Friday, November 07, 2014
CVAs and employee claims
The position of employees in CVAs continues to exercise the minds of IPs in the light of last year’s Employment Appeals Tribunal (EAT) decision in Secretary of State for Business Enterprise and Skills McDonagh & Ors. A couple of clients have used their contacts at the RPS to find the answers to various questions relating to this issue, and they have kindly agreed that we can share the information with you. The responses from the RPS are shown in italics.
You will recall that the EAT decision confirmed that the national insurance fund operated by the RPS will only pay out any unpaid wages and holiday pay at the time a company (or individual) first suffers an insolvency event, e.g. on the company entering into a CVA, and will pay such liabilities in any subsequent liquidation if the CVA fails. The reason for the decision is that the liability of the national insurance fund to pay such liabilities is triggered by the “appropriate date”, which is the date of the first insolvency event.
What is the position as regards any employees who are dismissed during the CVA, can they claim against the RPS for any unpaid wages or holiday pay?
“The employer is classed as insolvent for the whole period that the CVA is in place, therefore, if any employees are dismissed after the date the voluntary arrangement was made, they would qualify for a redundancy payment, notice pay, and any wages or holiday owed before the insolvency date. Wages or holiday pay cannot be paid for any periods that fall after the insolvency date.” So the answer is no, and since the company is still live and these are post CVA liabilities, the company would be liable for them.
What is the position as regards any employees who are dismissed during the CVA, can they claim against the RPS for any redundancy or compensatory notice pay, i.e. where insufficient notice was given?
“CVAs are classed as insolvencies for the purpose of making redundancy and insolvency payments to former employees of the insolvent company. In order for payment to be considered, the employee's job must have ended, the employer must be insolvent and on the 'appropriate date' the employee was entitled to be paid the whole or part of any debt guaranteed by s184 of the ERA. The ‘appropriate date' differs for each type of payment - see s185. For wages and holiday pay the appropriate date is the date of insolvency (date of the CVA) and they can be paid only if they fall as due before that date. In relation to compensatory notice pay and redundancy pay, the appropriate date is the later of the insolvency date or the termination date.” The RPS seem to be suggesting that they will still pay redundancy and pay in lieu of notice claims of employees who are made redundant after the CVA has commenced. However, a word of caution is required as this answer differs slightly from the less comprehensive answer given above, which seems to suggest that the employees would only be due redundancy and pay in lieu of notice in respect of pre-CVA periods. In any event though, since this is a post arrangement liability of the company then all that will happen is that the RPS will reclaim the monies they have paid out from the company as it is primarily a liability of the company, and the national insurance fund is just there as a safety net if the employer cannot or will not pay.
Extending what the RPS have said in this answer to a situation where the CVA fails and the company is placed into liquidation, then it appears possible that the RPS may continue to meet pay redundancy and pay in lieu of notice claims of employees who are made redundant as a result of the liquidation even though it is the second insolvency event affecting the company. The reason for the difference in approach between unpaid wages and holiday pay on the one hand, and redundancy and pay in lieu of notice on the other, is that the date used to trigger liability is different under the ERA legislation, with it being the date of insolvency, i.e. the CVA, for the former, and the date of dismissal of the employee for the latter. We would again repeat the word of caution above, as this answer differs slightly from the earlier, less comprehensive answer, which seems to suggest that the employees would only be due redundancy and pay in lieu of notice in respect of pre-CVA periods.
What happens if the company takes on any employees during the course of the CVA and the CVA was to fail such that the company was placed into liquidation?
“However if a company enters a CVA and the CVA fails and the company enters liquidation no matter how long the CVA has been in place prior to the liquidation no holiday pay or arrears of pay can be assessed after the date of the CVA even if the employee started their employment during the CVA as for our purposes the relevant date of insolvency is the date the CVA commenced.” So even the new employees would not be able to claim from the RPS as it is the insolvency event affecting the company that is key and which triggers the RPS’s duty to pay such claims.
“If the company is to take new employees on during a CVA no matter of the outcome they would be entitled to redundancy pay if they have been there for over 2 years and if the employer fails to give them notice of their redundancy they can still qualify for compensation for loss of notice as long as they have been with the employer for more than 1 calendar month.” So, new employees would receive their redundancy and pay in lieu of notice as long as they have been employed for the minimum statutory period to qualify.
What happens if the CVA is successfully completed, but the company then subsequently fails and is placed into liquidation, can the employees then make a claim against the RPS for any unpaid wages and holiday pay?
“If a company is placed into a CVA and the CVA is successful and the company enters back into a solvent state then 3 years later enters liquidation the date of liquidation would be the relevant insolvent date which would mean we could assess claims of holiday pay and arrears of pay to the liquidation date.” Whilst the response refers to 3 years, I am not aware of this as being a minimum time limit. As far as I am aware the key is that the company has returned to solvency by completing the CVA before then entering liquidation, such that the date of the liquidation would be then become the appropriate date for the company. In view of the RPS responses on other questions then it also clear that they would pay any employee claims for redundancy and pay in lieu of notice in such a situation.
The bottom line though is that it would be helpful if the RPS were to issue some definitive guidance for IPs, and also employees, on these matters.