How does Liquidation Affect Employees?

Employee rights during company liquidation

When a company goes into liquidation, employees face the immediate loss of jobs and become creditors of the company they worked for. If owed outstanding salary and benefits, they can claim this from the sale of any corporate assets. All creditors are contacted by the appointed insolvency practitioner about how long this process will take and what to expect.

If the liquidation doesn’t cover the full amount of arrears, employees can make a claim from the Redundancy Payments Service (RPS) if their employer is unable to pay them. The RPS is a government-funded scheme that provides financial assistance to employees who have been made redundant.

In addition to statutory redundancy pay, employees who are made redundant as a result of liquidation may also be eligible for other benefits, such as unpaid wages, holiday pay, and notice pay.

We’ll cover all this in detail below.

What Happens to Employees When a Company is liquidated?

Upon the appointment of a liquidator to an insolvent company, employees are immediately dismissed. Subsequently, these former employees become creditors of the company, positioned to claim any outstanding wages or other owed reimbursements.

Employees should expect the following steps, often with specific time frames:

1. Announcement of Liquidation: The process starts with the company publicly declaring its closure due to insolvency. Employees usually learn about the liquidation through a formal announcement from the company’s directors or the appointed Insolvency Practitioner (IP).
2. Appointment of an Insolvency Practitioner (IP): Shortly after the announcement, a licensed professional is appointed to manage the liquidation. The IP takes control of the company’s assets and liabilities, aiming to settle debts. This appointment can happen quickly, within days of the decision to liquidate.
3. Immediate Job Loss: Employees are often made redundant almost immediately after the liquidation announcement. The exact timing can vary but typically happens within days to weeks, depending on the company’s size and the liquidation’s complexity.
4. Notification of Redundancy: Employees are formally notified about their redundancy by the IP or the company’s HR department. This notification includes details about redundancy pay and any other entitlements. The law requires employees to be notified in writing.
5. Redundancy Pay Process: Eligible employees may receive redundancy pay, which is calculated based on length of service, age, and salary. The IP will provide information on how and when payments will be made. This process can take several weeks to months, depending on the liquidation’s complexity and the available assets to distribute.

Employees should expect to maintain communication for updates, gather employment documents for claims, be ready to submit claims for redundancy or owed wages with the IP’s guidance, and exercise patience as the process from liquidation to final payments unfolds.

Do Employees Get Paid if a Company Goes into Liquidation?

Employees may or may not get paid if a company goes into liquidation. Employees are considered to be unsecured creditors, meaning that they are paid after secured creditors, such as banks and other lenders who have a charge on the company’s assets. This means that employees may not receive all of the money they are owed, or even any of it, if there is not enough money to pay all of the company’s debts.

If you are an employee of a company that is going into liquidation, it is important to contact the liquidator as soon as possible to discuss your rights and options. You may also want to seek advice and support from trade unions and other employee organisations.

What Rights Do Employees Have in Insolvent Liquidation?

Employees have certain rights when their employer is insolvent and enters liquidation. These rights include:

• To receive unpaid wages and holiday pay. Employees are entitled to receive any unpaid wages and holiday pay that they are owed when a company is liquidated. However, employees are only entitled to payments outlined in their employment contract.
• To receive statutory redundancy pay. Employees who are made redundant as a result of liquidation are entitled to statutory redundancy pay, which is calculated based on their age, length of service, and salary.
• To claim for redundancy pay and other payments from the Redundancy Payments Service (RPS). Employees can make a claim for redundancy pay and other payments from the Redundancy Payments Service (RPS) if their employer is unable to pay them.
• To be eligible for other benefits, such as unemployment benefits and jobseeker’s allowance. In addition to statutory redundancy pay, employees who are made redundant as a result of liquidation may also be eligible for other benefits, such as unemployment benefits and jobseeker’s allowance.

To exercise their rights, employees should contact the company liquidator. The liquidator is responsible for selling off the company’s assets and distributing the proceeds to the creditors.

» MORE Read our full article on the Role of a Liquidator in the Insolvency Process?

What are Employees Entitled to in Liquidation?

In the event of insolvent liquidation, employees are entitled to several financial compensations from the National Insurance Fund (NIF), given the company’s inability to pay. These entitlements include:

• Unpaid Wages: Employees can claim up to 8 weeks of unpaid wages, capped at a statutory weekly limit.
• Holiday Pay: Claims can be made for up to 6 weeks of accrued holiday pay, subject to the same weekly cap as unpaid wages.
• Redundancy Pay: Eligible employees (those with at least 2 years of continuous service) are entitled to redundancy payments, calculated based on their age, length of service, and a capped weekly pay rate. The maximum period service considered for redundancy pay is 20 years.
• Notice Pay: Employees can claim notice pay as if they were given the statutory notice period by the employer, based on their length of service, up to a maximum amount.

Employees must file their claims through the Redundancy Payments Service to access these entitlements.

Why Voluntary Liquidation Can Be in the Best Interests of Employees

When a company faces insurmountable financial issues, opting for a Creditors’ Voluntary Liquidation (CVL) can be the most practical course of action. This method of closing down provides a structured process, which is beneficial for employees for two main reasons.

First, it speeds up the process for employees to get their statutory entitlements, such as unpaid wages and redundancy pay. Second, it gives employees a clear understanding of when and how the company will close, allowing them to plan their futures with more certainty.

FAQs about Employees and Company Liquidation