How Does Liquidation Affect Employees?

Liquidation

Liquidating a company can be tough, but it is something many businesses have to face for a number of reasons. For directors and managers, one of the main concerns is their staff.

Below, we explain what happens to employees during liquidation, as well as employee rights.

What happens to employees when a company is liquidated?

As soon as a liquidator is appointed to an insolvent company, employees are dismissed immediately. These employees then become creditors, and if they are owed wage or other reimbursements, these will be allocated out of the sale of assets.

If the liquidation does not raise enough to pay the amounts owed to staff, the workforce will be covered by the Redundancy Payment Service, subject to statutory limits.

In simple terms, employees become preferential creditors, meaning they are entitled to:

Outstanding salary for the previous four months, up to a maximum of £800 in total;
Holiday pay of up to six weeks;
Some occupational pension payments.

What happens to employees when a company ceases trading?

When a company ceases trading, business stops, employees may lose their job and assets will be sold.

If trading has ceased voluntarily, funds from the sale of company assets are used to repay the creditors – this includes employees – and then distributed amongst shareholders.

However, if the company is insolvent a licensed Insolvency Practitioner (IP) is appointed to deal with the sale of company assets, whether the business can be saved and whether some jobs can be saved too.

If the business cannot be rescued, the assets are sold to repay the company’s creditors, following a strict order of priority.

How does company strike off affect employees?

Rather than going through a formal insolvency process, some directors choose to strike their company off the Companies House register through a process called Dissolution.

Although some may view Dissolution over Liquidation as the quick and easy way to close a company, it can have serious downsides especially if a company has employees.

If a company does not go through a formal insolvency process, employees will not have a case reference number that is required to claim through the Redundancy Payments Service. This can make it extremely difficult for employees of the company to claim redundancy.

Instead, the employees will have to take part in an employment tribunal, which can be both time consuming and costly.

It’s important to note here, that even if the tribunal is successful, any claims are limited to redundancy pay. This means employees will not be granted the additional statutory entitlements, such as holiday pay and notice.

If you are currently an employer and considering striking off your insolvent company, it is vital to consider the position of your staff during this time, ensuring your actions do not prevent them from claiming the money owed to them.

Employee rights during company liquidation

If an employee has been made redundant due to company liquidation, the IP will provide advice on the next steps.

IP’s will provide:

A reference number, referred to as a Case reference number (CR), which the redundant worker will need to quote on any claims.
An RP1 Fact Sheet detailing how the Redundancy Payments Service works.

The rights of an employee from a company in liquidation will depend on how long each individual employee was employed, their age and the details of their employment contract.

If staff members were employed for two years, they would receive redundancy pay as follows:

22 or under would receive half a week’s pay for each year of employment.
Between 22 and 40 would receive one week’s income for each year.
41 or above would receive one and a half week’s wages for each year of work.

Unfair dismissal claims

If a dismissal of an employee has resulted in significant loss to the individual, or was carried out without statutory notice, they may have the option to make an unfair dismissal claim against the insolvent company.

What happens to employees during other formal insolvency processes?

Administration

When a company enters Administration, it may continue to trade while its future options are considered by the appointed IP. Control of the company automatically shifts to the IP after 14 days, who will then adopt any existing employee contracts.

The employees will then be ranked as preferential creditors for unpaid wages, holidays and notice pay should the company enter liquidation. It is important to remember that during administration, employees are still at risk of redundancy.

Administration is seen as a holding stage while the company’s future is being decided. For employees, this could mean their job remains unaffected, is transferred to a new owner or their position is made redundant.

Company Voluntary Agreement

A Company Voluntary Agreement (CVA) is essentially a formal payment plan which is negotiated between a company and its outstanding creditors. A CVA allows the company to continue trading and use future profits to pay back its current debts.

As the aim of a CVA is to continue a business, employees may find themselves unaffected by it.

However, a CVA is an opportunity for businesses to cut costs where possible, which could mean making cuts to the existing workforce. It is not uncommon for a CVA to result in some redundancies in a company.

Any employees who lose their job during the process are able to submit a claim for redundancy and other statutory entitlements. Employee claims for redundancy during a CVA will be paid by the Redundancy Payment Service, and then the government will become a creditor in the CVA as it looks to recoup the paid redundancy money.

FAQs about Employees and Company Liquidation

Will employees get redundancy pay if a company goes into liquidation?

As soon as a company enters liquidation, any eligible employees can make a claim for redundancy pay and other statutory entitlements.

An IP will inform each employee how to claim for redundancy.

However, it may be unlikely that the company will be able to pay all these liabilities given its financial position. Employees may have to make a claim from the National Insurance Fund (NIF).

Is voluntary liquidation better for employees?

Yes, voluntary liquidation is better for employees as it means they have the opportunity to apply for redundancy sooner.

Employees are also able to plan for the future without the uncertainty hanging over them.

If you are an employer considering liquidation but you don’t know how it will affect your employees, please contact our professional team.