Limiting employee liability claims – a new approach when winding-down a dormant company
May 06, 2016
Employer Liability (“EL”) claims can be a real headache if one of the insurers is insolvent. The company will be exposed to a steady stream of claims and costs, which must be dealt with before the company can be eliminated. However, there is a way round this problem, which could be used by other companies in the same situation.
What usually happens?
In the UK the two options for eliminating a company are members’ voluntary liquidation (“MVL”) and Striking off. Before going down either route the directors need to find out whether there is a risk of EL claims arising that are not covered by insurance. This could be as a result of gaps in the cover history – i.e. there is no record of who the insurers were – or if any of the insurers are insolvent. In either situations future EL claims would need to be settled by the company or another group entity.
The situation
In a recent case, we were asked to liquidate a company with over £2 million of assets, as part of a wider plan to streamline the parent’s operations. The company had not traded for over 10 years but had received a steady flow of claims from former employees. In those cases where the EL insurer was insolvent, the parent had been settling the claims. Alternative options had been looked at, including seeking run-off cover for the ‘gap periods’. Unfortunately no cover could be found on commercially acceptable terms.
The solution
We helped the company approach the Financial Services Compensation Scheme (FSCS) – that’s the body that settles EL claims where the insurer is insolvent. Using our expertise, a proposal was put to FSCS - in return for a one off sum, FSCS would agree to settle future EL claims if the insurer was insolvent. Claims received pre liquidation would be paid by the parent. A formal agreement was reached between FCSC, the company and its parent and the company was placed into MVL. This allowed the assets to be distributed to the shareholders, after all the creditors had been paid. As the liquidation was just one stage in a wind-down of group activities this has removed a potentially significant blocker from the much larger plan.
Use in other scenarios
This approach could be used in other scenarios, where a history of EL claims, combined with an insolvent insurer, has resulted in companies being retained years after they’re no longer required. As well as saving on compliance costs, it could permit surplus capital to be returned to shareholders.
Do you have a dormant company with EL claims that are causing you issues? If you would like to discuss the topics covered above and how they affect your individual situation, please get in touch using the contact details below.
