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 changes 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 usual approach taken 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. Contracts of employment are also 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. The legal position