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What Happens to Employees During Compulsory Liquidation?

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What Happens to Employees During Compulsory Liquidation?

In any formal insolvency procedure it is important to consider the rights of the insolvent company’s employees, especially during compulsory liquidation, as the company is being forcefully wound up and put out of business, potentially leaving many of the employees without a job.  

So, what happens to the employees during compulsory liquidation?

As soon as the compulsory liquidation process begins (upon appointment of the liquidator), the employees of the insolvent company are automatically dismissed.  According to Transfer of Undertakings (Protection of Employment) (TUPE) regulations, dismissed employees are allowed to file a wrongful dismissal claim against the employer being liquidated, but only in certain situations. Employees can only bring a wrongful dismissal claim against an employer if they can establish that:

  • They were dismissed without being given adequate notice, according to the statutory minimum period of notice.
  • They were dismissed in breach of contract
  • As a result of dismissal they have suffered a loss

Even if the wrongful dismissal claim is honoured it will be owed as an unsecured debt, which means it would not be considered a preferential debt and it is therefore put at the back of the payment queue. In fact, many employees who file a wrongful dismissal claim against an employer have a slim chance of being compensated.

If the employee is not eligible to file a wrongful dismissal claim but the company in liquidation owes unpaid wages, payment in lieu of notice, redundancy pay, or holiday pay, then the employees may be able to receive compensation by filing a RP1 form with the Redundancy Payments Service (RPS).

While a wrongful dismissal claim is paid out of the liquidation account containing the proceeds of the sale of company assets, an RP1 claim for owed payments would be paid by the RPS, so employees have a much greater chance of being compensated as long as it can be established that they are indeed owed funds. An RP1 claim is reviewed by a case officer and usually takes about 3-6 weeks to be paid.

Can You Be Held Personally Liable for Employee Wages or Company Debt?

As the director, manager, or owner of a limited liability company you normally would not have to worry about being held personally liable for the payment of unpaid wages or the company’s outstanding debts. However, if you’ve committed wrongful or fraudulent trading, or if you have wrongfully dismissed employees during the time the company was insolvent, this may come to light during the post-liquidation investigation and you could be required to pay fines and/or some of the company’s debts.

If you have any questions about employee rights and compulsory liquidation, feel free to write us or call us on 0800 231 6040 for free advice from a licensed insolvency practitioner.

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