Facing an Uphill Battle to Get Paid: Employees in Situations of Informal Insolvency in Ireland

We are pleased to welcome this guest post from Eddie Keane, Lecturer in Law at the University of Limerick.

In the wake of the demise of the Celtic Tiger, the issue of ‘informal insolvency’ has become a problematic phenomenon, with the most recent example being the ‘Paris Bakery’ debacle. The situation arises where an employing company ceases trading, leaving the employees not only unpaid but facing significant challenges to getting any monies owed to them, as can be seen from the epic Vita Cortex dispute. Normally when an employing company ceases trading, it is declared insolvent and the provisions of the Protection of Employees (Employers’ Insolvency) Act 1984 are triggered to ensure the employees receive monies owed to them. However, in an informal insolvency, where the employing company is not declared insolvent, the Achilles Heel of the Act is exposed. The crux of the problem is in the narrow definition of insolvency under section 1(3) of the Act. Essentially the Act only considers an employing company to be insolvent when:

  • A winding up order is made (by a court),
  • A resolution for a voluntary winding up is passed
  • A receiver is appointed, or
  • Charged property of the company is taken under control by the relevant creditors.

 In any event, the protection of the Act, is dependent upon either a declaration by a court or a positive step by the management of the company or its creditors. Consequently where the employing company simply ceases trading, without further action by any party, the employees are in a very difficult and vulnerable situation.

This issue came before the Irish High Court in Re Davis Joinery & the Companies Acts [2013] IEHC 353. The petitioner to the court was an ex-employee of Davis Joinery who was owed €53,080 as a result of awards for inter alia unfair dismissal and personal injuries. However, as a result of the downturn in the construction industry, Davis Joinery ceased trading without paying the petitioner. Their only response to a demand for payment from the petitioner being “Davis Joinery Ltd. has not been able to trade out of its creditors’ arrears and cannot collect monies owing from debtors, therefore it has no option but to stop trading”. This left the petitioner in the unenviable position of being owed money by a company who was, in practice insolvent, but not insolvent in the eyes of the Act.

Laffoy J, in commending the petitioner and his legal team for pursuing the matter, was critical of the legislatures’ failure to remedy the defect in the legislation and noted that “one has to be concerned for less fortunate employees of corporate employers”. She noted that the only manner in which the Court could be of assistance to the employee in this circumstance was by making a winding-up order or, alternatively, appointing a provisional liquidator and then making a winding-up order. Consequently Laffoy J made an order for the winding up of the company under section 213 (e) of the Companies Act 1963, thus ensuring that the company was declared insolvent and triggering the use of the Protection of Employees (Employers’ Insolvency) Act 1984. The key point to note here is that once the petitioner came under the protection of the 1984 Act, he could apply to the Minister for Enterprise, Trade and Innovation to have the monies owed to him paid from the Employers Insolvency Fund (established under the 1984 Act and subsequently merged with the Social Insurance Fund).

While this course of action resolved the issue for the petitioner in this case, the options available to unpaid employees can vary, depending upon whether or not the employing company has sufficient assets to meet the debts owed to the employees.

In situations where the employing company holds the assets but has simply refused to pay the employees, the situation can be resolved without any significant cost to the employee. The employee can initially make an application to the Employment Appeals Tribunal (through the Workplace Relations Commission) under the relevant legislation, e.g. Redundancy Payments Acts, 1967 to 2007, the Minimum Notice and Terms of Employment Acts, 1973 to 2005, the Unfair Dismissals Acts, 1977 to 2007 or the Payment of Wages Act, 1991. The primary advantage of this option is that the costs are significantly lower due to the fact that legal representation is not required, unless desired by the employee. In the event that the Employment Appeals Tribunal has made a determination and the employing company hasn’t met this demand within six weeks of the decision, an employee can apply to the Circuit Court to have the determination enforced by way of Notice of Motion pursuant to Order 57 of the Circuit Court Rules. A determination, unless appealed, may be enforced in the Circuit Court within six weeks from the relevant date of the determination being made.

Another option for an employee who is owed money is to make a complaint to the Insolvency Unit of the Office of the Director of Corporate Enforcement. Under section 251 of the Companies Act 2001 (as amended by section 54 of The Company Law Enforcement Act 2001) the Director of Corporate Enforcement has the power to apply for various orders against the company if it is insolvent and has not been wound up. However, it should be noted that the Director retains the discretion on whether or not to take an action and may decide not to act in circumstances where there is no breach of the Companies Acts.

In circumstances where the employing company does not have any assets to meet the debts owed to the employees, the employees can try to access to the Employers Insolvency Fund, by petitioning the High Court for an order to have the company wound up. However, an initial difficulty with this option is that the claim to the fund must be lodged within a period of eighteen months from the date of insolvency. This can prove problematic due to the potential for long delays between the date when the company ceased trading and the hearing of the petition.

An employee, as a creditor of the company, has locus standi to petition for the winding up of the company. The most common ground for petitioning for the winding up of a company is that the company is ‘unable to pay its debts’. The test for the inability to pay debts is set out in s. 214 of the Companies Act 1963, which requires that the debt owed exceeds €1,269.74 and that a written demand letter on the company to pay the sum due is not satisfied within 21 days. If the petition is successful, the court will order the winding up of the company and appoint a liquidator to oversee the process. Subsequently, the employing company will fall within the definition of ‘insolvency’ as stipulated under s.1 of the Protection of Employees (Employers’ Insolvency) Act 1984, in turn the unpaid employee will be able to access the Employers Insolvency Insurance Fund.  While this course of action proved successful for the employee in Re Davis Joinery, it requires not only significant effort on the part of the employees, but the financial stamina to pursue the matter through to completion.

In October 2012, the Irish Congress of Trade Unions made a submission  to the Government on how to deal with the legislative lacuna that has caused this problem. However, while we still wait for legislative action, the hazards of informal insolvency are fast becoming a growing reality for an ever increasing number of employees.

Facing an Uphill Battle to Get Paid: Employees in Situations of Informal Insolvency in Ireland

Leave a Reply

Your email address will not be published. Required fields are marked *