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What happens to employees when a company is liquidated?

When a company is liquidated all employees will be made redundant as part of the process. This is because liquidation means the company ceases to exist as a legal entity and therefore all trade must stop. If the company is insolvent and enters administration, however, the situation for employees is different. Depending on the outcome of the administration, employees may continue to work for the current company or be transferred to the new company should the business be sold.

What happens to employees during liquidation and other insolvency processes?

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.

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What happens to employees during an insolvent liquidation procedure?

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; the difference is in how the process is instigated. A CVL is a director-initiated process, whereas compulsory liquidation arises when a creditor takes action to forcibly wind the insolvent company up.

What both processes have in common is that they 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, which is upon appointment of the liquidator, 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 a host of 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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Voluntary vs Compulsory liquidation

When it comes to companies with employees, one of the main advantages of opting for a CVL over waiting for compulsory liquidation action to begin is the timescales involved. As employees can only start to make their claims for redundancy and other statutory entitlements once the company has been formally placed into liquidation, directors are often keen to accelerate this process thereby allowing their staff to receive their redundancy pay in a timely manner.

With voluntary liquidation, directors are in control of when the liquidation will happen. Should they decide to wait for a creditor to initiate the winding up, however, this could take many months to happen; meanwhile their employees are unable to claim during this time.

Unfair dismissal

According to Transfer of Undertakings (Protection of Employment) (TUPE) regulations, dismissed employees are permitted to file a wrongful dismissal claim against their employer, 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, any amount due will be ranked as an unsecured debt, and will therefore rank low down in the queue for payment. In fact, many employees who file a wrongful dismissal claim against an employer have a slim chance of receiving any compensation which may have been awarded. You can read more about the order of payment to creditors during an insolvency procedure here.

If the employee is not eligible to file a wrongful dismissal claim but the company owes unpaid wages, payment in lieu of notice, redundancy pay, or holiday pay, then the employees may be able to receive compensation by submitting an application to the Redundancy Payments Service.

While a wrongful dismissal claim is paid out of company funds, statutory redundancy payments will be made through the Redundancy Payments Service. This means that employees who are owed redundancy will be able to receive this regardless of the financial position of the company they are being made redundant from. Applications for redundancy claims will be reviewed by a case officer and they aim to pay out any money owed within 6 weeks.

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How company strike off affects employees

Rather than going through a formal liquidation process as detailed above, some directors opt to strike their company off the register held at Companies House through a procedure known as dissolution. This is done by submitting a DS01 form, and does not require the input or appointment of a licensed insolvency practitioner. Although some view this as a quick and cheap way of closing a company, there are serious downsides to this practice, particularly if the company has employees.

In order for employees to make a claim to the Redundancy Payments Service, they will need to provide a case reference number. This will be provided by the insolvency practitioner handling the liquidation. If the company does not go through a formal liquidation procedure then this makes it extremely difficult for employees of the company to claim redundancy. Instead, staff will have to take part in an employment tribunal which not only takes time but can also be costly. It is important to note here that even if the tribunal is successful, any claims will be limited to redundancy pay only meaning employees will not be granted the additional statutory entitlements such as notice and holiday pay.

If you are an employer and are considering closing your insolvent company, it is vital that you consider the position of your employees during this time, and ensure your actions will not prevent them from claiming  the money they are owed. Speaking to a licensed insolvency practitioner and placing your company into a formal liquidation procedure will ensure your employees will be able to claim redundancy should they meet the criteria.

What happens in the event of administration or a CVA?

While the end result of any liquidation process is the ultimate closure of the company, things are not always so clear cut when it comes to other insolvency procedures.

  • Administration – 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.

  • 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.

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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.

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