Where a company has become insolvent can an employee, who won an EAT against the company, get paid? – Ireland
A recent High Court decision has grappled with a problem that has plagued Irish employment law for decades. How can an employee who has been awarded unfair dismissal compensation get hold of that compensation when his employer is an insolvent company?
On the surface, the answer looks relatively simple. In 1984, the Protection of Employees (Employer’s Insolvency) Act was made law in Ireland. It says that where certain types of debt owed to employees have remained unpaid due to employer insolvency, then the Minister for Social Protection may pay these debts out of a State-run Insolvency Fund. This law was introduced to give effect to an EU Directive and covers unfair dismissal compensation. It has been updated several times since 1984. Most recently, the Employer Insolvency Fund has been merged with the Social Insurance Fund.
However, in the decision of Davis Joinery Limited [2013] IEHC 353, the High Court had to squarely confront a long-standing defect in this Irish law. Access to the Insolvency Fund only kicks in once a formal winding up order has been made against an employer. Where there is no formal winding up order, the employees of an insolvent company are effectively excluded from the Fund. This situation is known as “an informal insolvency” and often arises where a company ceases trading without a formal winding-up. This can happen when the amount of available assets in a company does not justify the formal process. In particular, nominating a liquidator is difficult when resources are lacking to pay the costs of liquidation.
Therefore, the main problem for the High Court in this case was how to extend the protection of formal insolvency proceedings to a deserving ex-employee clearly trapped in an informal insolvency. This ex-employee was owed a significant amount of compensation
arising from a successful unfair dismissal claim. His former employer had been a construction company hit badly by the recession. It had not been able to collect money from its debtors and had simply stopped trading. Interestingly, no other creditor of the company ever appeared in court. Justice Laffoy, who heard the case, had initially tried to explore alternatives to compulsory winding up proceedings. However, when it was clear that no alternatives were possible, she proceeded to deal with the case.
She first considered whether there was a conflict between EU and Irish law on the right of access to the Insolvency Fund. At first glance, the relevant EU Directive allows employees gain access to the Insolvency Fund where an informal insolvency situation exists. The EU Directive states that an employer is insolvent not only when a winding up order is made but also when a business has been definitively closed down and available assets are insufficient to warrant a formal winding up. However, the Irish law, intended to implement this EU Directive, only allows access to the Fund when a formal winding up order is made. So, could the employee rely directly on EU law and recover his debt without a formal winding up? The High Court noted the possibility that the Irish State had failed to correctly implement the EU law. A failure could make the Irish State liable to compensate the employee for the loss caused to him as a result. However, the EU courts gave Member States a wide discretion in deciding what amounts to employer insolvency in their domestic law. Therefore, the failure of the Insolvency Fund to cover informal insolvency may not be a direct breach of EU rules. Laffoy J. would not make any definite findings on this. She concluded that the problem could not be tackled from that angle.
The next problem for Justice Laffoy was how to deal with the time limit that applied to employees seeking payment from the Fund. The Fund only covers those debts owed to employees that were accrued in the 18 months prior to the making of a winding up order. Therefore, any debts outside that time period are not protected by the Fund regardless of how they arose.
In the case before her, this was a matter of urgency since, if a winding up order was not made quickly, the creditor-employee would be outside the 18 month window of protection.
In effect, she had to decide how to stop the clock ticking on an informal insolvency.
A number of approaches were considered by Justice Laffoy. The first approach involved the appointment of a provisional liquidator. This person could be appointed initially without a formal winding up order being made in order to confirm the precise status and asset base of the business. However, the problem with this approach was that the 1984 Act says that a company is insolvent only when a “winding-up order is made”. Therefore, the appointment of a provisional liquidator only stops the clock when it is followed by a formal winding up order at some later date. If no subsequent winding up order is made, the appointment of a provisional liquidator is irrelevant to the date of insolvency. As such, a winding up order seemed unavoidable.
The next step was whether a winding up order could be made without the appointment of an official liquidator. Laffoy J agreed that the law seemed to imply that a winding up order could be made without an official liquidator being appointed. However, she held that a compulsory winding up could not, in practice, proceed without having an official liquidator on board.
As such, having decided that all legal requirements were satisfied, she made the winding up order and appointed an official liquidator for this purpose. This formalised the insolvency situation and the employee finally gained access to the Insolvency Fund. However, she stressed that the fundamental problem remained. The employee in this case was fortunate to have been able to pursue the matter with vigour. It was also fortunate that a qualified person was willing to act as official liquidator. However, less fortunate employees are still very vulnerable. New legislation is essential to remedy this unfairness.