What happens to employees during liquidation and administration?

What happens to employees when a company enters liquidation or administration?

What happens to employees when a company enters liquidation or administration?
When a company is insolvent, there are a number of formal procedures it can go through to help resolve the problems it is currently facing. Some of these procedures result in the closure of the company, others lead to the restructuring and streamlining of operations in order to allow the company a chance to recover and continue trading.  The most commonly utilised processes are liquidation, administration, and the implementation of a Company Voluntary Arrangement (CVA).

In any formal insolvency procedure it is important to consider the rights of the insolvent company’s employees. This is especially true during liquidation, where the company is being wound up and existing employees being made redundant.

What happens to employees during company liquidation?

Insolvent liquidation comes in two forms; Creditors’ Voluntary Liquidation (CVL) and Compulsory liquidation. Both processes involve the company being wound up by a licensed insolvency practitioner and both ultimately result in the complete closure of the business and the dismissal of any staff employed by the company.

As soon as the liquidation process begins the employees of the insolvent company are automatically dismissed.

Upon the company entering a formal insolvency procedure, staff will be entitled to claim redundancy pay, along with other statutory entitlements such as arrears of wages, overtime, or commission, pay for untaken holiday allowance, and notice pay. Ordinarily, the company making the redundancies is liable for ensuring these entitlements are paid to dismissed staff; however, when it comes to an insolvent company, there is rarely enough money left in the business to cover these amounts owed.

In this scenario, payments will be made from the government’s National Insurance Fund (NIF) which is administered by the Redundancy Payments Service.

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What happens to employees during company administration?

Liquidation is different to administration in many ways. While liquidation brings about the end of a company, administration may be used to turnaround and rescue a company allowing it to continue to trade.

When a company enters administration, it may continue to trade as normal while its future options are considered by the appointed licensed insolvency practitioner. Control of the company automatically shifts to the insolvency practitioner and after a period of 14 days they will adopt any existing employee contracts.

For the employees, this means that they will rank as preferential creditors for unpaid wages, holidays, and notice pay, should the company subsequently enter liquidation. It is important to remember here that employees are still at risk of redundancy while the company is in administration.

This is because administration can be seen as a sort of holding stage while the company’s future is being decided. A company cannot remain in administration indefinitely and sooner or later an exit route must be agreed upon. Depending on the company’s viability as a trading entity, the company may be restructured, sold, or even liquidated.

For employees this may mean their job remains unaffected, is transferred to a new owner through a process known as TUPE, or is their position is made redundant.

Company Administration and TUPE for employees

TUPE, or the Transfer of Undertakings (Protection of Employment) Regulations, ensures that the rights of employees are protected when a business is sold out of administration. It safeguards the current terms and conditions of employment, including length of service, employee’s rights with regard to their working hours, as well as their entitlement to claim arrears of holiday pay and other monies, and provides for the safe transfer of contracts to the new employer.

Contracts cannot be varied or terminated apart from under certain conditions. The regulations can be complex, and both employers have specific duties and obligations. TUPE rules don’t apply if the business is going to be liquidated and closed down.

What happens to employees during a Company Voluntary Arrangement (CVA)?

A Company Voluntary Arrangement, or CVA, is essentially a formal payment plan which is negotiated between a company and its outstanding creditors. A CVA allows the company to continue trading, using future profits to pay back its current borrowings. As the aim of this procedure is continuation of business and preservation of employment, employees may well find themselves unaffected by their employer entering into a CVA.

However, it must be remembered that a CVA is an opportunity for a business to reduce costs wherever possible, which for some companies may mean making cuts to the existing workforce. Therefore it is not unusual for a CVA to go hand-in-hand with a spate of redundancies. Any redundancies made must be done using the correct procedures while adhering to redundancy legislation; a CVA does not remove the obligations of employers when it comes to treating their staff fairly when making redundancies.

It is important to note that as a CVA is a formal insolvency event, any employees who lose their job during the process will be able to submit a claim for redundancy and other statutory entitlements. Employee claims for redundancy as a result of a CVA will typically be paid by the government’s Redundancy Payments Service in the first instance in order to limit the waiting time for the employee. The government will then become a creditor in the CVA as it looks to recoup this money.

Need to speak to someone?

If your company is struggling with unmanageable debts, squeezed cash flow, or an uncertain future, you are far from alone. We speak to company directors just like you every single day, and we are here to give you the help and advice you need. Call our team today on 0808 253 3856

If you are considering liquidating your insolvent company, you should make it a priority to obtain advice from a professional. Real Business Rescue’s team of licensed insolvency practitioners can help you understand the options available to you and your company, as well as the impact each process may have on your employees. Call us today to arrange a free no-obligation consultation with an insolvency expert at any one of our nationwide offices.