When a company enters liquidation, employees are immediately impacted as this process results in the permanent closure of the company. Liquidation can be either solvent or insolvent and is carried out by a licensed insolvency practitioner. The reasons for liquidation can differ, but the outcome is always the same.
In a solvent liquidation, also known as Members’ Voluntary Liquidation, employees continue to receive their regular pay until their final day of employment. However, in an insolvent liquidation, funds are usually not available to pay employee wages and other outstanding payments.
If a company enters insolvent liquidation, whether it be through a Creditors’ Voluntary Liquidation or by court order, the employees are affected. This can be a difficult and uncertain time for employees as they face losing their jobs and potentially not receiving their full entitlements.
Impact of Insolvency on Employees
When a company goes through liquidation, its assets are sold and the company is dissolved. This results in all employees losing their jobs. At the end of the process, the company is removed from the register at Companies House.
The former employees of the company become creditors for any unpaid wages, holiday pay, and other outstanding amounts owed to them. They may be considered preferential creditors for certain payments, but for others, they are unsecured creditors and will be prioritised lower for payment.
Once the company enters liquidation, eligible employees can apply for redundancy pay and other legal entitlements. However, given the financial situation of the company, it is unlikely that all liabilities can be fully paid. In such cases, employees may have to file a claim with the National Insurance Fund.
The Advantages of Voluntary Liquidation for Staff
Directors have the option to initiate the liquidation process when the company is unable to recover. By doing so proactively instead of waiting for a creditor to take action, employees can receive redundancy pay sooner and avoid the uncertainty of when the company may close.
When an employer is insolvent, how can employees claim redundancy?
Making Claims for Redundancy During Liquidation
The Redundancy Payments Service (RPS) manages claims submitted to the National Insurance Fund by employees whose company has gone into insolvent liquidation. These claims generally include redundancy pay, wage arrears, and overdue holiday pay, and payments are usually received by employees approximately six weeks after the claim has been made.
It is important for employees to be aware that company directors should not attempt to dissolve an insolvent company instead of using the proper liquidation process. While dissolution may be a cheaper option, it is only suitable for solvent businesses. Choosing dissolution makes it more difficult for employees to receive financial compensation for the loss of their job, as they would have to file a claim for unfair dismissal through an employment tribunal to secure any payment.
Getting Professional Help
Seeking professional advice is essential when a company is facing financial difficulties. This helps directors to act appropriately and provides support to employees during a stressful time.
If your company is struggling financially, InsolvencySupport.co.uk can offer reliable assistance. As nationwide experts in insolvency, we offer a free consultation that can take place on the same day.