Reviewed: 2nd November 2017
When a company becomes insolvent, one of the major concerns for directors is what happens to their employees. Even in insolvency, it’s not a foregone conclusion that the business will close down, however, and there are safeguards in place to protect employees.
If the business is sold on as a going concern, employment contract terms and conditions are safeguarded under TUPE - Transfer of Undertakings (Protection of Employment) Regulations, 2006.
Additionally, in some circumstances, statutory employment-related payments receive ‘preferential’ status if the company needs to be liquidated and there are sufficient funds to pay these claims from the sale of assets.
If the business is liquidated, the company will close down with the loss of all jobs, but employees can claim statutory payments such as arrears of wages and outstanding holiday pay. Some members of staff may also be eligible for redundancy pay.
As we mentioned earlier, when sufficient funds are available claims will be met from the sale of company assets, and under these circumstances employees are regarded as ‘preferential’ creditors, which means they rank higher than some others owed money by the company.
There are limits to the amounts that can be claimed as a preferential creditor, however:
Any shortfall in these payments can be claimed from the National Insurance Fund (NIF).
The National Insurance Fund is made up from employer, employee and self-employed NI contributions. If there aren’t enough funds for the liquidator to pay claims, employees can use form RP1 to make a claim from the NIF for:
If your employees have worked under a contract of employment for a continuous period of two years or more, they may be eligible to claim redundancy. The same applies to yourself as a director if you can also prove your status as an employee.
Redundancy payments are calculated according to age, length of service (capped at 20 years), and weekly wage (currently capped at £489). Your employees must make a claim from the company within six months of losing their job, and if the company cannot pay, redundancy pay can be claimed from the National Insurance Fund using form RP1.
If the company is deemed viable for the long-term, even though it’s currently insolvent, it’s possible that your employees could retain their jobs. Should a Company Voluntary Arrangement (CVA) be appropriate, for example, the company might be streamlined in such a way that avoids job losses.
Company administration is another formal insolvency procedure whereby jobs may be saved, but this depends on the circumstances of each case. Any employees who aren’t made redundant during the initial 14 days of administration become ‘preferential’ creditors if they’re made redundant at a later date, and stand a greater chance of receiving their money.
Real Business Rescue can provide further guidance on your employees’ rights if your company becomes insolvent. We operate from 55 offices around the country, and are able to offer free same-day consultations to quickly identify your requirements.