Employment Appeal Tribunal issues warning to insolvency practitioners

The Employment Appeal Tribunal has held that an employee cannot recover a basic award for unfair dismissal from the Secretary of State when the employer becomes insolvent unless an employment tribunal has already adjudicated the unfair dismissal claim and made a basic award. The ruling confirms that Part XII of the Employment Rights Act 1996 requires a tribunal decision before the National Insurance Fund can step in, even in situations where insolvency has halted the underlying claim.

Mr Justice Kerr dismissed Mohammed Shazan Chaudhry’s appeal against a 2023 tribunal decision that rejected his attempt to claim a basic award directly from the Secretary of State after Paperchase Products Ltd entered administration in January 2021. Mr Chaudhry had been dismissed in 2018 and filed a timely unfair dismissal claim, but the proceedings were stayed once Paperchase entered administration. With no tribunal judgment in place, his application for a guaranteed payment was refused.

Mr Chaudhry argued that a tribunal decision should not be required because the right to a basic award crystallises on dismissal, not on adjudication. He relied on EU principles of effectiveness and non discrimination under the retained Insolvency Directive, asserting that workers of insolvent employers face procedural barriers that make recovery “virtually impossible” without tribunal access. He also contended that administrators can block claims for arbitrary reasons, as occurred here when Paperchase’s administrators refused permission for the unfair dismissal claim to proceed.

The appeal tribunal rejected the interpretation. Justice Kerr found that the statutory language is too clear to allow any alternative reading. A basic award exists only when a tribunal makes one, and the “appropriate date” for calculating entitlement under section 185 requires the dismissal date, the insolvency date, and the date of the award. Without all three, the Secretary of State’s payment obligation cannot arise. He described the word “award” as inherently requiring a decision.

The judge acknowledged that the structure of Part XII treats employees differently depending on the type of debt owed. Arrears of pay and holiday pay can be recovered without a judgment. Protective awards and basic awards cannot. He noted that the distinction may be difficult to reconcile with the Insolvency Directive and that the UK regime creates barriers that may make the exercise of EU derived rights “excessively difficult”. Even so, post Brexit legislation prevents tribunals from disapplying domestic statutes that conflict with retained EU law, and the EAT could interpret the law only within its linguistic limits.

Justice Kerr went further, suggesting the UK may not be in full compliance with the Insolvency Directive. The system forces unfair dismissal claimants to seek administrator consent or apply to the insolvency court for permission to continue their claims. Tribunal fees are no longer an issue, but insolvency court costs and the risk of adverse costs make the route burdensome. The judge said the differential treatment lacked a clear justification, though that conclusion did not alter the statutory outcome.

Even with those concerns, the result remained the same. The domestic provisions require a tribunal award before the Secretary of State becomes liable, the court ruled, and no interpretive technique under retained EU law can override the plain words. The appeal was dismissed.

Justice Kerr added a pointed postscript aimed at insolvency practitioners. Administrators should give “careful” consideration to consenting to the continuation of unfair dismissal claims where the employee’s sole purpose is to obtain a basic award for recovery against the Secretary of State. Consent should not prejudice creditors, he said, because the insolvent estate would not fund the defence, and the Secretary of State could advance any merits based objections. The judge warned that administrators who refuse consent could face costs exposure if employees are forced to apply to the insolvency court instead.

Read the decision here.

Matt Jackson and Imogen Brown of Cloisters (instructed by Gowling WLG) represented Mr Chaudhry.