What Happens to Employees When a Company Goes into Liquidation?

If you’re wondering what happens to employees when a company goes into liquidation, the experts at Irwin Insolvency are here to explain everything you need to know.

If a company is liquidated, it ceases to exist. Liquidation sees a company closed down with its assets sold off, before it’s struck from the Companies House register.

For members of staff, this can be a stressful, unpredictable and confusing time, so it’s important to know your employee rights. Liquidation will usually result in the loss of jobs, but you may be able to claim for redundancy, lost wages and holiday pay.

Let’s begin by delving deeper into what liquidation means for employees and how it affects them

How does Liquidation affect Employees?

In the simplest terms, liquidation means the loss of an employee’s job. Liquidation is a very final process that results in the complete closure of the company, the sale of its assets and the letting go of its staff.

In certain circumstances, employees may find that parts of the business are sold off or transferred during the liquidation process. This may provide an opportunity for some jobs to be saved, while other companies may offer work to skilled and experienced workers.

In any event, the end result is that the employee will stop working for the company that’s been liquidated. However, employee rights during liquidation allow workers to claim certain entitlements, as they essentially become creditors owed money by the company.

Do Employees Get Paid When Companies Go Into Liquidation?

When a company goes into liquidation, its assets are sold by a liquidator. This raises funds that are used to pay off any remaining creditors. A company’s creditors will not only include banks and suppliers but employees, too.

During the liquidation process, the liquidator will establish who the preferential creditors are. By law, these are the creditors who are paid first when the company is closed down. If you are legally employed by the company (and not a contractor or freelancer), you will have certain employee rights during liquidation that allow you to claim any unpaid wages.

This preferential claim for unpaid wages assumes that there is enough money from the sale of the company’s assets to cover these costs. If the company has few assets to sell, then employees may struggle to recoup the money that’s owed to them.

What Are Employees Entitled to When a Company Goes into Liqudation?

As preferential creditors, employee rights during liquidation entitle them to unpaid wages. However, it should be noted that employees are not entitled to the entirety of the pay that might be owed to them. If the sale of assets fails to generate enough income, they may find themselves out of pocket.

Employees are only entitled to a minimum of £800 per month of unpaid wages. This means that if you’ve worked long hours or overtime in the lead up to the company’s liquidation, you could find yourself unfairly compensated.

Employees are also entitled to receive pension and holiday pay that they have accrued during their time working for the company. Again, any unpaid entitlements are reliant on there being enough funds from the sale of the company’s assets to cover this.

To summarise, employees are entitled to the following:

  • Unpaid wages (up to £800 per month)
  • Pensions
  • Holiday pay

Can Employees Claim Redundancy Pay When a Company Is Liquidated?

If you’ve worked for a company for a certain length of time, employee rights during liquidation may also entitle you to redundancy pay. This is paid in addition to the wages you might also be owed, but again it depends on there being enough cash available during the liquidation process.

The total amount you can claim depends on your age and how long you have worked for the company. You generally need to have worked for the company for at least two years in order to be entitled to redundancy pay.

The UK government sets the following minimum payouts for redundancy:

  • Half a week’s pay for each year worked when aged 22 or under
  • One week of pay for each year worked if aged between 22 and 40
  • One and a half week’s pay for each year worked if aged 41 or over

But what happens to employees when a company goes into liquidation but there’s no money to cover wages, pensions, holiday pay or redundancy pay?

In the event of non-payment, employees have the right to claim certain payments through the National Insurance Fund, which exists specifically to help in these circumstances. Again, there are limitations as to how much employees can claim through the National Insurance Fund, and the maximum payouts are set as follows:

  • Wages of up to 8 weeks, set at a maximum payment of £464 per week
  • Redundancy payments set at a maximum of up to £538 per week
  • A maximum of 6 weeks holiday pay
  • Partial pension payments

What type of Liquidation is best for Employees?

There are three types of liquidation that can terminate a company. The type of liquidation procedure that’s used to wind up operations can determine how smooth or difficult the process is for employees, particularly when they need to claim back unpaid wages.

The three types of liquidation are:

In general, it’s better for the employees if the company takes a voluntary form of liquidation. This makes for a much smoother process, provides employees have more advance notice of the closure of the company, which helps them to realise more of the money owed to them. Conversely, compulsory liquidation can cause the most stress, as creditors force the company into liquidation.

Need more help with Employee Rights during liquidation?

Irwin Insolvency has over 25 years’ experience providing expert advice to companies facing liquidation.

If you’re wondering what happens to employees when a company goes into liquidation, our expert team of insolvency practitioners has the experience and knowledge to help you. Contact Irwin Insolvency today for more information.

Contact Irwin Insolvency today for your free consultation

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About the author

Gerald Irwin

Gerald Irwin is founder and director of Sutton Coldfield-based licensed insolvency practitioners and business advisers, Irwin Insolvency. He specialises in corporate recovery, insolvency,
 rescue and turnaround.