By Jo Seery Professional Support Lawyer
Background
Mr Chaudhry was employed by Paperchase Products Limited as a site manager from November 2010 until his dismissal in October 2018. He brought a claim for unfair dismissal in February 2019, which Paperchase contested. Before the claim could be determined, Paperchase entered administration, and the unfair dismissal proceedings were stayed under the statutory insolvency moratorium.
Mr Chaudhry submitted a proof of debt to the administrator, including sums representing a basic and compensatory award for unfair dismissal, which was accepted and paid in part. He then sought to recover the basic award from the Secretary of State under Part XII of the Employment Rights Act 1996. The Secretary of State refused the claim on the basis that no Employment Tribunal had adjudicated the unfair dismissal claim or made a basic award. Mr Chaudhry brought proceedings seeking a declaration that payment was nonetheless due.
Key Issues:
Recovery of a Basic Award Following Employer Insolvency
The key issue was whether an employee can recover a basic award for unfair dismissal from the Secretary of State where the employer is insolvent, but no Employment Tribunal has determined the unfair dismissal claim or made an award.
Mr Chaudhry argued that the basic award crystallises on dismissal and constitutes a “debt” for the purposes of Part XII, such that a tribunal judgment is not required. He also relied on EU law principles derived from the Insolvency Directive, contending that requiring tribunal adjudication made the exercise of rights excessively difficult and resulted in unjustified differential treatment compared with other categories of employee debt.
Outcome
The Employment Appeal Tribunal dismissed the appeal. It held that the wording of Part XII ERA was clear: a “basic award of compensation for unfair dismissal” requires an Employment Tribunal decision. The statutory scheme expressly links entitlement to the date on which the award is made, and the Secretary of State cannot be obliged to pay in the absence of such an award.
While the EAT accepted that there were strong arguments that the legislation may be difficult to reconcile with the Insolvency Directive, it concluded that it could not reinterpret or disapply clear statutory wording. Any inconsistency must be resolved by Parliament.
Why This Matters
This decision confirms that employees cannot recover a basic award for unfair dismissal from the Secretary of State unless an Employment Tribunal has formally determined the claim and made an award. Acceptance of a proof of debt in insolvency proceedings is not sufficient.
The case highlights the practical difficulties faced by employees whose unfair dismissal claims are stayed due to employer insolvency and underscores the importance of seeking consent from insolvency practitioners, or permission from the insolvency court, to allow such claims to proceed to determination.
