Nick Hobden, a partner and head of the employment group, and Alison Antill a trainee solicitor, at Thomson Snell & Passmore LLP, give their verdict on the collapse of the Kids Company and the effect it has had on the charity’s employees…
Following the dramatic collapse of the charity Kids Company last month, news has emerged that many former employees have consulted lawyers with a view to making claims in the employment tribunal for redundancy payments. The charity suffered a sudden and spectacular demise amongst allegations of financial mismanagement by the trustees. Immediate concerns are for the legions of young people left without the valid services Kids Company provided. But what of the 500 employees suddenly without jobs, as well as many other charities who are struggling financially with decreasing incomes and ever growing demands for services?
The economic climate for charities has been particularly challenging in recent years. Inevitably, some charities will become insolvent as a result of being unable to meet their costs. The fate of Kids Company is a stark reminder for charities to maintain good financial management, despite funding challenges. Trustees have obligations in line with the Trustee Act 2000 and the Charity Commission about their financial management. Many charities are registered as companies and trustees must comply with their duties as directors under the Companies Act 2006, and remember that they may be liable for wrongful trading if they continue activities where there is no chance of avoiding insolvent liquidation. For unincorporated charities, trustees could find themselves personally liable, as with the Wedgewood Museum Trust where the trustees became personally liable for £100,000 each.
Charities should ensure they use competent trustees who are aware of their financial responsibilities and suitably qualified to manage these, as well as using advisors experienced in charity management including maintaining adequate financial reserves and take advice on potential insolvency issues at an early stage. It is important to be frank and honest with employees when problems such as lost contracts or reduced funding arise; so employees are fully aware of difficulties and it is not a shock if liquidation is necessary. Often the chief cause of complaint about loss of jobs is the way it happens out of the blue. Employees feel let down when their employer goes to the wall.
When an organisation becomes insolvent and closes, this often triggers redundancy for its employees. Employment is automatically terminated on a petition to the courts for compulsory liquidation. Employees with more than two years continuous employment may be entitled to a statutory redundancy payment and may also be owed notice pay, accrued salary, annual leave and other contractual entitlements. If payment is not made automatically by the employer shortly after the termination of employment, employees have 6 months from the termination date to submit a claim. Employees are entitled to redundancy payment by statute. For Kids Company, this will be a significant liability as the charity’s headcount grew from 44 to 495 in 10 years. The total salary bill for 2013 was £11.8 million.
Employers are also under an obligation to inform and consult employees of any potential redundancy. Where it is proposed that more than 20 employees are made redundant in a 90 day period the employer must engage in collective consultation with the employees. Failure to engage in collective consultation can give rise to an entitlement for employees to receive a “protective award” of up to 90 days gross pay which can be costly.
Employees of an insolvent company must register claims within the six month time limit. However, with compulsory liquidation, there is a stay imposed on legal proceedings against the company meaning former employees must wait for this to be lifted to proceed with any claims. Claims will be accepted by the employment tribunal but stayed pending permission of the court. On succeeding with a claim for redundancy pay against an insolvent employer, employees are ranked as unsecured creditors and they can only recover their awards at a proportionate rate of pence per pound. However, employee’s remuneration (pay owed) up to a capped level is a preferential debt and ranks third in priority in the list of creditors. Fortunately, employees are also entitled to claim and redundancy pay or other amounts owed from the National Insurance Fund where their employer is insolvent and unable to pay.
The best way to avoid the difficult situation with a charity’s collapse is for charities to maintain good financial management. Unfortunately, insolvency is sometimes unavoidable and a policy of realistic and open governance when dealing with a loss of revenue is best. In some situations it may be preferential for a charity to go into solvent liquidation to ensure employees are given the monies they are entitled to and avoid the distress of insolvency litigation. By exercising control over the liquidation before it is too late, charities can ensure a good liquidator is appointed to manage things in an appropriate way, so that all the debts can be paid including those to employees.
Feature Image from NHS Confederation annual conference & exhibition 2011.