What Happens to Employees in Liquidation?
When a limited company goes into liquidation, all employees will lose their jobs immediately. Liquidation, by definition, means the permanent closure of an insolvent limited company.
For employees, there will be the chance to recoup money owed up to certain statutory limits.
Read our complete guide below to employee rights and claims during the liquidation process.
Employee Rights in Insolvent Liquidation
For employees, liquidation means immediate redundancy without any further wages or expenses paid.
When a business becomes insolvent, all directors powers cease, the company ceases trading, and a liquidator assumes control of the company. One of the liquidator’s first jobs is the immediate termination of all employment contracts.
» MORE Read our full article on the Role of a Liquidator in the Insolvency Process?
In liquidation, employees actually become creditors of the very company they’ve been working for. Because liquidation often leaves many creditors (those owed money), there is a carefully prescribed order of priority to get paid.
For some monies owed, such a wage arrears, company employees become what are called ‘preferential creditors’ meaning they are amongst the first to be paid if there is money recouped by the liquidator.
For others areas (e.g. pay in lieu of notice, or expenses) employees are considered ‘unsecured’ creditors, meaning they are less likely to be paid by money recouped from the sale of business assets.
This complex area is part of the remit of the liquidator to explain and process.
As the liquidation unfolds, it is the task of the liquidator to value and sell corporate assets at fair market value, then distribute the proceeeds.
Banks with a secured charge get paid first, then the liquidators own fees and the expenses of the insolvent estate. Fourth come ‘preferential creditors’ which includes company staff (for certain payments) and HMRC themselves.
In most cases, unsecured creditors will find themselves out pocket as there is simply not enough money in the insolvent company to repay what it owes.
For this reason, and to protect the interests of employees, the governments own Redundancy Payments Service has a fund to make good the difference, up to certain statutory limits.
» MORE Read More about The Order of Creditors in a Liquidation
How Can Employees Process Redundancy Claims During Liquidation?
As creditors during liquidation, employees will receive updates and communication from the liquidator assigned to the case.
At the beginning of the process, the liquidator compiles a statement of affairs document detailing what is known of the company’s financial position, including what payments may be forthcoming to creditors. As a result you should find out fairly early on in the process if you are likely to get paid what you are owed.
The liquidator is responsible for providing employees with the details of how to make a claim. Employees will be provided with a dedicated reference number (called a Case Reference or CN) that you can use for your claim.
The IP should send you an RP1 Fact Sheet explaining how payments processed by the Redundancy Payments Service (RPS) are paid out of the National Insurance Fund (NIF).
What Entitlements Can Employees Claim for as Preferential Creditors in Liquidation?
Employees can claim for the following as a preferential creditor.
| Entitlement | Criteria | Preferential Creditor |
|---|---|---|
| Outstanding Salary | for up to 4 months, to a maximum of £800 in total | ✔ |
| Holiday pay | up to a maximum of 6 weeks | ✔ |
| Occupational Pension Payments | up to 4 months employee contributions | ✔ |
What Entitlements Can Employees Claim from National Insurance Fund (NIF) in Liquidation?
Where employees are owed money that is not paid in full from the sale of company assets, or which exceeds the limits available as ‘preferential creditors’, the government’s National Insurance Fund covers the shortfall.
You can use the RPS to apply for unpaid wages and things like bonuses, overtime and commission owed to you by your employee. You can claim for up to 8 weeks, and the amount is capped at £571 a week.
You can also claim for holiday pay, statutory notice pay, and pension contributions.
Again, there are statutory limits in place, and you must have been employed for at least 2 full years before the insolvency.
The best way to calculate this is using the .GOV redundancy calculator: https://www.gov.uk/calculate-your-redundancy-pay
Wrongful Dismissal Claims
If an employee is dismissed as soon as the liquidator is appointed, under the TUPE regulations (Transfer of Undertakings Protection of Employment), a claim for wrongful dismissal could be made if the following criteria apply:
- The dismissal has resulted in a loss for the employee
- The dismissal occurred without due notice according to the statutory minimum notice period required)
- The employee has been dismissed as a result of breach of contract
However, making a claim for wrongful dismissal could be counterproductive. If the claim is found to be valid, the amount awarded will be classed as an unsecured debt and the employee will have to wait in line with the other unsecured creditors for their money. That means, realistically, the employee will receive only a small amount or even no money at all.
Anything else you’d like to know?
If you are considering a Creditors’ Voluntary Liquidation but are unsure of the impact on your employees, please call our team on 0800 074 6757 or use the live chat function below.
