Employers Insolvency — Q & A

The impact of insolvency on the employment relationship is a complex area of law.  In this article I shall address questions we frequently receive from clients entering into examinership, liquidation or receivership.

1. What is the impact of insolvency on the employment relationship?

The effect of insolvency on the employment relationship largely depends on the nature of the insolvency which I shall discuss below.  However it is also important to look to the employee’s contract of employment as it may contain termination provisions which for example, may provide that upon the appointment of a liquidator the contract shall terminate with immediate effect.

1.1. Appointment of an Examiner

When an examiner is appointed to a company it allows the company a period of protection from its creditors within which time the examiner seeks to put a scheme of arrangement in place for the survival of the company.  The appointment of an examiner does not automatically terminate existing contracts of employment.  However if a company implements redundancies during the examinership process the usual redundancy rules apply.

1.2. Appointment of a Receiver

A receiver is usually appointed on foot of a debenture or loan agreement by a creditor to realise the secured assets where a company has defaulted on repaying the debt.  The appointment of a receiver does not automatically terminate existing contracts of employment.  However the appointment of a receiver typically indicates that the company is in financial difficulty.  Accordingly depending on the powers of the receiver he may make some or all of the employees redundant.

1.3. Appointment of a Provisional Liquidator

In some circumstances a provisional liquidator is appointed before the court orders the winding up of the company.  If the provisional liquidator is given the power to continue to trade the company and does so the employment contract is not automatically terminated.

1.4. Appointment of Official Liquidator

A court order for the winding up of a company usually constitutes a notice of dismissal of the company’s employees to commence on the date of the order.  However if the liquidator retains employees on the same terms and conditions as the original contract the effect of the court order can be waived so that the original contract is deemed to continue.  The Courts have held that the liquidator can waive the effect of the winding up order expressly or by implication.

2. Who pays notice entitlements, arrears in wages, sick pay and holidays pay?

If employees are due pay-related entitlements from an insolvent employer they can avail of the protections offered by the Insolvency Payment Scheme (“the Scheme”) that was set up by the Protection of Employees (Employers’ Insolvency) Act 1984.  Under the Scheme employees may claim for arrears in pay, holiday pay, pay in lieu of statutory notice, awards due under specified employment legislation and certain payments made into occupational pension schemes and personal retirement savings accounts.  Such claims are generally made through the receiver or liquidator as the case may be.

3. Who pays the redundancy monies?

The Redundancy Payments Scheme is separate to the Insolvency Payment Scheme although both are funded by the Social Insurance Fund.  If an employer is unable to pay the statutory lump sum redundancy payments the affected employees can make an application for payment from the Redundancy Payments Scheme.  An employee shall only be entitled to receive a statutory redundancy lump sum payment where the employee has reached the age of 16, has 104 weeks continuous service with the employer and is insurable for all benefits under social welfare legislation.  The employee, if eligible, shall receive the full amount of the redundancy lump sum and the Minister for Enterprise, Trade and Innovation shall recoup 40% from the employer.

4. Who is entitled to receive payments from the Insolvency Payment Scheme?

The Scheme applies to employees who:

4.1. Were employed by an employer who becomes insolvent for the purposes of the 1984 Act;

4.2. Are employed in the State;

4.3. Are in employment that is fully insurable for social insurance purposes or  employees who would be fully insurable but for the fact that they have reached 66 years of age.

5. When is an employer deemed insolvent for the Scheme?

An employer is legally insolvent for the purposes of the Scheme if the employer falls within one of the following categories:

5.1. Bankruptcy;

5.2. Liquidation both compulsory and voluntary;

5.3. Receivership;

5.4. Deceased Insolvent Employer ;

5.5. Where the employer is insolvent under the legislation of another EU Member State if the employees are habitually employed in insurable employment in the State.

Employers that cease trading but do not go into official liquidation do not fall within the ambit of the Scheme.

6. Are there any limitations on payments made under the Scheme?

The Scheme limits the amount recoverable in respect of arrears for pay, sick pay, holiday pay and pay in lieu of statutory notice to eight weeks.  All entitlements based on pay are limited to a weekly maximum rate which currently stands at €600 per week for insolvencies which occurred on or after 1 January 2005.  There are various other limitations that apply depending on the debt due.

7. How are employees’ debts treated in the distribution of the employer’s assets?

Bankruptcy and company legislation give preferential creditor status to employees for certain debts in the distribution of the assets of the company or the bankrupt.  This means that specified employee debts are given priority in the distribution of assets after the payment of the secured creditors and the liquidator’s/official assignee’s remuneration and expenses.  However preferential creditor status only offers protection to the employee where there are adequate assets to discharge the debts due.

Where an employee has received a payment in respect of a debt from the Social Insurance Fund that employees rights and remedies in respect of that debt are transferred to the Minister for Enterprise, Trade and Innovation.  Accordingly the Minister becomes a preferential creditor in the priorities of creditors.  Furthermore the debt due to the Minister shall be paid in priority to any unsatisfied claim of the employee.

For further queries on employer insolvency or any other employment law queries please contact Laura Graham, Senior Associate by email at lgraham@reddycharlton.ie or by phone on 01 —661 9500

Disclaimer

This information is for guidance purposes only. It does not constitute legal or professional advice. Professional or legal advice should be obtained before taking or refraining from any action as a result of the contents of this publication. No liability is accepted by Reddy Charlton for any action taken in reliance on the information contained herein. Any and all information is subject to change.