In December, the Employment Appeal Tribunal (EAT) considered whether employees claiming unfair dismissal against an insolvent employer could seek payment of compensation from the National Insurance Fund, without an Employment Tribunal judgment finding that there was unfair dismissal and awarding compensation.
The answer: no, they cannot. Which seems obvious; without a judgment finding liability for paying compensation, how can someone expect to receive compensation? But the finding was not quite as clear cut as might be expected.
The employee, Mr Chaudhry, brought an employment tribunal claim against his former employer, Paperchase Products Limited, claiming unfair dismissal. Paperchase submitted a defence denying that the dismissal was unfair, but then went into administration before any further progress could be made with the claim. The tribunal proceedings were therefore stayed, as is usually the case when an employer enters administration.
Despite never reaching a final hearing to determine whether he had been unfairly dismissed, Mr Chaudhry submitted a Proof of Debt to Paperchase's administrators for the maximum amount of compensation then available (comprising a basic award, which is a form of damages specific to claims for unfair dismissal and is calculated on the same basis as a statutory redundancy payment, and a compensatory award for loss of earnings). The administrators accepted the debt in full and, alongside similarly ranked creditors, paid him 2.53% of the debt.
Mr Chaudhry applied to the Insolvency Service for payment of the basic award but was rejected. He then applied to the Employment Tribunal for a declaration that the basic award should be paid by the Secretary of State from the National Insurance Fund.
Mr Chaudhry's argument was that section 182 of the Employment Rights Act 1996 states that if, in the event of an employer's insolvency, the Secretary of State is satisfied that an employee was entitled to be paid a debt on the "appropriate date", the employee will be paid out of the National Insurance Fund.
For most kinds of debt, the "appropriate date" is the date of insolvency. Mr Chaudhry therefore argued that he was entitled to the basic award from the date on which Paperchase went into administration. However, the Tribunal found that for the basic award in an unfair dismissal claim, the appropriate date is the later of: (i) the insolvency; (ii) the date of dismissal; and (iii) a judgment confirming that compensation is awarded. Crucially, all three events must have happened before an employee can claim a basic award from the National Insurance Fund. It was irrelevant that the administrators had accepted the Proof of Debt; there was no judgment awarding compensation and therefore no entitlement.
Mr Chaudhry appealed, arguing that this was inconsistent with retained EU law (the Insolvency Directive), as it meant employees like him would be disadvantaged because they could not claim the basic award unless their former employer's administrator consented to employment tribunal proceedings (given the moratorium). The EAT appeared to be sympathetic to this argument, but concluded that the Employment Rights Act could not be interpreted in a way which went directly against its wording.
As to the practical implications for insolvency practitioners, the EAT Judge commented that an administrator should consider consenting to a request from an employee for permission to proceed with a claim solely for the purpose of obtaining a basic award of compensation for unfair dismissal from a tribunal, provided the request is coupled with an undertaking to limit the claim accordingly and to recover any award from the Secretary of State rather than the insolvent employer. It would then be up to the Secretary of State to decide whether to defend the claim. Provided no assets from the insolvent employer are spent on defending the claim, this should not prejudice other creditors. This suggestion is not legally binding, but the Judge did warn that if an administrator refuses such a request and the employee applies to the Insolvency Court for permission to bring their claim, the administrator might run the risk of being ordered to pay the employee's costs of that application.
This case is a good reminder that the processes involved when an employee brings a claim against an insolvent employer are not always straightforward!
