What Happens to Employees in Liquidation? Redundancy Rights and Payments in England and Wales
If your company enters liquidation, your employees lose their jobs. They do not lose all their rights. The law in Great Britain gives employees of insolvent employers a statutory safety net: claims against the National Insurance Fund for unpaid wages, holiday pay, notice pay, and redundancy.
The National Insurance Fund is the government pot that pays those claims when an employer cannot. Your staff claim from the state, not from you, and the money does not come out of what is left in the company.
The Redundancy Payments Service handles those claims once the liquidator confirms the insolvency, so the burden of paying out does not sit on the company’s empty bank account. If you are asking this question before reaching formal liquidation, see our guide on what happens when an employer can’t afford redundancy payments.
Delaying liquidation to protect your staff usually has the opposite effect. Every week of further trading while insolvent grows the creditor pool and shrinks the recoverable assets.
It also pushes you closer to a wrongful trading claim under section 214 of the Insolvency Act 1986. That means carrying on past the point where you knew, or ought to have concluded, there was no reasonable prospect of avoiding insolvent liquidation or insolvent administration.
Employees who are told early can claim from the National Insurance Fund while you manage the closure properly. Employees who find out on the last day get less notice, less time, and less of everything the statute was designed to give them.
We speak to directors in this position every week. The hardest part is rarely the legal process. It is sitting down with the foreman who has been there twelve years, or the office manager who runs the payroll, and explaining what is about to happen. The directors who handle that conversation honestly tend to come out of the conduct review cleanest.
When Employees Are Made Redundant in Liquidation
In a Creditors’ Voluntary Liquidation, employees are typically made redundant on or shortly after the date of the winding-up resolution. The liquidator may retain a small number of employees briefly to assist with the wind-down, but most staff are let go immediately.
In a compulsory liquidation, the winding-up order itself operates as notice of dismissal, so employment contracts end on the date of the order unless the liquidator keeps staff on to help with the wind-down.
The timing of redundancy is one of the most painful parts of the process for directors. Many want to keep staff employed as long as possible, but every week of continued employment while the company is insolvent adds to the creditor claims and tightens the wrongful-trading exposure.
Our guide on when to stop trading explains where that threshold sits in practice. The liquidator’s later assessment will weigh whether retaining staff served the wind-down or whether it was an emotional decision that grew the creditor losses. The instinct is honourable. The conduct report cares about the consequences.
What Employees Can Claim from the National Insurance Fund
The Employment Rights Act 1996 (Part XII, sections 182 to 190) gives employees of insolvent employers a statutory safety net. Claims are paid from the National Insurance Fund and processed by the Redundancy Payments Service. The figures below reflect the statutory weekly cap of £751 from 6 April 2026 (the cap is reviewed each April).
| Entitlement | Statutory cap | Notes |
|---|---|---|
| Arrears of pay | Up to 8 weeks, capped at £751 per week | Wages earned but unpaid before the company entered liquidation. Higher earners recover only up to the cap. |
| Holiday pay | Up to 6 weeks, capped at £751 per week | Holiday earned but not taken in the 12 months before the insolvency date. |
| Statutory notice pay | 1 week after 1 month’s service, then 1 week per complete year of service, max 12 weeks, capped at £751 per week | Compensates for the notice period the employee did not receive when employment terminated. |
| Statutory redundancy pay | 0.5 to 1.5 weeks’ pay per year of service (age-based), max 20 years, capped at £751 | Maximum statutory redundancy payment is £22,530 (£751 × 30). |
| Unpaid pension contributions | Up to 12 months of employer contributions | Paid into the relevant pension scheme, not directly to the employee. |
The RPS sends claim forms to employees once the liquidator has formally confirmed the insolvency. In our experience, employees who understand the process before the resolution date are less anxious and more cooperative during the wind-down.
A ten-minute conversation in the break room on a Wednesday morning, explaining what they can claim and how, costs you nothing and changes how the closure feels for everyone in the room.
The cap matters. An employee earning £900 a week recovers only £751 per week from the Fund. The shortfall sits as an unsecured claim in the liquidation, where most unsecured creditors recover little or nothing. We tell directors this directly: the safety net is real but not generous, and your higher-paid staff should understand it before they hear it from a claim form.
Preferential Creditor Status for Employees in Liquidation
Under Schedule 6 of the Insolvency Act 1986, the part of the Act that sets out who gets paid first, employees are preferential creditors for up to four months’ unpaid wages (capped at £800 per employee) plus accrued holiday pay.
Preferential rank means employees are paid ahead of HMRC’s secondary preferential claims, and ahead of all unsecured creditors, when the money is shared out.
In practice the preferential claim is usually subrogated to the Redundancy Payments Service. The Fund pays the employee, then steps into the employee’s shoes as a preferential creditor in the liquidation. The employee gets paid from the Fund. The Fund recovers what it can from the company estate.
Directors sometimes assume they need to pay employees directly before liquidation to protect them. In most cases that backfires. The statutory safety net handles employee claims more reliably than ad hoc payments.
Worse, ad hoc payments made when the company is insolvent are textbook preference candidates under section 239 of the Insolvency Act 1986. A preference, in law, is a payment that puts one creditor in a better position than the others, made when the company was insolvent or that made it insolvent, and influenced by a wish to put that creditor ahead.
The liquidator can ask the court to reverse them, and a payment meant to look after staff can end up treated as a preference.
When TUPE Applies in a Liquidation Sale
If the liquidator sells the business (or part of it) as a going concern, the Transfer of Undertakings (Protection of Employment) Regulations 2006 may apply.
In a liquidation, though, the core TUPE protections do not apply.
Where the seller is in insolvency proceedings opened with a view to liquidating its assets under an insolvency practitioner’s supervision, the automatic transfer of staff and the protection against transfer-related dismissal are switched off. That covers a compulsory liquidation and, in the government’s view, a creditors’ voluntary liquidation.
So a buyer from a liquidator does not automatically take on the staff or their existing terms. Staff are usually made redundant and claim from the National Insurance Fund. A pre-pack administration is different: there, TUPE transfers usually do apply.
TUPE applies when there is a transfer of an economic entity that retains its identity. In practice, that means a business sale where the buyer takes the trading operation, the customers, and the staff. It does not apply to a pure asset sale where the buyer takes the equipment but not the business as a going concern.
We see TUPE cause confusion in liquidation sales because the liquidator’s duty is to maximise recoveries for creditors, and a sale that keeps jobs can sometimes achieve a higher price than a breakup sale. In a sale out of liquidation, though, the buyer is not obliged to take on the employees or their existing terms.
If you buy back the business through a new company out of a pre-pack administration, TUPE usually transfers the staff to the new company. If you buy it from a liquidator, the automatic transfer does not apply.
We recommend specialist employment law advice on any transaction where TUPE may apply. Errors here are the kind that surface as a tribunal claim eight months after the sale, and by then the cost of getting it right would have been a fraction of the cost of getting it wrong.
Director Obligations During Employee Redundancy
The four obligations below are what the liquidator and the Insolvency Service look for evidence of when the conduct report is filed. Failure on any of them is the kind of thing that turns a clean closure into a personal-liability question.
| Obligation | Statutory basis | What good practice looks like |
|---|---|---|
| Collective consultation (20+ redundancies) | Trade Union and Labour Relations (Consolidation) Act 1992, s.188 | 20 or more redundancies at one establishment within 90 days: consultation at least 30 days before the first dismissal (45 days for 100+). Failure to consult: protective award of up to 180 days’ pay per employee (dismissals from 6 April 2026). Failure to notify the Secretary of State (form HR1) is a criminal offence under s.194. Cannot be retrospectively fixed. |
| Individual notification | Employment Rights Act 1996 | Each employee receives written notice of redundancy and the reasons for it. A short, honest letter is better than a long defensive one. |
| Provide accurate records to the liquidator | Insolvency Act 1986, s.235 (cooperation duty) | Employment contracts, payroll records, holiday balances, length-of-service calculations. Incomplete records delay every employee’s claim and reflect badly in the conduct report. |
| Notify the Insolvency Service via the liquidator | Employment Rights Act 1996, s.187 | When asked, the liquidator gives the Redundancy Payments Service a statement of each employee’s debts as soon as reasonably practicable. You make sure the liquidator has the data to do it promptly. |
Of those four, we see directors fail on collective consultation more often than any other. If you are planning a CVL and 20 or more employees at one establishment will be made redundant within 90 days, consultation must begin at least 30 days before the first dismissal (45 days for 100 or more). In practice that usually means starting before the winding-up resolution.
The liquidator cannot retrospectively fix a failure to consult. By the time the resolution is on the agenda, you have already missed the window.
What Directors Should Do Next
If your company is approaching liquidation and you have employees, we recommend the following sequence. None of it requires legal training to do. Most of it requires honesty and reasonable record-keeping.
- Pull together complete employee records: contracts, payroll history, holiday balances, length-of-service calculations for every employee. The liquidator and the RPS will need them.
- If you have 20 or more employees being made redundant, begin collective consultation now, before the winding-up resolution. This is the obligation directors miss most often.
- Talk to your staff honestly: explain what is happening, what they can claim from the National Insurance Fund, and how the RPS process works. The conversation lands better in person than in a letter.
- Do not make ad hoc payments to employees outside the normal payroll cycle if the company is insolvent. The statutory safety net handles employee claims, and ad hoc payments create personal preference risk under section 239 IA 1986.
- Speak to a licensed insolvency practitioner who can advise on the timing and sequencing of employee redundancies within the liquidation process. The earlier the call, the more options you have.
If you are not yet sure whether the company is genuinely insolvent, take our two-minute insolvency test first to confirm where the position actually stands. Make no further preferential payments before you have had advice from us or another regulated firm. The cases that go badly for staff and for directors are rarely the ones where the director acted too soon.
Frequently Asked Questions About Employees in Company Liquidation
Will my employees get their statutory redundancy pay?
Yes, where they qualify. Employees with at least two years’ continuous service are entitled to statutory redundancy pay. If the company cannot pay, they claim it from the National Insurance Fund through the Redundancy Payments Service.
The maximum statutory payment is £22,530 (£751 weekly cap × 30, reflecting up to 20 years of service at 1.5 weeks per year). The RPS processes the claim once the liquidator has formally confirmed the insolvency.
How long does it take for employees to receive their money?
The Redundancy Payments Service aims to process complete claims within 6 weeks. In practice, straightforward claims are often paid within 3 to 6 weeks of submission. Complex cases or claims with incomplete records take longer.
Providing accurate, organised employee records to the liquidator is the single biggest thing you can do to speed up your staff’s claims.
Do I have to consult employees before making them redundant?
If you are making 20 or more employees redundant at one establishment within 90 days, yes: collective consultation must begin at least 30 days before the first dismissal (45 days for 100 or more). The legal basis is section 188 of the Trade Union and Labour Relations (Consolidation) Act 1992.
For fewer than 20 redundancies there is no statutory collective-consultation requirement, but individual consultation is still good practice and reduces the risk of unfair dismissal claims later.
What happens to employees if the business is sold as a going concern?
The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) have limited effect in a liquidation sale. Where the seller is in liquidation, the rules that transfer employees automatically and protect them from dismissal do not apply, so the buyer does not automatically take on the staff or their existing terms.
Staff are usually made redundant and claim from the National Insurance Fund. In a pre-pack administration, TUPE transfers usually do apply. Take specialist employment law advice before any sale or buy-back.
Can employees claim for unfair dismissal when the company is liquidated?
Redundancy because the company is closing is a fair reason for dismissal under the Employment Rights Act 1996. The risk is procedural: if you failed to follow the correct consultation procedure, or dismissed employees for reasons unrelated to the closure, they may have grounds for an unfair dismissal claim.
In practice, unfair dismissal claims in liquidation are rare because the company has no assets to satisfy a tribunal award. The procedural failure can still affect your personal conduct assessment, though, where the failure was yours.
Can an employee claim for wages I paid them in cash off the books?
Generally no. The Redundancy Payments Service pays claims based on PAYE records and documented employment contracts. Off-the-books cash payments are not on those records and usually will not be included in the claim calculation, although an employee can challenge the amount at an employment tribunal.
The employee loses out, and the cash payments themselves can surface in the conduct review as evidence of broader compliance failure. Get the payroll records correct from the start; ad hoc cash arrangements never end well in liquidation.
Related Guides
Where directors and staff go next.
- Creditors’ Voluntary Liquidation: the route most employee claims arise from, and how it runs.
- Director Redundancy: whether a director can claim from the same fund, and what the Redundancy Payments Service tests.
- Which Creditors Get Paid First: where employee claims sit in the payment queue.
- When an Employer Cannot Afford Redundancy Payments: the guide for the stage before formal liquidation.
- 30-Second Insolvency Test: check where the company actually stands.
