Employees’ rights in insolvency

The recent Employment Appeal Tribunal (EAT) decision in Chaudhry v Paperchase Products Limited & Anor [2025] EAT 181 has important implications for insolvency practitioners and employers alike, particularly in the context of unfair dismissal claims. With corporate insolvencies and restructurings continuing to shape the employment landscape, this judgment highlights key principles about when an employee can recover compensation where their employer becomes insolvent.

In this update, we clarify the position on an employee’s ability to claim the basic award for unfair dismissal from the Secretary of State, where their employer is insolvent.

Background

Under Part XII of the Employment Rights Act 1996 (ERA), employees whose employers become insolvent can recover certain sums, including unpaid wages and statutory redundancy pay, from the Secretary of State through making a claim at the Redundancy Payments Service (RPS). However, the route to securing a basic award in the context of unfair dismissal is less straightforward.

Mr Chaudhry had brought a claim against his employer, Paperchase Products Limited, for unfair dismissal. Before Mr Chaudhry’s claim could be heard by an employment tribunal, Paperchase went into administration, resulting in the claim being stayed due to the statutory moratorium.  As a result, Mr Chaudhry applied to the RPS for payment, including the basic award for unfair dismissal. This application was rejected by the RPS and Mr Chaudhry brought a claim at the tribunal against the Secretary of State.

Can an employee recover a basic award after employer insolvency?

Where the Secretary of State has failed to make a payment which an employee has applied for, that employee may bring a claim to an employment tribunal under Part XII ERA. This includes claims for payment of the basic award.

A key point of the appeal in Chaudhry was whether an employee is entitled to a basic award against the Secretary of State if the employer goes into insolvency before an employment tribunal has formally made such an award at a full hearing.

The EAT confirmed that under Part XII ERA, an employee cannot recover a basic award via the Secretary of State unless an employment tribunal has first made that award at a final hearing. The tribunal must have completed the unfair dismissal proceedings and issued an award before the basic award can be pursued as a claim against the National Insurance Fund. This was because a basic award only comes into existence when a tribunal awards it, and it is not the role of the Secretary of State to determine this. Therefore, the case against the Secretary of State was dismissed.

What can an employee recover from the RPS?

This judgment does not impact the other categories of debts (holiday pay, arrears, notice pay), which can exist and be calculated without a tribunal.

Where an employer is insolvent, the RPS can also pay the statutory redundancy payment without any tribunal judgment, provided there is:

• confirmation of insolvency, and
• evidence of dismissal by redundancy.

Where does this leave employees and insolvency practitioners?

The Chaudhry decision sits within a broader insolvency landscape where employee claims are often affected by the timing of formal proceedings.

The EAT indicated that, in cases of employer insolvency, an administrator should give consideration to agreeing to an employee’s request to continue proceedings where the employee undertakes that the claim is being pursued solely to secure a basic unfair dismissal award, with recovery to be sought from the Secretary of State. Granting consent should not disadvantage other creditors provided no assets of the insolvent employer are spent on defending the claim (e.g. by maintaining that the dismissal was fair). The EAT further noted that, if consent is withheld and the employee instead seeks permission to continue the claim from the Insolvency Court, that leave may well be granted on the same limited basis. In those circumstances, an administrator or liquidator who unreasonably refused consent could face liability for the costs of the permission application.

Practically, the decision highlights the importance of case management where insolvency risks emerge. Employees may wish to consider:

• earlier listing of unfair dismissal claims,
• listing claims in regions with fewer delays, or
• proactively seeking consent from the employer company’s administrators to continue tribunal proceedings aimed solely at securing a basic award.

How we can help

If you need assistance or have any questions on unfair dismissal or employer insolvency, please contact our employment team.