What Happens to Employees During a Liquidation?
When a company enters into liquidation, it means the end of the business and, sadly, the redundancy of all employees.
Fortunately, employees are entitled – by law – to receive various payouts, such as redundancy pay, unpaid wages, unpaid notice, and holiday pay. The amount you can claim depends on various factors, including the manner of company closure and their individual contracts.
In this guide, we’ll explain what employees are entitled to, how you can claim, and how else you might be affected.
Contents
What Happens to Employees When a Company Gets Liquidated?
All employees are made immediately redundant when a liquidator is appointed over a business.
Employees are then made creditors in the liquidation, meaning you might be able to reclaim some of what you’re owed through the liquidation proceeds.
In a liquidation, secured creditors – such as banks – are repaid first, before the unsecured creditors. Unsecured creditors are divided into preferential and non-preferential creditors, with preferential creditors being paid first.
Employees are registered as unsecured creditors. Depending on what you’re owed, you may be classed as a preferential or non-preferential creditor. The liquidator will create a Statement of Affairs at the start of the liquidation process, letting you know how likely you are to get repaid.
What Are Employees Entitled to in a Liquidation?
- Redundancy Pay
- Unpaid Wages
- Holiday Pay
- Unpaid Notice Pay
The insolvency practitioner overseeing the liquidation will tell you what you’re entitled to and how to claim it. They’ll provide you with the Case Reference Number you need to apply and an RP1 sheet which explains how the process works.
How Can Employees Make a Claim?
Redundancy Pay
To be eligible, you must:
- Claim within 6 months of the date they were made redundant
- Have been continuously employed by the business for the last 2 years
The amount you can get paid depends on your age, wage, and time served.
Staff are paid:
- Half a week’s pay for every year served under the age of 22
- A week’s pay for every year served between the ages of 22-41
- One and a half week’s pay for every year served over the age of 41
This is capped at 20 years of service.
The amount for a week’s pay is based on your average pay. You can claim a maximum of £643 per week, meaning the maximum overall redundancy pay you can get is £19,290.
Many directors assume that only their employees can claim redundancy from the government – however, this isn’t the case. Directors can also make a claim, so long as they’re an employee of the company.
Unpaid Wages
Sometimes struggling businesses reach the point where they’re unable to pay their staff. Fortunately, you can claim this back through the government.
The maximum amount you can claim per week is £643 per week. This means the maximum you can claim is £5144.
Unclaimed Holiday Pay
You’re allowed to claim up to 6 weeks of unclaimed holiday.
The maximum amount you can claim is £643 per week, meaning the maximum you can get is capped at £3858.
Statutory Notice Pay
If you’ve worked at the business for over one month, you’re entitled to statutory notice pay. The amount you’re entitled to varies depending on how long you’ve been at the company:
- One week’s notice if employed between one month and 2 years
- One week’s additional notice for every year over 2 years (up to a maximum of 12 years)
- 12 weeks’ notice if employed for 12 years or more
You may be entitled to more than this in your contract, but no less.
Your notice pay will be worked out based on your average weekly wage, at a maximum of £643 per week. The maximum unpaid notice pay you can claim is £7716.
To claim unpaid notice pay, you first need to claim for redundancy from the government – even if you’re not owed any money. You then must make a separate application to get your statutory notice paid through the National Insurance Fund.
Can Employees Still Claim in a Voluntary Strike-Off?
Some insolvent directors opt for a voluntary strike-off rather than a formal liquidation, in a misguided effort to save money.
Unfortunately, this can have some nasty knock-on effects on employees; staff won’t have the case reference number they need to claim through the RPS. This means that they’ll have to claim through an employment tribunal, which – even if successful – will only allow them to claim redundancy (not unpaid wages, holiday pay, etc.)
It’s important employers consider the position of their staff before pursuing a voluntary strike-off. If you cannot afford to pay your staff, it will deprive them of a lot of money.
You also need to consider your own position. If your company is insolvent, you must place the interests of your creditors first. Striking off the company essentially serves as an effort to swerve repaying your debts. With no business to pursue, they cannot seek repayment.
If your creditors reinstate your company to get what they’re owed, the resulting investigation into your conduct won’t reflect on you kindly – you may be left facing misfeasance and wrongful trading charges, leaving you personally liable for company debts.
How Are Staff Affected by Other Insolvency Procedures?
Company Voluntary Arrangement (CVA)
A CVA is a formal repayment plan between a business and its creditors; so long as the company keeps up with its repayments, it remains under the control of its current directors and is allowed to trade as normal.
This means staff may be unaffected.
However, as is the case with all insolvency procedures, CVAs do increase redundancy risks as directors look to reduce their overheads to ensure they can keep up with their monthly payments to creditors. Employees made redundant will be able to claim through the RPS.
The government then becomes a creditor in the CVA, looking to recoup the money it paid out on behalf of the company.
Administration
When a company enters administration, it trades normally during a ‘moratorium period’, where it is protected from forced closure or debt-recovery efforts. The administrator will assume control of the company, trying to save it by reorganising its finances or selling it to a third party.
While a company is under administration, employees can continue working as usual; however, there’s a good chance they may face redundancy as the administrator looks to reduce the company’s overheads and return the business to profitability.
Any employees who are made redundant can claim through the RPS.
If the company is sold, employee contracts will be protected under TUPE legislation. This protects the existing terms of employee contracts and makes it harder for new owners to dismiss existing staff members.
Speak to an Expert
If you’re considering liquidation but are worried about the impact it might have on your employees, let us know.
Our team can provide you with expert guidance, assessing your situation to see which procedure is right for you. If early action is taken, a recovery option may be viable, helping to keep staff on board.
Contact us today to book a free consultation.
FAQs
Yes. Employees will be informed by the liquidator how to claim for redundancy.
Yes – voluntary liquidation means employees can claim redundancy sooner.
Compulsory liquidation can leave employees in the lurch for an indefinite length of time, as they have to wait for a winding-up order to be issued by the court before they can claim from RPS.
Voluntary strike-off, on the other hand, results in employees only being able to claim redundancy pay. They will not be able to claim unpaid wages, holiday pay, etc. If an employee isn’t eligible for redundancy, they won’t be able to claim anything at all.
Payments are usually made around 6 weeks after the employee’s original claim date.
