Some redundancies are precipitated by a company becoming insolvent. Whether insolvency has the effect of terminating contracts of employment depends on the way in which the company has become insolvent, and companies that are facing insolvency will therefore need to obtain specialist advice on this issue.
Under the Employment Rights Act 1996, employees who work for a company that becomes insolvent may be entitled to have their redundancy payment paid from the National Insurance Fund, a central government fund administered by the Department of Trade and Industry. The Fund will pay only if the employee has taken all reasonable steps to recover the payment, including taking employment tribunal proceedings, but the company has failed to pay up, or if the company is insolvent. For these purposes, a company is insolvent only if one of the following events has happened:
- a winding up order or administration order has been made;
- a resolution for voluntary winding up has been passed;
- a receiver or manager has been appointed, or possession has been taken, of company property subject to a floating charge; or
- a voluntary arrangement has been approved under Part I of the Insolvency Act 1986.
An employee who is owed certain other sums by a company that becomes insolvent is also entitled to a payment from the National Insurance Fund, but only if the company is insolvent as defined above. The Fund will cover, for example, up to eight weeks' arrears of pay, notice pay for the employee's statutory minimum notice period (minimum notice periods ) and up to six weeks' holiday pay. The amount that the Fund will pay for each week is capped at an amount that is reviewed annually but from February 2008 stands at £330. The Fund will also pay an apprentice a reasonable sum in reimbursement of any fee or premium that the apprentice has paid. In addition, the Government will pay up to 12 months' unpaid pension contributions owed by an insolvent company, under the Pension Schemes Act 1993.