Employees rights in the event of an insolvency

Of the many negative effects of the global economic and financial crisis caused by Covid, one not frequently considered is the inability of companies to meet their obligations to both their suppliers and their staff. The legal consequence of this is that companies are forced into insolvency.

As it is common practice under insolvency, when a company cannot pay its debts, any creditor having a claim against it over a certain threshold is entitled to move to court and file and or initiate insolvency proceedings in order to recover part or all of the debt from the remaining assets.

Insolvency has a variety of impacts on employers and workers. An insolvent firm may owe creditors such as banks, suppliers, and landlords among others partial or full payments for outstanding debt. At the same time, the company as an employer may accumulate internal debts to employees if they have not paid part or all of wages and remuneration. This can have profoundly negative consequences for employees as they and their families may be wholly dependent on that wage or remuneration to live.

For these reasons policy, legal, and institutional mechanisms are important in addressing worker wage claim in company undergoing insolvency. Below are some of the key considerations to be made when addressing employee wage claims in insolvency.

To begin with, a company is said to be insolvent when its debts (liabilities) are greater than the value of its assets and income. In effect, such companies are not able to pay back money owed, either currently or in the future.

Similarly, It is possible for a company to be insolvent even if their assets outweigh their liabilities where the assets are not easily convertible to liquid cash needed in order for the company to make the necessary payments.

The main objective of insolvency proceedings thus is to consolidate and manage the company and or employer’s assets with a view to the collective reimbursement of its creditors some of whom are its employees.

However, certain categories of workers, mainly government employees are excluded from these proceedings due to the nature of their employment relationship or other forms of protection available to them.

Under the ILO Convention No. 173 (1992), there are two ways of safeguarding employee’s interest with regard to their claims against their employer. They include; granting staff preferential rights; and establishing a guarantee institution to deal with their claims in the event of insolvency, for instance a group cover.

Thus, if preferential rights have been granted, employees’ claims take precedence over the claims of other creditors with regard to the payment of wages from the insolvent employer’s assets. In other words, the ILO Convention No. 173 (1992) considers the employees’ claims as preferential debts and establishes a priority regarding their payment.

The convention includes a priority list of employee claims considered as privileged debts to be covered by the employer such as employees’ claims for wages relating to a prescribed period, which shall not be less than three months, prior to the insolvency or prior to the end of the employment contract; Employees’ claims for amounts due in respect of other types of paid absence relating to a prescribed period, which should not be less than three months prior to the insolvency and lastly allowances due to employees on the termination of the employment contract such as notice pay, gratuity among others.

With regard to the protection of employees’ claims by means of a guarantee institution or group cover, payment may be made from a special fund in the event of an employer’s insolvency and insufficient assets. Similar to the list of preferential debts, the convention provides a limited list of employees’ claims to be paid from the Guarantee Fund.

Oscar Onyango, Advocate of The High Court