How a company's insolvency affects its employees
How a company's insolvency affects its employees

The following Restructuring & Insolvency guidance note provides comprehensive and up to date legal information covering:

  • How a company's insolvency affects its employees
  • The position of an employee on a company's insolvency
  • What happens if a contract of employment is 'adopted' by an office-holder?
  • Priority of claims
  • Preferential claims
  • National Insurance Fund

The position of an employee on a company's insolvency

The general rule is that a contract of employment is between the employer and the employee. This means that due to the personal nature of the contract, if either party changes, the contract in its current form should terminate. However, if this were always to be the case when a company changed its status due to an insolvency occurrence, every contract of employment would automatically terminate. This is not necessarily to the benefit of the employee or the company and so employment contracts can operate differently in insolvency situations depending on the insolvency event.

The general approach is that how the employment contract is treated depends on the particular circumstances of the company, including whether it is continuing to trade or not. The legal position of employees is protected and settled to some extent by The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE 2006, SI 2006/246). For more information on TUPE, see Practice Note: TUPE—effect of insolvency. Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE 2006), SI 2006/246

Contracts of employment are treated differently depending on the insolvency event, as set out below. Reference should be made to the relevant sections of the Insolvency Act 1986 (IA 1986) set out below.

Compulsory winding-up

The making of a winding-up order by the court constitutes a notice of termination of the employee's contract of employment and will amount to wrongful termination which can lead to an award of damages. This is because if there is no trading employer, there can be no ongoing contract. However, if a liquidator taking over office