Who pays for staff redundancy when a business goes into liquidation?

When a business goes into liquidation, unfortunately all members of staff lose their jobs. The business closes down and is struck permanently from the Register of Companies at Companies House.

But how do the company’s employees obtain their redundancy pay and other statutory entitlements if their employer has had to enter insolvent liquidation? Here are two ways that staff redundancy pay can be covered in this situation?

Staff redundancy when a business is liquidated

Business liquidation involves repaying creditors in a statutory order of priority, using the funds generated from an asset sale. If the sale of business assets doesn’t cover the redundancy payments, employees can make a claim through the Redundancy Payment Service (RPS).

The liquidator will provide them with the necessary claim form, offer advice on eligibility, and insight into the process/ timescale for receiving payments. Form RP1 is used to claim redundancy payments, and should be submitted within six months of redundancy.

This process applies whether the liquidation was compulsory or voluntary, as the ultimate outcome is the same – the business closes down with the loss of all jobs. The National Insurance Fund (NIF) holds the monies used to make statutory payments, such as redundancy and the state pension.

Employees as preferential creditors

A statutory hierarchy exists in relation to payments made in corporate liquidation. This means that members of staff may be able to access some payments without making a claim on the National Insurance Fund.

If the company is able to make any redundancy payments from the sale of assets, employees will be regarded as preferential creditors for some payments. These include unpaid wages and arrears of holiday pay up to set limits, and unpaid pension contributions.

Can directors claim redundancy pay?

It’s a little known fact that company directors can claim redundancy pay when their business is liquidated, if they meet the eligibility criteria. The payments are also made from the National Insurance Fund, via the Redundancy Payment Service.

Directors must be regarded as employees of the company to be eligible, and have received a regular salary under PAYE rather than only dividend payments. So how much might employees/directors be entitled to following redundancy?

How much are redundancy payments when a business goes into liquidation?

The amount of redundancy pay depends on an employee’s age, length of service, and final wage, as follows:

• Aged 18-21: half a week’s pay for each full year of employment at the company
• Aged 22-40: one week’s pay for each full year
• Aged 41-65: one and a half week’s pay for each full year

Length of service is currently capped at 20 years, and weekly pay at £643 for redundancies that occurred on or after 6th April 2023. The amount of statutory redundancy pay individuals can receive is also limited to £19,290 from this date.

Employees must have worked for the company for two continuous years under a contract of employment to be eligible for redundancy payments. For directors to be regarded as employees, and so entitled to claim redundancy, they must also:

• Have worked a minimum of 16 hours per week in a practical role
• Be owed money by their company – their original investment in the business, for example
• Receive a regular salary through PAYE

If you would like more information on who pays for staff redundancy when a business goes into liquidation, please contact one of the team at UK Liquidators. We can explain the process further, and provide the professional support you need. We also offer same-day consultations free-of-charge, and operate a broad network of offices around the UK.