Insolvency: No basic award from Secretary of State without Tribunal judgment

In Chaudhry v Paperchase Products Ltd and anor, the Employment Appeal Tribunal (EAT) has confirmed that an employee whose employer becomes insolvent cannot recover a basic award for unfair dismissal from the Secretary of State unless an Employment Tribunal has actually determined the claim and made such an award.

'Insolvency': No basic award from Secretary of State without Tribunal judgment

In Chaudhry v Paperchase Products Ltd and anor [2025] EAT 181, the Employment Appeal Tribunal (EAT) has confirmed that an employee whose employer becomes insolvent cannot recover a basic award for unfair dismissal from the Secretary of State unless an Employment Tribunal has actually determined the claim and made such an award. The EAT acknowledged that this interpretation likely fails to fully implement the EU Insolvency Directive by making recovery "excessively difficult." However, concluding that the wording of the Employment Rights Act 1996 was clear, the EAT held that the provision could not be interpreted differently, nor could it be disapplied following Brexit.

Background

The Claimant, Mr Chaudhry, brought a claim for unfair dismissal against Paperchase Products Ltd. Paperchase filed a response (ET3) defending the dismissal as fair, but subsequently entered administration. As is standard in administration, a statutory moratorium was placed on legal proceedings. The Claimant’s unfair dismissal claim was stayed. He submitted a proof of debt to the administrator for his basic and compensatory award. The administrator accepted the debt and paid a dividend of 2.52%. The administrator refused consent for the Claimant to lift the stay and proceed with the Tribunal claim, and the Claimant did not apply to the insolvency court for permission to do so. Instead, he applied to the Redundancy Payments Service (the Secretary of State) for payment of his basic award.

The Secretary of State rejected the application on the grounds that no Tribunal judgment existed. The Claimant brought proceedings against the Secretary of State, arguing that a judgment was not required to trigger liability under the insolvency provisions of the Employment Rights Act 1996 (ERA).

The EAT Decision

The EAT dismissed the appeal, upholding the Tribunal's decision that the Secretary of State was not liable to pay. The Meaning of "Award" The EAT analyzed Part XII of the ERA 1996, specifically s.184(1)(d), which lists "any basic award of compensation for unfair dismissal" as a recoverable debt. Mr Justice Kerr held that the word "award" implies a judicial decision that a payment should be made, rather than a mere entitlement that crystallises on dismissal. This distinguishes a basic award from other debts, such as arrears of pay, which do not necessarily require a Tribunal judgment to be recoverable from the National Insurance Fund. The EU Law Conflict The Claimant argued that requiring a Tribunal judgment, which is often impossible to obtain during administration due to the moratorium, breached the EU Insolvency Directive and the principles of effectiveness.

The EAT expressed sympathy with this view, stating there was a "strong argument" that the UK legislation does not fully implement the Directive because it makes exercising the right to recovery excessively difficult. However, the EAT concluded that the wording of the ERA is too clear to be interpreted ("read down") to mean anything other than a requirement for a judgment.

Following Brexit, domestic courts can no longer disapply UK legislation even if it conflicts with retained EU law.

Implications for Practitioners

This judgment confirms a significant hurdle for employees of insolvent companies. Unlike redundancy pay or notice pay, a basic award for unfair dismissal cannot be claimed from the National Insurance Fund based solely on the fact of dismissal; a Tribunal must formally rule on the case. However, the EAT provided a significant "postscript" offering a practical workaround for Insolvency Practitioners (IPs) and employee representatives. Mr Justice Kerr suggested that administrators and liquidators should consider consenting to a stay being lifted where the employee gives an undertaking 'that':

The sole purpose is to obtain a declaration of a basic award; and
They will recover that amount from the Secretary of State, not from the insolvent company’s assets.

The EAT noted that acceding to such a request does not prejudice other creditors, as no assets are spent defending the claim. Conversely, if an IP refuses consent and the employee applies to the insolvency court, the IP could be exposed to costs.