What-happens-to-employees-during-liquidation-and-other-insolvency-processes

What happens to employees when a company is liquidated?

When a company goes into liquidation, all workers will lose their jobs as the company closes down. 

This happens because liquidation ends the company’s legal existence, so all business activities must halt. However, if the company becomes insolvent and goes into administration, the situation changes for the employees.

Following the administration’s decision, employees might stay with the existing company or move to the new one if the business gets sold.

 

Voluntary vs Compulsory liquidation

When dealing with companies that have employees, one of the main benefits of choosing a CVL over waiting for compulsory liquidation is the timeframe.

Employees can only begin claiming their redundancy and other statutory entitlements once the company has been formally placed into liquidation. Therefore, directors are often eager to expedite this process, enabling their staff to receive their redundancy pay promptly.

With voluntary liquidation, directors have control over when the liquidation occurs. However, if they choose to wait for a creditor to initiate the winding-up process, it could take several months, during which time their employees are unable to make claims.

 

What happens to employees during an insolvent liquidation procedure?

Insolvent liquidation comes in two forms: Creditors’ Voluntary Liquidation (CVL) and Compulsory liquidation. 

Both processes involve the company being wound up by a licensed insolvency practitioner; the difference lies in how the process is initiated.

A CVL is initiated by the directors, while compulsory liquidation occurs when a creditor takes legal action to wind up the insolvent company forcibly.

Both processes ultimately lead to the complete closure of the business and the dismissal of all staff employed by the company. Once the liquidation process begins, which occurs upon the appointment of the liquidator, the employees of the insolvent company are automatically dismissed.

When the company enters a formal insolvency procedure, employees will have the right to claim redundancy pay, as well as other statutory entitlements such as arrears of wages, overtime, or commission, payment for untaken holiday allowance, and notice pay.

Typically, the company responsible for making the redundancies is responsible for ensuring these entitlements are paid to dismissed staff. However, in the case of an insolvent company, there is seldom enough money left in the business to cover these outstanding amounts.

In this situation, payments will be made from the government’s National Insurance Fund (NIF), which is managed by the Redundancy Payments Service.

 

What happens to employees during liquidation and other insolvency processes?

When a company is insolvent, it can undergo various formal procedures to address its current challenges. Some of these procedures end with the closure of the company, while others involve restructuring and streamlining operations to give the company a chance to recover and keep operating.

The most commonly used processes are liquidation, administration, and the implementation of a Company Voluntary Arrangement (CVA). In any formal insolvency procedure, it’s vital to consider the rights of the insolvent company’s employees. This is particularly crucial during liquidation, as the company is being wound up and current employees are being made redundant.

 

Unfair dismissal

Under Transfer of Undertakings (Protection of Employment) (TUPE) regulations, dismissed employees are allowed to file a wrongful dismissal claim against their employer, but only under specific circumstances

Employees can pursue a wrongful dismissal claim against an employer if they can prove that:

 

    • They were dismissed without being given sufficient notice, as per the statutory minimum notice period.

    • They were dismissed in violation of their contract.

    • They have suffered a loss as a result of the dismissal.

 

Even if the wrongful dismissal claim is successful, any amount owed will be considered an unsecured debt, placing it low in the priority queue for payment. In reality, many employees who pursue a wrongful dismissal claim against an employer have a limited chance of receiving any awarded compensation. 

You can find further information about the order of payment to creditors during an insolvency procedure here.

If the employee isn’t eligible to file a wrongful dismissal claim but the company owes unpaid wages, payment instead of notice, redundancy pay, or holiday pay, then the employee may be able to receive compensation by applying to the Redundancy Payments Service.

While a wrongful dismissal claim is paid out of company funds, statutory redundancy payments will be made through the Redundancy Payments Service. This ensures that employees owed redundancy will receive it irrespective of the financial state of the company from which they are being made redundant.

Applications for redundancy claims will be assessed by a case officer, aiming to pay out any owed money within 6 weeks.

 

How do company strikes off affect employees?

Instead of undergoing a formal liquidation process as outlined above, some directors choose to dissolve their company by striking it off the register held at Companies House.

This is achieved by submitting a DS01 form, and it doesn’t necessitate the involvement or appointment of a licensed insolvency practitioner

While some consider this a fast and cost-effective method of closing a company, there are significant drawbacks to this approach, especially if the company has employees.

To claim from the Redundancy Payments Service, employees must have a case reference number, provided by the insolvency practitioner managing the liquidation. If the company doesn’t undergo a formal liquidation process, it becomes highly challenging for its employees to claim redundancy.

Instead, employees will need to engage in an employment tribunal, which not only consumes time but can also incur expenses. It’s crucial to note that even if the tribunal rules in their favour, any awarded claims will be restricted to redundancy pay only, meaning employees won’t receive additional statutory entitlements such as notice and holiday pay.

If you are an employer contemplating the closure of your insolvent company, it’s crucial to consider your employees’ situation during this period and ensure that your actions won’t hinder their ability to claim the money they are owed.

Consulting with a licensed insolvency practitioner and initiating a formal liquidation process for your company will guarantee that your employees can claim redundancy if they meet the criteria.

 

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What happens in the event of administration or a CVA?

While the ultimate outcome of any liquidation process is the closure of the company, things are not always as straightforward as other insolvency procedures.

1. CVA 

A Company Voluntary Arrangement, or CVA, is essentially a formal payment plan negotiated between a company and its outstanding creditors. A CVA enables the company to continue trading, using future profits to repay its current borrowings.

As the aim of this procedure is business continuity and preservation of employment, employees may find themselves unaffected by their employer entering into a CVA.

However, it’s important to remember that a CVA presents an opportunity for a business to reduce costs wherever possible, which for some companies may involve making cuts to the existing workforce.

Therefore, it’s not uncommon for a CVA to coincide with a wave of redundancies. Any redundancies made must adhere to the correct procedures and comply with redundancy legislation; a CVA does not exempt employers from their obligations to treat their staff fairly when implementing redundancies.

It’s important to note that since a CVA is a formal insolvency event, any employees who lose their jobs during the process will be able to submit a claim for redundancy and other statutory entitlements.

Employee claims for redundancy as a result of a CVA will typically be paid by the government’s Redundancy Payments Service in the first instance to limit the waiting time for the employee. The government will then become a creditor in the CVA as it looks to recoup this money

 

2. Administration 

When a company enters administration, it may continue trading as usual while its future options are assessed by the appointed licensed insolvency practitioner. Control of the company automatically transfers to the insolvency practitioner, and after 14 days, they will adopt any existing employee contracts.

For employees, this implies that they will be prioritised as preferential creditors for unpaid wages, holiday pay, and notice pay if the company later goes into liquidation. It’s crucial to note that employees are still vulnerable to redundancy while the company is in administration.

This is because administration can be seen as a sort of holding stage while the company’s future is being decided. A company cannot remain in administration indefinitely and sooner or later an exit route must be agreed upon. 

Depending on the company’s viability as a trading entity, the company may be restructured, sold, or even liquidated.

For employees, this may mean their job remains unaffected, is transferred to a new owner through a process known as TUPE, or their position is made redundant.

If you are contemplating liquidating your insolvent company, it’s crucial to seek advice from a professional. Vanguard Insolvency‘s team of licensed insolvency practitioners can assist you in understanding the available options for you and your company, as well as the potential impact of each process on your employees.

Contact us today to schedule a free, no-obligation consultation with an insolvency expert at any of our nationwide offices.

Senior Partner at Vanguard Insolvency Practitioners | Website | + posts

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.