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Comprehending Liquidation and Employee Redundancy Compensation

When a business goes bankrupt and enters liquidation, it leads to the unfortunate termination of employment for all staff members. The company shuts down permanently and is removed from the Companies House registry. 

However, the employees can still obtain their redundancy pay and other legal benefits even if their employer is in insolvent liquidation. Here are two ways this can happen.

Redundancy for Staff during Business Liquidation


The process of business liquidation involves paying back creditors in a legally determined order, using the money generated from selling assets. If the proceeds from the asset sale do not cover the redundancy payments, employees can make a claim through the Redundancy Payment Service (RPS). 

The liquidator will provide the required claim form and offer guidance on eligibility and the process and timeline for receiving payments. Claims for redundancy payments should be submitted using form RP1 within six months of redundancy.

This procedure applies in both compulsory and voluntary liquidations, as the outcome is the same in both cases – the business closes down, resulting in the loss of all jobs. The National Insurance Fund (NIF) holds the funds used for statutory payments, such as redundancy and the state pension.

Workers as Priority Creditors


In the context of corporate liquidation, there is a legal order for payments. This means that employees may receive some payments without having to make a claim on the National Insurance Fund.

If the company is able to use the proceeds from the sale of assets to make redundancy payments, employees will be considered as preferred creditors for certain payments. These payments include outstanding wages and holiday pay arrears within certain limits, and unpaid pension contributions.

Is it possible for Directors to Receive Redundancy Pay?


It is not widely known that when a company is liquidated, directors who meet the eligibility criteria can receive redundancy pay. This pay comes from the National Insurance Fund through the Redundancy Payment Service.

In order to be eligible for redundancy pay, directors must be considered as employees of the company and receive a regular salary under PAYE rather than just receiving dividend payments. How much employees and directors may be entitled to following redundancy can vary.

How much are Employees Entitled to in Redundancy Payments during Liquidation?


The amount of redundancy pay an employee is eligible for depends on their age, length of service, and final salary. This breaks down as follows:

  • For those aged 18-21: half a week’s pay per full year of employment with the company
  • For those aged 22-40: one week’s pay per full year
  • For those aged 41-65: one and a half week’s pay per full year

Service length is capped at 12 years and weekly pay is limited to £571 for redundancies that occurred on or after April 6th, 2021. The maximum amount of statutory redundancy pay that can be received is £16,320 as of this date.

Employees must have worked for the company continuously for two years under a contract of employment to be eligible for redundancy pay. For directors to be considered employees and eligible for redundancy pay, they must also meet the following criteria:

  • Work a minimum of 16 hours per week in a practical role
  • Be owed money by the company, such as their original investment in the business
  • Receive a regular salary through PAYE

For more information on who is responsible for paying staff redundancy during liquidation, please contact They can provide further details on the process and offer professional support, including a free same-day consultation. They have a wide network of offices across the UK.

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