Liquidations & Insolvent Redundancy

When a Liquidated Company Can’t Fully Pay its Redundant Employees

When a business is liquidated due to insolvency, it’s a tough time for everyone. The Directors will have lost a business they likely put their hearts and souls into building, suppliers have lost a customer and customers have lost a supplier. But perhaps most unfortunate, is that any employees will have lost their livelihoods and in the case of insolvent redundancy the company may not have sufficient funds from its liquidated assets to pay the employees what they’re owed.

How are employees protected in Insolvent Redundancy?

When insolvent businesses are liquidated owing funds to creditors, not every creditor is treated equally. There is a hierarchy of creditors and employees are ‘preferential creditors’ which is the second to top tier. In practice, this means that former employees owed wages and also their pensions take precedence over most other creditors giving them a far better chance of being paid everything that’s owed from them, up to a set limit.

If there’s insufficient money left after liquidation to pay staff wages, there are contingencies in place where the state will step in and to a certain degree, make up the difference from the National Insurance Fund via the Redundancy Payment Service (RPS).

In these situations, employees are able to apply for unpaid wages, as well as the value of any accrued holidays, commission earned and payments in lieu of notice. If less notice was given than was statutorily or contractually required. The employee will have to provide evidence to back up the claim.

While the Redundancy Payment Service will pay what is can towards the difference between what is owed and what has been realised in the liquidation, there are limits to payouts, so if there’s a very large shortfall, or employees were high earners, it’s possible that employees affected by insolvent redundancy might not be paid every penny they’re owed.

It’s worth noting that that from April 2020, HMRC, in some circumstances, will once again be given preferential creditor status, meaning that if there aren’t sufficient funds to pay what’s owed to HMRC as well as former employees, these two sets of interests will be in competition on more or less equal terms, which will inevitably mean some redundant employees will lose out.

How do employees claim their entitlements in an Insolvent Redundancy?

When a company is liquidated, the process is managed by either the Official Receiver, or an Insolvency Practitioner acting as the Liquidator.

Part of the process of liquidation involves contacting all creditors of the company (employees included) and arranging for liquidated assets to be distributed as the rules dictate. For employees, the Liquidator will contact the Redundancy Payment Service and begin the claims  process, passing on details of how to claim and the relevant case numbers to redundant employees as soon as is practical.

There’s an online form to fill out, but once this has been submitted, it’ll be at least three weeks before a payment is made, in some circumstances it can take up to eight weeks after liquidation.

Worried About Insolvency and Redundancy?

It’s a tough time for all involved, but if you’re looking for assistance going through the process of insolvent redundancy, whether as an individual whose redundancy is likely to make you personally insolvent, or as a business whose insolvency is likely to result in staff redundancies, contact us for a free consultation and we can look at your situation and provide advice on what to do next.