When your company faces insolvency, your employees’ future becomes a major concern. Are they entitled to redundancy pay? Who ensures they receive what they’re owed?
This guide answers these questions and more. We’ll break down employee rights during insolvency, explain the claims process for unpaid wages and redundancy, and outline how different procedures affect your staff.
Whether you’re facing liquidation or trying to save your business, this article provides clear, practical advice to help you handle employee concerns with confidence.
The impact of different insolvency procedures on employees
Insolvency doesn’t always mean the same outcome for your employees. The effects depend on the specific procedure your company enters. Each process comes with its own rules about employee redundancies, rights, and entitlements.
Creditors’ Voluntary Liquidation
In a Creditors’ Voluntary Liquidation (CVL), directors decide to close their company in an orderly manner because it can no longer pay its debts. For employees, this often means immediate redundancy once a liquidator is appointed.
In a CVL, employees become preferential creditors, which means they are given priority for certain payments. These include unpaid wages, holiday pay, and payments in lieu of notice (PILON). These payments are typically made from the funds raised by selling the company’s assets.
However, if the sale of assets doesn’t generate enough money to cover these claims, employees can turn to the Redundancy Payments Service (RPS). Funded by the National Insurance Fund (NIF), the RPS allows employees to claim statutory payments, ensuring they are not left empty-handed.
To make a claim, employees must submit form RP1, a process overseen by the appointed Insolvency Practitioner (IP). While redundancy through a CVL can feel abrupt and disruptive, these statutory protections offer a clear route for employees to claim what they are owed.
Related: Is a Creditors’ Voluntary Liquidation Right For My Business?
Compulsory Liquidation
In a compulsory liquidation, a company is forced to close by a court order, typically following a creditor’s winding up petition for unpaid debts. For employees, this usually results in immediate redundancy, often without much warning.
As in other insolvency procedures, employees can claim for unpaid wages, holiday pay, and payments in lieu of notice. If the sale of company assets doesn’t generate enough funds to cover these claims, employees can seek support through the Redundancy Payments Service.
Administration
When a struggling company goes into administration, an Insolvency Practitioner takes control with the goal of rescuing or restructuring it. Unlike liquidation, administration often provides an opportunity for the business to continue trading or be sold as a going concern, which can offer some stability for employees.
If the company continues to operate during this period, employees may keep their jobs. In cases where parts of the business or its assets are sold, employee contracts may transfer to the new owner under TUPE (Transfer of Undertakings Protection of Employment) regulations, protecting their existing terms and conditions.
However, if redundancies occur after the first 14 days of Administration, affected employees become preferential creditors for unpaid wages, holiday pay, and redundancy entitlements.
Company Voluntary Arrangement
A Company Voluntary Arrangement (CVA) is a formal agreement between a company and its creditors designed to restructure debts and allow the business to continue trading. Unlike liquidation, the focus of a CVA is on recovery rather than closure, with the aim of preserving jobs wherever possible.
However, financial restructuring often requires cost-cutting measures, which may still result in some redundancies. Employees who are made redundant during a CVA can claim statutory redundancy payments through the Redundancy Payments Service.
Related: What is the difference between a CVL and a CVA?
Employee rights when a company closes down
UK employment law provides safeguards to ensure that employees can claim key entitlements, including statutory redundancy pay, unpaid wages, holiday pay, and notice pay.
Employees who have been continuously employed for at least two years are eligible for statutory redundancy pay, which is calculated based on their age, length of service, and weekly pay (subject to a statutory cap). If the company lacks sufficient funds to make these payments, employees can turn to the Redundancy Payments Service.
Beyond redundancy pay, insolvency can affect other key areas, including unpaid wages, employee benefits, and preferential claims.
Related: Voluntary Liquidation & Redundancy:
How To Claim Statutory Payments During Liquidation
Insolvency and employee wages
During insolvency, unpaid wages are a top concern for employees. Claims can cover up to eight weeks’ pay, including basic salary, overtime (if contractually agreed), and bonuses. These payments are capped at a statutory weekly limit set by the government.
If company funds fall short, employees can recover unpaid wages via the Redundancy Payments Service. These measures provide employees with a safety net to recover owed wages despite the company’s financial difficulties.
Insolvency impact on employee benefits
Employee benefits, such as pensions, healthcare plans, and company perks, can also be significantly affected during insolvency. Directors must be aware of their obligations to ensure these are handled correctly.
For pensions, defined benefit schemes are often protected by the Pension Protection Fund (PPF), which steps in when an employer cannot meet its pension obligations. Any unpaid pension contributions deducted from employee wages but not transferred to the pension scheme can still be recoverable.
Other employee benefits, such as private healthcare or company car schemes, are usually discontinued immediately if the company cannot fund them. Directors should communicate these changes clearly to employees.
Employee preferential claims in insolvency
Employees are classified as preferential creditors for certain claims. This status gives their claims priority over those of unsecured creditors. Preferential claims include up to eight weeks’ worth of unpaid wages, up to six weeks’ unused holiday pay, and payments in lieu of notice.
When company assets are sold, these employee claims are addressed first before payments to unsecured creditors. If the available funds fall short, employees can recover the shortfall through the Redundancy Payments Service by submitting form RP1. The Insolvency Practitioner oversees this process, ensuring claims are handled correctly and efficiently.
TUPE regulations and employee contracts during insolvency
When a company enters insolvency, there are scenarios where the business or its assets may be sold to a new owner. In such cases, employee rights are often protected under the Transfer of Undertakings (Protection of Employment) Regulations (TUPE).
TUPE is a legal framework designed to ensure that employees are treated fairly when ownership of a business or its assets changes hands. It safeguards employment terms and conditions, preventing employees from being disadvantaged simply because of the transfer.
Key protections under TUPE include:
- Employees’ existing contracts, terms, and conditions transfer directly to the new employer.
- Employees retain their length of service, which means their rights to redundancy pay, notice pay, and holiday entitlement remain intact.
- Changes to employment terms cannot be made solely because of the transfer unless there is a clear economic, technical, or organisational (ETO) reason justifying those changes.
The main goal of TUPE is to ensure that employees are not unfairly dismissed or treated less favourably as a result of the business transfer.
Large-scale redundancies and collective consultation
When 20 or more employees are at risk of redundancy within a 90-day period, directors have a legal obligation to carry out a collective consultation process. This involves meaningful discussions with either trade unions or elected employee representatives to explain the reasons for redundancies, explore alternatives, and ensure the process is handled fairly and transparently.
The consultation should begin as early as possible and must address key points, including:
- The criteria for selecting employees for redundancy.
- Proposed timelines for the redundancy process.
- Potential measures to reduce job losses or lessen the impact on affected employees.
The minimum consultation periods are:
- 30 days if 20–99 employees are at risk.
- 45 days if 100 or more employees are at risk.
Failing to comply with these requirements can lead to serious consequences. Employees may claim a Protective Award, entitling them to up to 90 days’ gross pay as compensation.
The role of the Insolvency Practitioner
An Insolvency Practitioner (IP) plays a crucial role in managing the insolvency process, ensuring employee claims are handled correctly and legal requirements are met. Their involvement helps reduce risks for both directors and staff during an often challenging time.
For Employees:
- Provide a case reference number (CN): Required for making claims through the Redundancy Payments Service.
- Issue an RP1 fact sheet: Outlines the claims process for redundancy pay, unpaid wages, holiday pay, and notice pay.
- Guide through the claims process: Assist employees in submitting accurate and complete claims via the National Insurance Fund (NIF).
- Clarify employee rights: Ensure employees understand their entitlements and next steps.
For Directors:
- Advise on legal obligations: Help directors understand and comply with employment and insolvency laws.
- Manage employee redundancies: Ensure proper procedures are followed to reduce legal and financial risks.
- Facilitate transparent communication: Support directors in delivering clear messages to employees about their rights and the next steps.
- Oversee claims processes: Ensure employee claims are processed efficiently and in compliance with statutory requirements.
An experienced IP acts as a bridge between all parties. They streamline the process, minimise complications, and protect both employees’ rights and directors’ responsibilities.
Related: What Are the Duties of an Insolvency Practitioner?
Will employees get redundancy pay if the company goes into liquidation?
Yes, eligible employees are entitled to statutory redundancy pay if they have been continuously employed by the company for at least two years. If the company lacks sufficient funds to cover these payments, employees can make a claim through the Redundancy Payments Service.
How long do employees have to make redundancy claims?
Employees must submit their claims for redundancy pay, unpaid wages, holiday pay, and other statutory entitlements within six months of their dismissal date. Claims are processed through the RPS using the RP1 claim form, which requires a Case Reference Number provided by the Insolvency Practitioner.
Are directors entitled to redundancy pay?
Yes, directors may qualify for statutory redundancy pay, but eligibility depends on whether they can demonstrate they were also genuine company employees. To claim redundancy pay, directors must typically show:
- They had a contract of employment (written, oral, or implied).
- They received a regular salary through the PAYE system.
- They performed specific employee duties separate from their role as a director.
Each case is assessed individually, and directors seeking redundancy pay may need to provide supporting evidence, such as payslips, employment contracts, and proof of regular PAYE payments.
Related: What Happens to Shareholders When a Company Is Liquidated?
Get expert advice from Clarke Bell
If your company is facing financial difficulties and you’re considering Creditors’ Voluntary Liquidation, it’s crucial to have the right support and guidance. At Clarke Bell, we provide expert advice to help you navigate the CVL process, meet your legal obligations, and handle employee redundancies with care and compliance.
Our team will guide you through every stage, from managing employee claims and statutory entitlements to communicating effectively with all stakeholders. With our professional support, you can approach liquidation confidently and take control of your company’s financial situation.
Contact Clarke Bell today for a free consultation and expert guidance on CVL.
