Paperchase: EAT issues costs warning to administrators and liquidators

Quick read

The Employment Appeal Tribunal (EAT) has considered whether employees of an insolvent company can claim a "basic award" for unfair dismissal from the government's National Insurance Fund without first obtaining an employment tribunal judgment.

Background

The employee filed an unfair dismissal claim against Paperchase Products Limited in February 2019. Paperchase entered administration in January 2021. The claim was stayed under the moratorium on legal proceedings. The administrator refused consent for it to proceed and the employee did not seek consent from the insolvency court to proceed. The employee then tried to recover the basic award directly from the Secretary of State. That application was rejected and the employee brought a tribunal claim against the Secretary of State. The Employment Tribunal (ET) dismissed the claim.

Decision

The EAT upheld the ET's finding that an employee, whose employer becomes insolvent, cannot recover a basic award of compensation for unfair dismissal unless an ET has adjudicated the claim and decided that the employee is entitled to the basic award. Despite acknowledging that this interpretation might disadvantage employees, the EAT found the legislation's words were too plain to interpret differently.

Warning for insolvency practitioners

The EAT had some pointed advice for administrators and liquidators: think carefully before you refuse to allow employees to proceed with their unfair dismissal claims - especially when those employees give an undertaking to pursue only a basic award and claim it from the Secretary of State, not from the insolvent company itself.

Agreeing to such requests shouldn't prejudice other creditors, provided no costs are incurred defending the claim. But if the request is refused and the employee successfully applies to the insolvency court for permission to proceed, you may be exposed to the costs of the application.