Secretary Of State For Business Innovation & Skills v Pengelly & Anor

Where an employer enters a company voluntary arrangement and remains insolvent until liquidation, it becomes insolvent only once for the purposes of Part XII of the Employment Rights Act 1996. For arrears of pay and holiday pay, the appropriate date is therefore the date on which the CVA was approved, not the later liquidation date.

The EU insolvency-protection Directive permits a Member State to fix a reference date and to limit guarantee payments. It does not require payment of arrears and holiday pay arising after that date. A purposive construction cannot create a second insolvency or alter the statutory reference date where the Directive creates no inconsistency.

Two groups of employees sought arrears of pay and holiday pay from the National Insurance Fund after their employers entered compulsory liquidation. Each employer had previously entered a company voluntary arrangement (CVA), while the employees continued working and were unaware of it.

Employment Judge Foxwell and Employment Judge Baron upheld the claims. The Secretary of State appealed both decisions. The central issue was whether the later liquidation created a fresh insolvency and a fresh appropriate date for the guarantee payments under Part XII of the Employment Rights Act 1996, as properly construed in light of Directive 2008/94/EC.

1. Appeals allowed. The Employment Tribunals erred in holding that compulsory liquidation supplied a new appropriate date for claims for arrears of pay and holiday pay.

2. Sections 182, 183 and 185 of the Employment Rights Act 1996 require a single date on which the employer became insolvent. A company becomes insolvent when its CVA is approved under section 183(3)(c). If it is later wound up without first emerging from that insolvency, the liquidation does not make it insolvent again. The appropriate date for arrears and holiday pay remains the CVA approval date.

3. The statutory language, including the singular reference to the appropriate date and the past-tense formulation of when the employer has become insolvent, does not permit serial insolvencies. Treating each event in section 183(3) as a separate reference date would undermine the certainty which the statutory date is intended to provide and could permit repeated claims.

4. The Tribunals had respectively added requirements not found in the statute. Insolvency does not depend upon whether the business has ceased trading or whether it can pay wages. Nor did the Directive treat a CVA as outside its concept of insolvency. Its definition was informed by the insolvency proceedings covered by the relevant EU insolvency regulation, which included voluntary arrangements.

5. Applying the purposive interpretative approach in Litster, no modification of domestic legislation was required. Directive 2008/94/EC permits Member States to fix the reference date and to limit the guarantee. The United Kingdom chose not to cover, for these particular debts, claims arising after the fixed insolvency date. That choice did not conflict with the Directive, although it produced harsh results for these employees.

6. Findings were substituted that the Secretary of State was under no obligation to pay these claims from the National Insurance Fund.

• Employment Appeal Tribunal: the Secretary of State's appeals were allowed. The Tribunal decisions were set aside and findings were substituted that no payment obligation arose.
• Employment Tribunals: Employment Judge Foxwell, in reasons delivered on 30 March 2012, upheld Miss Pengelly's claim. Employment Judge Baron, in reasons dated 15 March 2012, upheld the claims of Mr McDonagh and the other employees.