Sponsor Licences: Insolvency

This is the third article in our series about sponsor licences. This article focuses on the effect of insolvency on a sponsor licence. 

Businesses are facing challenging times in the current economic downturn and insolvency is a real possibility for many, with 5,595 company insolvencies in the third quarter of 2022[1] alone. 

If a business is on the brink of insolvency this will potentially have an impact on any sponsorship licences held within the company group. But what are the implications of this and what does it mean for sponsored employees? 

The umbrella term “insolvency” covers different insolvency processes including but not limited to administration, company voluntary arrangements and liquidation. 

Part 3 of the Home Office guidance for sponsor licences is clear that if a company with a sponsor licence enters into an insolvency procedure or stops trading altogether, the company has an obligation to report this to the Home Office through the Sponsorship Management System (SMS). The trigger point to report differs depending on the type of insolvency procedure invoked.

Administration 

If the company goes into administration, the company must inform the administrator as soon as possible that it holds a sponsor licence. The company also must report through the SMS that it has entered into administration. This report must be completed within 20 working days from the date the company went into administration. 

It should be noted that in the case of administration, the administrator or administrative receiver will also need to be appointed as the new authorising officer (“AO”) on the sponsor licence. This is so they can take overall responsibility for the licence while the company is in administration.

When faced with administration, the company will need to also consider whether it wishes to surrender its licence (or whether it is forced to) if it no longer sponsors any workers or the company ceases trading altogether. If this happens, the leave of any existing sponsored workers will be curtailed and they will be forced to find a new sponsor or alternative right to work permission within 60 days as otherwise they will have to leave the UK.

Company voluntary arrangement or debt arrangement scheme

If the company enters into a company voluntary arrangement (CVA), a report must be made through the SMS within 20 working days of the CVA being agreed. The company must also confirm in the report if there has been a change of ownership.

Where a change of ownership has occurred through a CVA, the Home office is likely to view this as the company selling their business and consequently the company’s existing sponsor licence could be revoked. If this happens, any sponsored workers will have their leave curtailed unless the new owner wishes to continue employing them and applies for a fresh sponsor licence. 

If the CVA is only an agreement with the company’s creditors and doesn’t result in a change in ownership, the company will likely be able to continue to hold their sponsor licence. 

Where the company enters into a debt management plan or a debt arrangement scheme and again there is no change in ownership, the company will likely be able to continue to keep their existing sponsor licence.

Liquidation

If the company enters into voluntary or compulsory liquidation, again a report must be made through the SMS within 20 working days of entering into the liquidation.  

Sole Traders

If a business is set up as a “sole trader” the business needs to be aware that there are also additional reports that need to be made if the business is entering into an insolvency procedure but that is outside the scope of this article.

Key considerations

This is really tricky area to navigate and the Board and Senior Leadership Team of any business who hold a sponsor licence needs to be aware of the implications of entering into any particular type of insolvency process – particularly given some of those processes will require a new licence, a new AO or could mean revocation and the loss of key sponsored employees. Given the complexity of this area, it is important to seek legal advice as soon as possible to ensure the implications are understood and all reporting obligations are fulfilled.

If a business is making redundancies or dismissals as a result of entering into an insolvency procedure, the company should be mindful of whether the dismissed employees undertake any of the key personnel roles on its licence such as AO, key contact or level 1 user. If they do, new key personnel will need to be appointed immediately to maintain access to the sponsor licence and avoid revocation. In addition, if any sponsored workers are “at risk” then it may be that alternative employment or roles cannot be offered without a change of employment application, and if made redundant, their termination must be reported through the SMS.

Entering into any type of insolvency process does not mean that any business can stop complying with the stringent rules surrounding employing workers from outside the UK, especially if it is still trading.  The Home Office will expect right to work checks on all employees to continue (and records kept) and civil penalties can still be applied. Where the business holds a licence, an unannounced or announced compliance visit could still take place. 

If an administrator or administrative receiver is appointed, they will need to be aware that liability for civil penalties (up to £20,000 per illegal worker) could pass to them and where they are appointed as AOs they will be responsible overall for the recruitment of all sponsored workers within the company and ensuring that the company’s sponsor duties are met. This includes ensuring that any existing sponsored workers’ visas do not expire during the time in administration. In addition, if the administrator or administrative receiver could also be subject to criminal sanction if they do not fulfil their AO duties although this is likely to only happen in exception circumstances.

Therefore given the potential consequences, financial or otherwise, that could arise if immigration compliance is not maintained, these could have a significant impact on creditor claims.   

Footnote:

[1] Company Insolvency Statistics: July to September 2022 - GOV.UK (www.gov.uk)