What Happens to Employees When Going Into Liquidation?

When a company faces insurmountable financial challenges and enters the liquidation process, it affects not only its directors, shareholders, and creditors but also significantly impacts its employees.

Going into liquidation often leads to employee uncertainty, job losses, and concerns about employee rights and entitlements.

Understanding what happens to employees during the liquidation process is essential for employees and employers to navigate this challenging situation.

Insolvency Practitioner provides a comprehensive overview of what happens to employees when a company enters liquidation.

We will explore the rights and entitlements of employees, the role of the insolvency practitioner, and the available support mechanisms.

By shedding light on these aspects, we seek to empower employees and employers alike with the knowledge necessary to navigate the complexities of the liquidation process.

Employers must be aware of their legal responsibilities and obligations toward their employees, while employees need to understand their rights, entitlements, and available support mechanisms.

By being informed, employees can assert their rights and seek support during this challenging time.

Employee Termination in Liquidation

When a company enters liquidation, the immediate outcome for employees is the termination of their contracts.

This can be distressing and confusing, as employees suddenly face the daunting prospect of finding new employment while dealing with the financial repercussions of losing their jobs.

The liquidation process is conducted by a licenced insolvency practitioner (IP), who oversees the winding up of the former company’s assets and the distribution of its assets to creditors.

Two main types of liquidation impact employees differently: compulsory liquidation and voluntary liquidation.

When a court orders a company’s closure as a result of pressure from creditors, voluntary liquidation begins, whereas compulsory liquidation occurs when the company’s directors decide to close the operation and sell its assets.

Compulsory Liquidation

Compulsory liquidation results in the immediate termination of employee contracts.

This can lead to claims of unfair dismissal and the awarding of damages to workers.

Additionally, the process can take several months to settle, leaving employees in a state of uncertainty and financial instability.

In contrast, voluntarily closing a company allows for greater control over the process, potentially offering a more favorable outcome for employees.

Voluntary Liquidation

In cases of voluntary liquidation, directors may choose this route in order to expedite the process of staff receiving their redundancy pay.

Once the company is formally placed into liquidation, employees can begin making claims for other statutory entitlements, such as redundancy and other related entitlements.

To reduce the potential for employee litigation during formal liquidation process, it is crucial for directors to consult a qualified insolvency practitioner as soon as possible.

Employee Claims and Redundancy Pay

During company liquidation, employees can make claims for redundancy pay, arrears of wages, and outstanding holiday pay.

These redundancy claims are typically handled through the Redundancy Payment Service (RPS), which administers claims on the National Insurance Fund (NIF) from employees whose company has gone into insolvent liquidation.

Employees’ claims during liquidation are prioritised differently depending on their status. As preferential creditors, employees are entitled to certain payments, including unpaid wages and holiday pay.

This preferential status ensures that employees receive the money owed to them before other creditors, increasing the likelihood of them recovering their losses during the liquidation process.

Preferential Creditors

In the context of liquidation, preferential creditors are employees who are entitled to certain payments.

Some of the payments they can claim include holiday pay, unpaid wages, and notice pay.

This preferential status ensures that employees are prioritised over other creditors during the liquidation process, increasing the likelihood that they will receive the money owed to them.

National Insurance Fund

The National Insurance Fund (NIF) plays a crucial role in providing financial support to employees during company liquidation.

Eligible employees can claim for unpaid wages, bonuses, overtime, commission, holiday pay, statutory notice pay, and pension contributions, up to a maximum of £571 per full week’s pay.

However, there are statutory limits in place, and employees must have been employed for a minimum of two full years prior to the insolvency to be eligible to claim redundancy, from the NIF.

Directors and Redundancy

Insolvency alternatives such as administration and Company Voluntary Arrangement (CVA) provide companies with an opportunity to continue trading while their future is being considered.

In the event of liquidation, employees become preferential creditors for holiday, wage, and notice pay.

Depending on the situation, the workforce may remain employed, be transferred to a new owner, or be made redundant.

Directors play a significant role in determining the outcome for employees during insolvency alternatives.

By consulting with an insolvency practitioner and taking the necessary steps to protect the company’s and future profits, directors can minimise the negative impact on employees and ensure that their rights and entitlements are upheld during the process.

Eligibility Requirements

The eligibility requirements for directors during liquidation may vary depending on the country and jurisdiction.

It is therefore imperative for directors to consult the relevant laws and regulations in their applicable jurisdiction to ensure they are meeting the necessary requirements and protecting the rights of their employees during the liquidation process.

This is especially important as the liquidation process can be complex and time-consuming, and directors must ensure they are taking the necessary steps to protect the interests of their employees.

Self-Funding Liquidation

The concept of self-funding liquidation refers to a situation wherein a company utilises its own assets to satisfy its debts during the liquidation process.

This can help to minimise liquidation costs and optimise the use of the company’s assets.

However, it also carries risks, such as the difficulty of obtaining the necessary funds to cover the company’s liabilities and potential delays in the liquidation process.

Directors should carefully consider the benefits and drawbacks of self-funding liquidation, as well as the legal implications, before deciding on this approach.

Insolvency Alternatives and Their Impact on Employees

When a company enters administration or CVA, it can have varying effects on employees and their rights.

These insolvency alternatives enable the company to continue trading, benefiting employees who may remain employed, be transferred, or face redundancy based on the process outcome.

Employees’ rights during insolvency alternatives are also protected by their status as preferential creditors for certain payments, such as unpaid wages, holidays, and notice pay.

This ensures that employees are prioritised during the liquidation process and increases the likelihood that they will receive the money owed to them.

Administration

During administration, an insolvency practitioner assumes control of the company and negotiates a Company Voluntary Arrangement (CVA) to facilitate ongoing trading or a sale as a ‘going concern’ to another party.

The impact on employees can range from job losses to reduced wages and altered working conditions.

However, employees may also be eligible for redundancy pay if their full employment contract is ended due to the administration process.

CVA

A CVA is a formal agreement between a company and its creditors that outlines a payment plan. During a CVA, employees can generally expect that their roles will remain unchanged.

However, it is possible that a CVA may necessitate redundancies for some businesses, depending on the company’s financial situation and the terms of the CVA.

Employee Rights and Legal Protections

Employees have legal protections available to them during company liquidation, ensuring their rights are upheld and their financial losses are minimised.

One such protection is the ability to make claims for wrongful dismissal through an employment tribunal.

However, the payout for a wrongful dismissal claim is considered an unsecured debt, which ranks low among unsecured creditors on the hierarchy of creditors and may not result in a payout due to a lack of funds.

In addition to legal protections, employees also have certain rights during company liquidation, such as the statutory minimum notice period.

This notice period ensures that employees are given adequate time to prepare for the termination of their employment and find new job opportunities.

Unfair Dismissal Claims

Unfair dismissal claims arise when employees believe their dismissal from their job was unjustified, such as due to discrimination, breach of contract, or other unfair reasons.

Employees have the right to present a claim of unfair dismissal to an employment tribunal, which will evaluate the claim and determine whether the dismissal was fair or not.

The potential outcomes of an unfair dismissal claim can vary, with the tribunal potentially awarding compensation to the employee or ordering the employer to reinstate the employee.

Statutory Minimum Notice Period

The statutory minimum notice period is an important protection for employees during company liquidation.

In the UK, the statutory minimum notice period mandated by law is a minimum of one week’s notice.

This notice period increases based on the employee’s length of employment, with employees employed between two and twelve years receiving one half week’s wages more of notice for every year of employment.

Employees employed for twelve years or more are entitled to 12 weeks’ notice.

Frequently Asked Questions

Who gets paid last during a liquidation?

Unfortunately, shareholders tend to be the last in line when it comes to being paid out during a liquidation.

This is because all creditors and other stakeholders must be taken care of before any remaining funds can be distributed to shareholders.

Ultimately, they are at the end of the payout list.

Will I get redundancy pay if my employer goes into liquidation?

Unfortunately, if your employer goes into liquidation, you are unlikely to receive redundancy pay as the funds may not be available.

You should check with the Insolvency Service to see what other forms of assistance they may be able to provide.

What happens to employees when a company ceases trading?

When a company ceases trading, the employees can be impacted significantly as they may lose their jobs, and often any owed wages or leave entitlements.

Depending on the financial circumstances of limited company, liquidators may be called in to manage the sale of assets and distribute funds among creditors, including employees. Before dividing any remaining assets among shareholders.

What are the consequences of liquidating a company?

When a company is liquidated, it means it the insolvent company must cease all operations and sell off its assets in an attempt to pay off creditors.

All business activities and employment contracts are terminated, leaving the people associated with the business in difficult financial straits.

Liquidation also affects the credit ratings of the former directors, making them more liable for any outstanding debts.

Summary

Navigating the complexities of employee rights during company liquidation can be challenging, but it is crucial for both employees and directors to be aware of the various rights, protections, and entitlements available.

By understanding the processes and implications of liquidation, employees can better prepare for and navigate the difficulties that arise during this time.

Remember, knowledge is power – the more you know about your rights and protections during company liquidation, the better equipped you’ll be to face any challenges that come your way.

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