voluntary.
Q. What happens to employees in a receivership scenario?
The receiver is generally regarded as an "agent" of the company. In such circumstances, from the perspective of employees, there is no change in the identity of their employer. The receiver will simply step into the shoes of the employer and assume the employer's obligations in relation to those employees. Where an employee is dismissed by a company in receivership, the employee's contractual and statutory entitlements are unaffected.
However, in circumstances where a receiver is appointed by the High Court, that receiver is not an agent of the company and is unable to continue employing the affected company's employees. In practice redundancies follow the appointment of a receiver by the High Court.
Q. What happens to employees in an examinership scenario?
The appointment of an examiner does not, in and of itself, have an effect on the employment relationship. The employment contracts of the company's workforce continue as normal. Ultimately, however, cost cutting measures taken following the appointment of an examiner or receiver may include redundancies.
Q. What happens to employees in a liquidation scenario?
There are two types of liquidation (or winding up) of a company: (i) court ordered; or (ii) voluntary.
(i) Court ordered liquidation
In a court ordered liquidation, the winding-up order generally constitutes notice of immediate dismissal of employees. An employee dismissed in these circumstances may be entitled to damages for wrongful dismissal and breach of his or her contractual or statutory rights. In some cases the business of the company will continue for a limited period of time and some or all of the employees may be rehired by the liquidator.
The appointment of a provisional liquidator is unlikely to result in the automatic termination of employment provided that the business continues to trade.
(ii) Voluntary Liquidation
There are two types of voluntary liquidation:
- a creditors' voluntary liquidation (a CVL)
- a members' voluntary liquidation (an MVL)
A CVL is usually an insolvent liquidation. However an MVL is a solvent liquidation where all debts owing to the company's creditors (including employees) must be paid in full. In the case of a CVL, employees will have no access to the Social Insurance Fund (the SIF), out of which certain payments can be made to employees which cannot be recovered against an insolvent employer. Further detail on employee entitlements and the SIF is provided below.
The effect of a voluntary liquidation on the contract of employment depends on whether the employee continues to work after the resolution to wind up the company is passed. Where the employee ceases to work immediately, the employee is entitled to their contractual entitlements and statutory entitlements (in relation to notice pay, redundancy pay, etc.). Where a company continues to trade for a period after the resolution to wind up, the company may be required to continue to employ people to facilitate the orderly winding up of the company.
Q. Does an insolvent employer have the same obligations to redundant employees?
An insolvency situation will generally give rise to redundancies – whether to reduce costs or in connection with the closure of the business. The nature of the redundancy and the procedure to be followed in effecting the redundancy will be depend on the number of employees being made redundant and, to some extent, the type of insolvency. Employees remain entitled to information and consultation (in individual and collective redundancy scenarios) even in an insolvency context.
In a collective redundancy situation, an employer is required to inform the Minister for Jobs, Enterprise and Innovation at least 30 days before the first of the collective redundancies are to take effect. This obligation continues to apply in insolvency situations – with the exception of a business closure following a court ordered wind-up. In that scenario, a liquidator is only required to comply with the notification obligation if the Minister so requests. Also, it is not required to comply with the requirement that no redundancies take effect during the 30 day period following notification to the Minister. This notification "exemption" was scrutinized by Nessa Cahill BL and Kevin Duffy (former chair of the Labour Court) in a report commissioned by the Government following the Clearys collective redundancy. In their report they recommended that the exemption be eliminated, however it remains to be seen whether that recommendation will be followed and the exemption curtailed.
Q. What happens to payments owing to employees where they are made redundant in an insolvency situation?
In each insolvency scenario, once redundancies take effect, employee statutory and contractual entitlements become payable. In practical terms, the ability of employers to make those payments is often an issue. The extent to which employee payments are protected by the State will depend on how they are ranked in the insolvency situation.
The Companies Act 2014 sets out the order in which debts and liabilities are discharged in a liquidation situation (in which case certain employee debts rank as "preferential debts"). Employees' preferential debts include: (i) wages earned during the four months prior to winding up subject to a maximum of €10,000; (ii) all accrued holiday and sickness pay; (iii) statutory redundancy lump sums; and (iv) employer and employee contributions to any pension schemes. However, in practice, preferential status only provides protection in the case of insolvency where the insolvent employer owns assets of sufficient value to discharge the debts.
The Protection of Employees (Employers Insolvency) Acts 1984 – 2012 (the Employers' Insolvency Act) enables the Minister for Social Protection to make payments from Social Insurance Fund (SIF) to discharge certain debts owing to employees where their employer is insolvent.
The Employers' Insolvency Act covers payment of the following:
- wages
- sick pay
- holiday pay
- statutory notice
- amounts an employer is required to pay by virtue of an award made by an statutory employment tribunal
- unpaid company contributions and contributions deducted from employees in respect of any pension schemes
These debts are paid out of the Insolvency Payments Scheme and are subject to certain limits on the maximum amounts that may be recovered. All entitlements to pay are subject to a cap of €600 per week. In addition, there is a limit of 8 weeks for arrears of pay, sick pay, holiday pay and pay in lieu of statutory notice.
In cases where an employer cannot pay employees' statutory redundancy due to insolvency, the employee may seek to recover payment through the Redundancy Payments Scheme.
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