Member Article

The Employment Appeal Tribunal (“EAT”), in the case of Secretary of State for Business, Innovation and Skills v McDonagh, has had to consider what the “appropriate date” is for the purposes of employees claiming arrears of salary and holiday pay from the National Insurance Fund, in circumstances where a voluntary insolvency procedure is followed by a compulsory insolvency procedure.

In this case, the Claimants (who were employed by two different companies) were not aware that their employers had entered into a Creditors Voluntary Arrangement (“CVA”).  They continued to work for the companies, and the companies subsequently went into liquidation.  By this time, they had unpaid wages and holiday pay relating to the period between the CVA and the liquidation.  They submitted claims to the National Insurance Funds for the unpaid sums.

Under section 182(c) of the Employment Rights Act 1996, an employee of an insolvent employer can claim from the National Insurance Fund where “on the appropriate date the employee was entitled to be paid the whole or part of any debt”.  Under section 185(a), the “appropriate date” means “the date on which the employer became insolvent”.  The National Insurance Fund refused to pay out the Claimants’ claims because it considered that the claims related to the period after the employers had become insolvent (being when they entered into the CVA), even if the employees weren’t aware of it at the time.  It argued the Claimants were not, therefore, due to be paid the debts on the “appropriate date” as per section 182(c); liability only arose after this point.

Whilst two separate employment tribunals initially upheld the Claimants’ claims, and rejected BIS’ argument, both decisions were overturned on appeal to the EAT.  The EAT held that insolvency for this purpose is a single event, which occurred at the date the CVA was approved by the Court.  The EAT felt that this was the only possible interpretation of the domestic statute and no other interpretation was required by EU law.  The Insolvency Directive does provide that “the claims taken over by the guarantee institution shall be the outstanding pay claims relating to a period prior to and/or, as applicable, after a given date determined by the Member State”.  However, it was noted that the UK had not chosen to allow claims after a given date.  The EAT acknowledged that this leads to a result that many might consider to be unfair, given the employees’ lack of knowledge of the voluntary insolvency procedure.

Points for Insolvency Practitioners
• There will often be genuine business reasons why employees are not made aware of voluntary insolvency arrangements such as a CVA, however insolvency practitioners should be aware of the impact this might have on the employees’ ability to recover any unpaid wages from the National Insurance Fund that arise after the date such arrangements are approved.
• Claims for unpaid wages and holiday pay not picked up by the National Insurance Fund will either rank as unsecured claims against the insolvent company or may pass to a buyer upon a sale, if TUPE applies.