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Can I Sue My Employer If They've Gone Bust?28th Jan 2021

by Hugh Reid on 28th Jan 2021

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Employment Law Claims Against Insolvent Companies

Until recently there was some doubt surrounding employment law compensation claims against insolvent companies. Where did an ex-employee stand if their employer had gone bust?

Could they pursue a claim against their former employer’s insurer? Even though – by virtue of insolvency – that company no longer existed as a client of the insurer?

Now it has been ruled that they can – whether they are employees/ex-employees (who have more rights) or workers/ex-workers (who have fewer rights).

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Third Parties (Rights Against Insurers Act) 2010

The Third Parties (Rights Against Insurers Act) 2010 – plus further legal changes in 2015 and 2016 – have made it easier for third-party claimants to sue insurers when the insured has become insolvent.

So they can now sue the insurer without first having to establish liability and damages against the insolvent company. That is quite a leap forward from the old Third Parties (Rights Against Insurers) Act 1930 which ruled that any insurance payout should be paid into the insolvent estate and shared out among creditors, rather than being paid directly to the aggrieved third party.

So, since 2016 third parties have had new rights – and the insurers have had another pitfall to worry about.

But the insurers still had a loophole they could rely on to avoid paying…and that is jurisdiction (whether a court or tribunal had the necessary authority to rule on a particular type of case).


Jurisdiction – Is A Tribunal A ‘Court’?

In the case of Irwell Insurance Company Ltd v Watson, Hemingway Design Ltd (in liquidation) and Darren Draycott, the insurer was facing an unfair dismissal and disability discrimination claim relating to an insolvent company.

The insurer argued that the employment tribunal did not have the necessary legal jurisdiction to hear the case – because it was a tribunal, not a ‘court’ within the meaning of the Third Parties (Rights Against Insurers Act) 2010.

But the Court of Appeal has ruled against the insurer. It upheld an earlier decision by the Employment Appeal Tribunal (EAT) as a “clean and meticulous judgment” and dismissed the insurer’s appeal. This decision by three Lord Justices was unanimous.


What Does All This Mean For You?

For employees/workers and former employees/workers, the Court of Appeal decision offers a lifeline of hope that they will still receive justice (and potentially compensation) – even though their employer has become insolvent.

For an insolvent employer, you may think that it offers very little. After all, the company is insolvent. But there may be circumstances in which it could matter. It may dissuade ex-employees from going after the directors personally and deflect them towards the insurers.

That’s because (in this instance), it makes much more sense for the employees to take legal action against a large and financially secure insurance company. It presents a better target than a beleaguered director who may be facing personal bankruptcy (because their outstanding business loans may be secured against their home or other personal property).

For insurers, it means a whole heap of extra expense (which they may pass on in the form of higher premiums). Not even the powerful insurance lobby – which often seems to have the government’s ear when it comes to legislation – could get them off the hook this time.


Get Expert Legal Advice

For more information about unfair dismissal compensation claims, contact Coles Miller employment law solicitor Hugh Reid.