The Employment Appeal Tribunal (EAT) has recently provided clarification on when an employee can recover a basic award for unfair dismissal from the Secretary of State where their employer has become insolvent. In Chaudhry v Paperchase Products Ltd (in administration) & Secretary of State for Business and Trade [2025] EAT 181, the EAT held that no payment can be made from the National Insurance Fund unless the employment tribunal has actually made a basic award, even if the claim was issued in time, and even if the employer’s insolvency prevented the hearing from taking place.
Employment Rights Act 1996: protected debts
The Employment Rights Act 1996 (ERA) sets out when the Secretary of State will make payments to employees whose employer has entered an insolvency process. The scheme only covers certain categories of debt, and payments are made from the National Insurance Fund.
The ERA sets out the debts protected under the scheme. These include arrears of pay, holiday pay, statutory notice pay (all capped) and, importantly in this case, a basic award of compensation for unfair dismissal.
An employee can recover these debts only where three conditions are met:
- the employer is insolvent, and
- the employee’s employment has terminated, and
- on the “appropriate date” the employee was entitled to be paid the debt.
The definition of employer insolvency includes administration. Upon entry into administration, tribunal proceedings against the company are automatically stayed.
The timing mechanism in the ERA is crucial. For a basic award, the “appropriate date” is the latest of:
- the date the employer became insolvent, and
- the date of termination of the employee’s employment, and
- the date on which the award was made.
Facts
Mr Chaudhry, a site manager, brought an unfair dismissal claim against Paperchase. Before the claim could be heard, Paperchase entered administration, triggering the statutory moratorium and staying the tribunal proceedings. He submitted a proof of debt in the administration in relation to his unfair dismissal claim, which the administrator accepted, but only paid 2.52% of what Mr Chaudhry claimed for. The administrator refused Mr Chaudhry consent to proceed with his tribunal claim, and Mr Chaudhry did not apply to the court for permission to continue it. No tribunal hearing of his unfair dismissal claim therefore took place, and crucially no basic award was ever made.
Mr Chaudhry later applied to the Secretary of State for payment from the National Insurance Fund of an amount equal to what he believed he was entitled to as a basic award. The application was refused on the basis that no tribunal judgment existed. The employment tribunal upheld that refusal and Mr Chaudhry appealed to the EAT.
The EAT decision
The EAT dismissed the appeal. An "award" under the ERA means a tribunal decision that a payment should be made, not merely an entitlement that crystallises on dismissal.
The EAT encouraged administrators and liquidators to consider giving consent to an employee to proceed with a tribunal claim where the sole purpose is to obtain a basic award for the purpose of recovering that amount from the National Insurance Fund. The EAT noted that this should not disadvantage other creditors as no company assets should be expended and no defence would be presented by the company. Consequently, if the insolvency officeholder refuses consent and the employee instead obtains permission from the insolvency court, the administrator or liquidator may be required to bear the costs of that application.
Key takeaways for insolvency practitioners
In light of the EAT’s comments, insolvency practitioners should consider:
- Consenting to tribunal claims which are limited to a claim for an unfair dismissal basic award. This should not prejudice other creditors, because any eventual payment is made by the Secretary of State through the National Insurance Fund, and not from the insolvent estate.
- Where the employee offers an undertaking limiting the purpose of the claim, refusing consent may be deemed unreasonable and may have adverse cost consequences.
Key takeaways for employees
If your employer is in an insolvency process, you should seek permission (from the insolvency office holder or the court) to continue any unfair dismissal claim. A basic award cannot be recovered from the Secretary of State without a tribunal judgment.
