If your company is unable to trade any longer, you may need to consider making staff redundant. But how should insolvent small and medium-sized enterprises (SMEs) handle redundancy? And what happens to employees if your business is being sold? In most cases, the sale of a business and its assets to a third party will trigger the Transfer of Undertakings (Protection of Employment) Regulations (TUPE), which means that employees will automatically transfer to the new owner and their terms and conditions of employment will be maintained. However, TUPE is a complex area of law, and legal advice should always be sought when dealing with these situations.
If your company is subject to a winding-up order or appointed receiver, employees’ contracts of employment will be terminated at the point that the order or appointment is made. If you are unable to pay wages, employees can only pursue their contractual employer for unpaid wages, rather than a director of the employer company – although in very limited circumstances, a director may be found to be personally liable for unpaid wages. If an employee is owed more than £750, they could serve a statutory demand on the company, prior to winding-up proceedings commencing. If the sum is not paid within 21 days, the employee can start winding-up proceedings or pursue other legal action.
When an employer company is in administration or compulsory liquidation, legal action cannot be taken against the company without the consent of the administrator or the court. TUPE transfer typically means that employment liabilities transfer to the purchasing company, but if the business has been sold in administration certain liabilities will not transfer. If an employee is made redundant, they are entitled to certain payments and may also be able to bring a claim for constructive wrongful dismissal or unfair dismissal in certain circumstances.
Unsecured debts such as payment in lieu of notice, statutory redundancy pay, unfair dismissal pay and wrongful dismissal damages are likely to result in little to no sums being recovered. Employees may choose not to make a claim for these sums and instead claim from the National Insurance Fund (NIF), which guarantees a basic minimum payment of certain debts owed to employees. Seeking insolvency advice may enable a rescue plan to be pursued, and directors should act swiftly to avoid claims for misfeasance, breach of fiduciary duties and wrongful trading.
During insolvency, Transfer of Undertakings (Protection of Employment) Regulations (TUPE) is the key legislation that applies, and companies must ensure compliance with the obligations within TUPE, such as informing and consulting employees. Certain TUPE protections may not apply in some circumstances, meaning any dismissals will not be deemed automatically unfair, but normal unfair dismissal rules will still apply.
In summary, if your company is facing insolvency, it is essential to seek legal advice on how to handle redundancy and other employment matters. The complexities of TUPE, winding-up proceedings, and unsecured debts mean that it is an area of law where professional guidance is highly recommended.