How Employees Are Protected in the Case of Insolvency

Insolvency occurs when a business can no longer pay off its debts. This difficult financial situation has challenging implications for employees, who may be owed wages, holiday pay or sick pay.

Insolvency can have multiple outcomes for a business, but employees need to know exactly how they’re protected throughout the insolvency process and what rights they’re entitled to should the company be liquidated.

In this article, we ask the expert team at Irwin Insolvency how employees are protected in the case of insolvency. Here’s what they had to say.

What Happens When a Company Becomes Insolvent?

Insolvency is not an easy process for anyone involved. Insolvency must be declared when a business no longer has the necessary funds to pay its creditors. Financial mismanagement, bad business decisions or sheer bad luck (especially in the case of the pandemic) can all be reasons for insolvency, and it leaves employees with an uncertain future.

When insolvency occurs, a company has several options available to them. The route that’s taken can have a huge bearing on employees, as well as shareholders and directors. Once insolvency has been announced, a company brings in an insolvency practitioner to take the next steps.

There are three major insolvency procedures that could be instigated by an insolvency practitioner, in efforts to either save the company or close the business down entirely:


The company is temporarily taken over by administrators, who work towards a turnaround plan to save the business. If the administration period fails, the business will be liquidated.

Company Voluntary Arrangement

Insolvency practitioners implement voluntary arrangements, the most common of which is a CVA (Company Voluntary Arrangement). This is an agreement between the business and its creditors, which results in consolidated debts and repayment plans aimed at saving the business. If a CVA fails, liquidation is the next step.


Liquidation is the final option. Liquidation occurs when the debts are too much and the company needs to be closed down entirely. Employees lose their jobs and company assets are sold off to pay creditors. Liquidation can be voluntary or it can be forced on a business by its creditors. For employees, this is the worst scenario that can result from insolvency.

What Happens to Employees When a Business Becomes Insolvent?

Insolvency can lead to several courses of action. What happens to an employee depends on the insolvency process that’s implemented. As an employee, you’re going to be most concerned with what happens to you, your career and your finances as a result of insolvency.

For employees, the best course of action is for insolvency practitioners to attempt to save the company. This obviously means they can keep their jobs. For creditors, customers and directors, this is always the best option too. Ultimately, no one wants to see a business fail.

If the business is placed into administration, then the new administrators can ask employees to continue working. You can also be asked to take a pay cut in the short term to help the company’s finances. The same can happen if a company organises voluntary agreements with creditors.

In the event of insolvency however an employee’s job isn’t necessarily protected, even if the company is being saved through administration or voluntary agreements. As part of a restructuring process, employees often find themselves being let go, either temporarily or permanently.

In the event of liquidation, the company is closed down entirely. This means that all employees will lose their jobs. At this point, it’s important to know what you’re entitled to.

How Are Employee Wages Protected in the Case of Insolvency? 

The biggest concern for employees is financial. If a company becomes insolvent and can longer pay its debts, how is it going to pay its employees?

A company in administration may ask employees to take a pay cut, as we already discussed. They may temporarily lay people off too. If the company is ultimately saved, this can be a good move for the employee. If a business is sold to new owners, then all employee rights (including wages and back pay etc.) are automatically passed on.

However, it becomes difficult if the employee is asked to take a pay cut and then the business is liquidated. You have to make tough decisions when a company becomes insolvent, and know your rights.

What Happens If a Company Is Liquidated as a Result of Insolvency?

In the case of wages already owed, then employees become creditors too. If a company is liquidated, the insolvency practitioner sells off the remaining assets. The practitioner will sell the remaining stock, leases on vehicles, property, etc. as the company is closed down. The funds that are raised go towards paying creditors.

Importantly, employees become preferential creditors. This means they are entitled to the first share of repayments once a business is liquidated and the assets are sold.

Employees are first in line and as preferential creditors they’re entitled to the following:

  • Wages (up to £800 per month)
  • Pension
  • Holiday pay

Unfortunately, not all of your wages are guaranteed in the case of insolvency. Employees are only protected to a maximum sum of £800 per month. If you’ve worked 40 hours per week for the last month, then you miss out on a lot of back pay.

Unfortunately, there’s also no guarantee that the sale of assets will raise the amount necessary to pay all outstanding wages.

Are Employees Entitled to Redundancy Pay in the Event of Insolvency?

If a business is liquidated or you’re asked to leave your job as part of an insolvency procedure (such as administration) then you may also be entitled to redundancy pay in addition to wages already owed to you.

The amount varies and depends almost entirely on how long you’ve been in continuous employment with the company. To claim redundancy pay, you ordinarily need to have been working for two years or more. The amount also depends on your employment contract and your age.

The minimum amount required by law is the following:

  • Half a week of pay for each full year worked under the age of 22
  • One week of pay for each full year worked between the ages of 22 and 40
  • One and a half week’s pay for each full year worked at the age of 41 or above

Just like back pay though, there’s no guarantee that any redundancy pay will be made from the sale of assets, even if you’re entitled to it. So, what happens if you’re left out of pocket when a company becomes insolvent?

The National Insurance Fund

The National Insurance Fund exists specifically to protect employees in the case of insolvency. The National Insurance Fund has to pay out if a company is unable to meet the minimum requirements through the sale of its assets. However, there are also limitations on what can be claimed through the fund.

Employees are able to apply for the following through the National Insurance Fund:

  • Redundancy payments capped at a maximum of £538 per week
  • Up to 8 weeks of wages owed (limited to £464 per week)
  • Up to 6 weeks of holiday pay accrued
  • Partial pension payments

In the first instance, employees should always contact their insolvency practitioner for advice on repayments and making claims. They can assist with the process and ensure that you receive your full entitlements.

If you are also owed sick pay, this is unfortunately not covered by the National Insurance Fund. Insolvency practitioners can help you to make claims for statutory sick pay through the Department of Work and Pensions, however.

Know Your Rights as an Employee

Insolvency can be a distressing experience for everyone involved. It’s not easy when creditors start demanding repayments and business owners have to make cuts. Employees need to know their rights, or it’s all too easy to be lost in the chaos as the business breaks down. Always seek professional advice if you’re unsure what you’re owed or what you should be demanding from your employer.

It’s wise to seek advice before insolvency procedures are implemented, so you know exactly where you stand if the company is suddenly entered into a period of administration or announces it’s being forcibly liquidated by creditors. With a worsening economic crisis in the United Kingdom, this is more relevant now than in previous years.

Contact Irwin Insolvency Today for Your Free Consultation

Insolvency is a difficult time for employees. As an employee, you must know where you stand and what your rights and entitlements are. This is where a professional insolvency service can offer expert advice and assistance.

With decades of experience advising on insolvency procedures, our expert team are ready to help you. If you’re worried that your employer is heading towards insolvency, then don’t hesitate to contact Irwin Insolvency today for your free, no-obligation consultation.

Contact Irwin Insolvency today for your free consultation

Call us
0800 254 5122

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.