What happens to employees when going into liquidation?

When a company goes into liquidation, unfortunately, all employees lose their jobs straight away. This is because liquidation, whether solvent or insolvent, is a terminal process that results in the permanent closure of a company.

It’s a formal procedure carried out by a licensed insolvency practitioner (IP), and although the process is effectively the same with regard to the outcome, the reasons for entering liquidation can vary.

During a solvent liquidation process, Members’ Voluntary Liquidation (MVL), staff are paid by the company as normal until their final payday, but in an insolvent liquidation there isn’t typically the funds available to pay employee wages and other payments.

But what happens to the employees of a company when their employer goes into insolvent liquidation - whether voluntarily via a Creditors’ Voluntary Liquidation (CVL), or compulsory liquidation by a creditor?

Insolvent liquidation and employees

When a company goes into liquidation, its assets are liquidated and the company closes down. All employees are automatically made redundant and at the end of the process the company is struck off the register at Companies house.

Employees become creditors of the company for unpaid wages, holiday pay, and other outstanding amounts. For certain payments they’re preferential creditors; for others they’re unsecured creditors and therefore placed further down the line for payment.

As soon as the company enters liquidation, eligible employees can make a claim for redundancy pay and other statutory entitlements. As we mentioned earlier, it’s unlikely the company will be able to pay all of these liabilities given its financial position, so employees may have to make a claim from the National Insurance Fund (NIF).

Why voluntary liquidation can be in the best interests of employees

Directors are able to take some control over the liquidation process by voluntarily placing their company into liquidation when there’s no chance of recovery. By being proactive rather than waiting for a creditor to force the issue, employees can claim redundancy pay faster, and don’t have to live with the uncertainty of when the company will close.

So how do employees make a claim for redundancy when their employer is insolvent?

Employee redundancy claims during liquidation

The Redundancy Payments Service (RPS) administers claims on the National Insurance Fund from employees whose company has gone into insolvent liquidation. Claims typically include redundancy pay, arrears of wages, and outstanding holiday pay, with payments generally being made around six weeks from the claim date.

From an employee’s point of view, it’s important that company directors don’t try to close down an insolvent company via dissolution rather than using the formal liquidation process. Although dissolution is cheaper, it’s only for solvent businesses.

Taking the dissolution route simply makes it harder for employees to receive financial compensation for the loss of their jobs, as they would have to claim unfair dismissal through an employment tribunal in order to secure any payment.

Seeking professional assistance

Obtaining professional guidance is crucial when a company is experiencing financial difficulty. It helps directors to avoid trading wrongfully, and protects employees at a worrying time.

If your company is in financial distress, UK Liquidators can provide the reliable support you need. We’re insolvency experts operating nationwide, and can arrange a free same-day consultation.