Employee claims in liquidation

With the number of employment claims predicted to rise sharply in light of the many employment issues caused by the current COVID-19 pandemic, in this article I take a look at the options for employees where their employer has entered liquidation.  This article will also be of interest to insolvency practitioners dealing with such claims.

The first point to note is that there is a prohibition on starting or continuing any proceedings against the company where the company is in compulsory liquidation, or where a provisional liquidator has been appointed, without specific leave of the court.  There is no such prohibition where a company is in voluntary liquidation (either creditors or members).

Whilst this will act as a block for many claims, is issuing a claim the best option in any event?  It may be that the liquidator is content to accept liability on behalf of the company.  Afterall, if the claim were to proceed/permission was given for it to proceed, putting up a defence on behalf of the company is going to be a difficult task where the liquidator was not in office at the time when the circumstances that gave rise to the claim occurred.  The first step is therefore for the employee to contact the liquidator and provide details of the claim.  The liquidator should deal with the claim without delay, bearing in mind that if the employee were to issue in the employment tribunal they would (depending on the precise nature of the claim) generally only have three months to do so.

Assuming liability is accepted, the next step is to determine the quantum of the claim as a debt provable in the liquidation.  There is a long line of case law that holds that employment claims are generally provable debts (including the likes of unpaid wages, breach of contract, unfair dismissal, and even discrimination).  It is for the liquidator to determine the quantum, just as they would the quantum of any other creditor claims.  This can be difficult for claims with a compensation element, and the liquidator should take advice on such claims.

If an employee disagrees with the liquidator’s decision on the quantum, they can either claim in the employment tribunal within the usual time limits for claiming (subject to the prohibitions discussed above), or they can challenge the liquidator’s decision under the Insolvency Rules by appealing to the court under Rule 14.8 within 21 days of the liquidator’s decision.  Note this timescale is strict.

Once quantum is determined (either by the liquidator or the court), the status of the claim will be determined as either preferential or unsecured.  The majority of major employment claims will be unsecured, with only claims for failing to consult in relation to redundancies and unpaid remuneration in the last four months (limited to £800) being preferential.

Distributions to the employee should then be made in the usual way of creditor distributions.

In summary, there are options available to employees that can avoid a protracted tribunal claim and employees would be best advised to open channels of communication with liquidators as soon as possible.  As ever, the strict employment tribunal time limits must be borne in mind at all times and employees should seek specialist employment law advice as soon as they think circumstances that give rise to a claim have arisen.

From the liquidator’s perspective, liquidators should look to make decisions on any such claims quickly and with specialist advice in order to avoid complaints about their conduct.

For more information, please contact Alexandra Withers on ajw@srflegal.co.uk.