Employees take a direct hit when a company becomes insolvent. Employees, in spite of the significant role they play in the life and growth of the company, are often the least protected. They are often the first to lose their place in the company. Even when they stay on, the terms of their existing contracts risks being altered. This Q&A considers the impact of an insolvency on the employment relationship.
Does an insolvency affect the employment relationship?
Yes, generally, the insolvency of a company affects the employment relationship/contract fundamentally. At the onset of an insolvency, employees are let go of, or have the terms of their contract varied to fit in with the state that the company finds itself in.
Is the impact of the various types of insolvencies equal?
No. An insolvency under Ghanaian law may see a company being placed in either an administration or a liquidation. Each of these have a different and varying impact on the employment relationship.
Where the company is placed under administration, the employment relationship is not automatically terminated. The Corporate Insolvency and Restructuring Act, 2020 gives the administrator the option of deciding which employees to let go and those to keep. The administrator has 21 days to do this. Failure to do this will be interpreted as an intention on the part of the administrator to keep the employees on the same terms and conditions under which they were previously engaged. Employees being let go under an administration ought to be treated in the same way as persons being let to go on a redundancy.
The position is slightly different in the context of a liquidation. Once a company is liquidated, it stops doing business and this naturally means that it has no need for employees. Liquidation completes the life cycle of the company. The liquidator may engage a limited number of persons to assist him or her with the beneficial winding up of the affairs of the company. But these engagements are considered as fresh engagements by the liquidator and may last up until the completion of the liquidation.
What about a private liquidation. What impact does it have on the employment relationship?
A company’s life may also come to an end through a private liquidation. But the resolution of a company to enter into a private liquidation does not automatically bring an end to the life of the company. In the case of a private liquidation, the employer warrants that it is in the position to take care of employee liabilities.
How are employee claims determined/adjudicated during the imposition of a moratorium?
The moratorium provisions are not absolute and give a court the discretion to decide on whether a claim against the company in administration is admissible or not. But the threshold for the admission of employment claim is very steep, and it is up to the claimants to demonstrate why the court should give them leave to commence, or continue proceedings in court.
One of the obvious gaps in the legislation is that it confines the moratorium provisions to actions in court. This naturally raises the question of whether claims before the national labour commission are not affected by the moratorium. In the absence of the judicial consideration of this point, it is submitted that that since the object of the law is to place a moratorium on all actions against the company it also includes actions at the Labour Commission.
How are employee claims treated in administration or liquidation?
Remuneration owed to an employee of the company regarding employment during the whole or a part of the four months preceding the date of commencement of administration
or winding-up is treated as a preferential debt and shall be paid in full . Employee claims falling outside these are treated as Class F debts which are unsecured debt (i.e., debt that is not secured by charge of any kind over the assets of the company).
This article was first published in the BnFT on 27th November 2023