The trend is surprisingly upward but the official data from the UK reveals the sad truth that more and more companies are failing. The numbers for June 2024 alone show that the figure of declared insolvents stood at 2361 or approximately 16 percent more than registered in May according to ‘the Insolvency Service’.

Moreover, it was also higher than the June figures of the previous year by 17%. The drastic increase especially the most recent one, is significantly higher than the conventional monthly advance suggesting that several employees face layoff grievances or alterations on the existing terms of their contracts.

It is necessary to evaluate the extent to which jurisdictions of insolvency disrupt employment contracts, the protections that such contracts offer, and the attempts at resolving disputes.

This article covers some aspects which are raising focus on existential issues on employment contracts and their usage during insolvency processes in the UK.

1. Types of Insolvency Procedures and Their Impact on Employment Contracts

According to the legislation in the UK, various forms of bankruptcy ring bells for individuals which in consequence affects how employment contracts are made to other variables and indicators:

Liquidation: The act of liquidation also implies reformations of business hence the ending of contracts. Most employees have no alternative but to pursue the liquidator to pay the outstanding salaries and other benefits.

Administration: Here an administrator is placed to manage the affairs of the business, with the possibilities of rehabilitating it and retaining its employees.  However, this is filled with uncertainty as the administrator has the power to make alterations and cut jobs if the business fails to recover.

CVA (Company Voluntary Arrangement): There usually is no effect on employment contracts, however, because the company is undertaking a CVA, there may be layoffs or the terms of employment contracts may be changed to aid in the recovery of the business.

2. Employee Rights in Insolvency: UK Statutory Protections

In the circumstance of insolvency, all the employees in the UK are given ‘Preferential Creditor’ status allowing such empowerment to claim up to the following allegedly outstanding salaries, unpaid salary, unpaid holiday entitlements, and amounts in respect of ‐ up to the limits imposed under

Employment Rights Act of 1996: In 2024 for instance, employees were anticipated to claim backward unpaid wages for maximum claims of Eight Weeks at assuming a cap of £643 paid on the claims a week.

Holiday Pay: However, this too has a limit on the amount of annual leave that goes unpaid.

Redundancy Payments: When sub-statutory payments are unavailable, statutory redundancy pay based on age, service length, and weekly remuneration is provided under the National Insurance Fund.

3. Redundancy and Consultation Requirements

Redundancy is a less desirable but inevitable outcome of the firm’s underperformance. The organisation needs to follow specific procedures to avoid claims of unfairness:

Consultation Obligations: In a situation where the employer intends to carry out 20 layoffs within three months, then it is required that this be communicated to the employees highly at least a month before the action is taken. In the case where the employer conducts 100 or more redundancies, 45 days advance notice is required.

Penalty for Failure to Consult: Employees may apply for a “protective award” of up to 90 days’ pay in situations where there was a failure to comply with the consultation requirements.

They also added that almost a fifth of the population, 21%, had the chance for protective awards due to the failure for consultation increase in 2023. UK redundancy consultations contain more information.

4. Continuity of Employment and Transfer of Undertakings (TUPE) Regulations

A company, or its part, in the course of being dissolved, is sold, the employees’ satisfaction with their contracts is guaranteed by TUPE Regulations:

The Right to Employment Protection: The employees’ rights and terms of employment with their former employer will still be intact with their new employer.

Employers remain liable, through the incorporation of ETO circumstances in which redundancy dismissals were made. Such restructuring may become even more rampant. Otherwise, it is likely such employees or other employees may contest such restructuring measures.

With regard to TUPE, slowly but surely these requirements are claimed and standards were raised by a further 12% in 2023. However, it is also worthwhile to note that such requirements are still in many ways the most relevant for employees who have suffered from partial business sales – a significant number of them now.

Summit Law can provide valuable guidance in these circumstances, especially for employees facing complex restructuring measures or the effects of partial business sales under TUPE regulations.

5. Employee Benefits and Pensions

Pensions, among other employee benefits, face the risk of bankruptcy. Contribution to defined pensions is safe while the defined benefit schemes are likely to fail:

Pension Protection Fund (PPF): There is the PPF scheme that ensures that defined benefit pensions are paid out when the sponsoring employer becomes insolvent, and this scheme pays about 90% of the benefits to members who are under retirement age (with a lifetime limit of this benefit up to £44,000 per year, effective 2024).

Other benefits, bonuses, and other related benefits are usually unenforceable and thus often accompany company bankruptcy.

Historical Context

In the year 2021, the statistics of the present-day government policy measures and the pertinent chapters of the bankruptcy increased but in 2023 the peak rates of insolvency have been recorded since 1993.

This pattern suggests that economic intervention may provide some sort of buffer to insolvent people, but only temporarily, as various negative economic consequences disrupt the trend patterns.

Conclusion

As such, the most recent increase in the number of bankruptcies in the UK substantially affects employment relations with a greater number of employees likely to be laid off, made redundant, or have their employment terms changed.

And for individuals who are affected, they need to know what statutory and legal protection measures are available for them.

Employment of the above knowledge about the various steps in the insolvency process as well as the rights of employees enables both employees and employers to have a direction in a time that is difficult for people most times.

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