In this article Laura Darnley and Rob Turner cover what Insolvency Practitioners need to know about the Right to Work and Sponsor Licences.
The immigration issues that arise on insolvencies are often overlooked, particularly in relation to the impact on businesses who hold a sponsor licence and sponsor migrant workers. As more businesses obtain sponsor licences post-Brexit to address the end of free movement, it is increasingly important that insolvency practitioners understand the practical and legal issues as a result.
This is particularly so given the Insolvency Service’s Monthly Insolvency Statistics for January 2023 which show that the number of registered company insolvencies in January this year were 7% higher than in January 2022.
There are two main areas where immigration considerations arise during insolvency proceedings:
1) Right to Work considerations
For insolvency proceedings with a view to rescue, such as an administration, the business sometimes continues to trade in insolvency whilst a buyer for the business is found. In most of those cases, the employer remains the insolvent company and the insolvency practitioner (IP) acts only as the agent of the business.
Notwithstanding that, IPs will no doubt want to make sure that all employees working in the business have the legal right to do so to ensure there is no risk of illegal working penalties being imposed on the business (typically a fine of up to £20,000 per illegal worker), particularly since such penalties could be payable as an expense of the administration.
In cases where anyone in the business knows or has reasonable cause to believe that someone is working illegally (including potentially that knowledge being held by the IPs personally) there is a potential for criminal liability against those individuals, including an unlimited fine and a prison term of up to 5 years. There is also the risk of “naming and shaming” and reputational damage for any business found to be employing people illegally.
Where there are contractors or individuals travelling from overseas (for example to undertake activities within the business, such as maintenance contracts, IT support etc) the IP may also want to make sure that they have the correct immigration status to enable them to undertake their activities in the UK.
If the business is ultimately sold on, whether as a pre-pack or otherwise, and employees TUPE transfer to a new employer, the incoming employer benefits from a grace period of 60 days to undertake new right to work checks. We discuss this in more detail in our previous article here.
2) Sponsor Licence compliance
Whilst IPs may be familiar with thinking about right to work issues on insolvency, they may not have come across the issues relating to sponsor licence compliance. However, this is an area where we foresee a growth in compliance issues. The number of registered sponsors is increasing rapidly following the end of free movement and it is inevitable that some businesses who hold sponsor licences will ultimately end up insolvent.
The reason why this is important is because sponsor licences are not transferable; any reorganisations or changes that impact on the business, its ownership or trading status potentially give rise to immigration compliance obligations.
In some cases, this may be a simple report to the Home Office, in other cases an entirely new licence may be needed. The rationale behind this is that the Home Office’s view on employer sponsorship is that it is a “privilege and not a right” and is only granted where organisations have satisfied them that they are a genuine trading organisation within the UK (which includes providing information regarding their ownership).
The Sponsor Guidance published by the Home Office gives some specific examples of the compliance requirements associated with insolvencies:
- If a registered sponsor goes into administration (including special administration or administrative receivership) it must:
- Tell the administrator that they are a licensed sponsor as soon as possible (the administrator in practice should make enquiries with the directors prior to their appointment as to whether the company is a registered sponsor);
- Inform the Home Office within 20 working days of going into administration (this would be a responsibility of the administrators since the powers of the directors cease on their appointment);
- The IP must be appointed as the Authorising Officer under the sponsor licence. IPs need to be aware of the compliance requirements associated with this position as this means that they take full responsibility for ensuring that the business meets all of its sponsor duties. This is a position of significant responsibility.
- If the business enters into a Company Voluntary Arrangement (CVA):
- It must inform the Home Office within 20 working days of the CVA being agreed;
- If there is a change of ownership, the existing licence will be revoked. If there are any existing sponsored migrants and/or the business wants to retain the option of recruiting sponsored migrants going forward, it will need to apply for a new licence. There is a time limit of 20 working days to do this. If they fail to do so, any existing sponsored migrants will have their leave curtailed and they will usually have 60 days to leave the country or find another sponsor (no matter how senior or business critical they are). If they continue working in the business, they will be working illegally (and the business will face the illegal working penalties outlined above);
- If there is no change in ownership and just an arrangement with creditors, the existing licence can continue.
- If a business enters into a debt management plan or debt arrangement scheme and there is no change in ownership, again, the licence can continue as before.
- If a business enters voluntary or compulsory liquidation, again there is an obligation to report the change to the Home Office within 20 working days of entering liquidation (and this obligation would lie in practice with the Liquidators). If the business ceases trading, the Home Office must be notified within 20 working days of the date that trading ceases. Their licence will then be revoked. Any existing sponsored migrants will again have their leave curtailed and be given a 60 day period to leave the country or find another sponsor.
- Where a business emerges from insolvency by way of a sale of assets, for example a pre-pack, TUPE is likely to apply to the employees. Where either the insolvent business or the new business holds a sponsor licence, this will prompt compliance requirements by way of reporting to the Home Office and/or applying for a new licence. Again, the window for making these reports/applications is usually 20 working days, which is very short. We discuss the impact of TUPE transfers on sponsor licence compliance in more detail in our previous article here.
- Where the insolvency results in a reorganisation of the corporate structure more generally, particularly in relation to changes in ownership (either in terms of the immediate owner of the business or in the group structure more generally) this can also prompt reporting obligations to the Home Office (or in some cases a requirement to apply for an entirely new licence). We discuss the impact of corporate reorganisations on sponsor licence compliance in more detail in our previous article here.
Action Points
IPs need to have a good grasp of immigration compliance where they are dealing with businesses who currently hold a sponsor licence. As a minimum we would recommend they take the following practical steps:
- The sponsor licence register is a publicly available document, so it would be prudent for IPs to search the register prior to being appointed to see whether the business currently holds a sponsor licence (in which case the obligations above may apply), The Sponsor Register can be found here;
- IPs may want to undertake training on how the sponsorship regime works and specifically in relation to sponsor licence compliance so that they gain an understanding of what is involved, particularly in circumstances where they are appointed as the Authorising Officer;
- As a minimum, IPs will need to think about whether the Key Personnel on the licence (such as the Level 1 users and Authorising Officer remain in the business and appropriate given the changes);
- IPs will need to work with insolvent businesses to consider how the insolvency impacts on the sponsor licence particularly if there are any current sponsored migrants working in the business – is there an obligation to make a report to the Home Office, will the current licence be permitted to continue or is a new licence application required? These need to be actioned within short timescales, typically 20 working days and therefore need to be factored into the plans for dealing with the business at an early stage;
- Where sponsored migrants are involved, the outcome of the insolvency process and compliance with the legal requirements will determine whether they are able to continue living and working in the UK or whether their current visa will be curtailed.
- The immigration compliance requirements on insolvency are complicated and the potential penalties for failing to comply are severe (particularly in respect of illegal working penalties). As such, we recommend taking advice at an early stage from specialist advisers.
Should you require further advice or support, please contact Laura Darnley or a member of our specialist Immigration Team.
This article contains a general overview of information only. It does not constitute, and should not be relied upon, as legal advice. You should consult a suitably qualified lawyer on any specific legal problem or matter.
