0800 901 2475 Menu

If I liquidate my company, what happens to my employees’ redundancy pay?

When a company is insolvent and needs to be liquidated, it is crucial directors think of the impact it will have on their employees. No one wants their company to fail, but if circumstances have led to such an eventuality being unavoidable then it’s important to understand exactly what to expect from the procedure, and how to do best by your employees.

How will liquidation affect my employees?

As soon as a liquidator is appointed with the task of winding up a company, employees are dismissed immediately. This can put a company’s workforce into an unfortunate scenario where the company may not be able to afford their payouts.

After all secured creditors have been paid, employees will be next and entitled to arrears of wages and holiday pay. If there isn’t remaining cash after paying secured creditors and the liquidator, employees are still covered by the Redundancy Payment Service.

During a liquidation, employees will become preferential creditors. This means that they will be paid after any secured creditors or creditors with fixed and floating charges. However, preferential creditors do get paid before unsecured creditors.
redundancy

Claims

Employees affected by a company entering liquidation are legally entitled to make a claim for any of the following:

  • Payment in lieu of any notice period.
  • Pro-rata holiday pay.
  • Redundancy pay.
  • Any wages that have previously been unpaid.

Compensation for claims such as these is dealt with by the Redundancy Payment Service, and liability does not fall upon the company. This means that employees are for more likely to successfully claim back funds than if they were to pursue an unfair dismissal claim.

Employees who have been working at the company for over two years will be entitled to a redundancy payout based on their years of service to the company.

Unfair dismissal claims

If the dismissal of an employee due to liquidation has resulted in significant loss to an employee, or was carried out without statutory due notice being given, they may have the option to make an unfair dismissal claim against the company.

This means an employee would be classed as an unsecured creditor and would be last on the list to receive any cash. Find an up to date guide on permissible allowances when claiming for unfair dismissal on the government website.

Redundancy for directors

Just as with any other employee, directors are entitled to a redundancy payout. If they have been an employee of the company, working there for at least two years, completing a minimum of 16 hours per week and taking home a monthly wage then a director could be entitled to redundancy pay.

Eligibility is fairly broad so it’s not something to overlook – there’s a strong chance your circumstances will qualify. These payouts can be invaluable when it comes to self-funding liquidations.

Find out more about redundancy for directors

In summary

Once a liquidator is appointed with the task of closing the company, its workforce is disbanded. Employees may choose to pursue a claim for any money to which they are legally entitled. This includes (but is not limited to) any due wage payment, pro-rata holiday pay, and redundancy pay. Payment of these particular claims is handled by the Redundancy Payment Service, and therefore is not held with any liability to the company or its directors.

One case in which the company itself may be held liable is if an employee is deemed to have faced significant loss due to its closure, and chooses to pursue an unfair dismissal claim. Any monies rewarded from the success of such a claim will be held against the company as unsecured debt. However, due to the preferential ranking of creditors of the company, it is unlikely that the employee will realistically see the full amount, or indeed any of this sum.

How we can help

If you believe your company is insolvent or could soon become insolvent, knowing which route to go down is essential to get the best outcome. If you’re concerned about where a liquidation could leave your employees, we give you the right advice and a free consultation in which we can talk you through every step of the process.

Authored by Gemma Roberts

Gemma Roberts

Licensed Insolvency Practitioner & Senior Insolvency Manager