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If I liquidate my company, what happens to my employees’ redundancy pay?

If you run a limited company that is insolvent and ultimately needs to enter formal liquidation proceedings and there are employees, it’s essential to consider their circumstances as much as your own.

No one wants their business to fail– but if circumstances have led to such an eventuality being unavoidable, it’s important to understand exactly what to expect from the procedure for you and your employees.

So how will liquidation affect my employees?

Unfair dismissal claims

As soon as a liquidator is appointed at a creditors meeting to wind up the company, employees will be dismissed immediately. However, they have a number of rights one of which is they can file for wrongful dismissal. Transfer of Undertakings Protection of Employment or TUPE regulations stipulate if certain criteria can be established a wrongful dismissal claim can be made.

Such circumstances are as follows:

  • If dismissal has resulted in a loss for the employee.
  • If dismissal occurred without due notice, as per the statutory minimum notice period required.
  • If the employee has been dismissed as a result of a breach of contract.

However, even if a wrongful dismissal claim is found to be valid and the claim is awarded to the employee, the amount awarded will be classed as unsecured debt and therefore not preferential. This means that it is likely the employee will see only a small amount of that money, or none at all especially if the company has little or no assets to sell.

Other Claims

Employees affected by a company entering liquidation,  can still legally claim for any of the following if they are owed it:

  • Payment in lieu of any notice period,
  • Holiday pay,
  • Redundancy pay,
  • Any wages that have gone unpaid,

Compensation for the above claims can be applied for by employees completing and returning a form called an RP1 form to the Redundancy Payment Service (RPS). It will be the responsibility of the appointed liquidator to inform employees of their rights and send the appropriate forms giving advice on what allowances they can claim.

For an up to date guide on current permissible allowances see: https://www.gov.uk/your-rights-if-your-employer-is-insolvent/overview

All RP1 claim forms are sent to the liquidator by your employees initially but they will ultimately be sent to the RPS. As claims for redundancy etc. (as listed above) are examined by an RPS officer all verified claims are paid by the RPS.  It is therefore far more likely that an employee will be able to claim such funds back – providing that they are entitled to them – than pursuing wrongful dismissal claims.

Are Company Directors Responsible for Company Debts and Employee Wages?

If you are a director of a limited company, this means you have limited liability for the company’s debts. The only circumstances under which you would become liable for company debts (including unpaid wages etc.) would be if you are found to have committed fraudulent activities or engaged in wrongful trading. Directors should take prompt action by contacting an insolvency practitioner when faced with a wage bill they cannot pay.

Are you looking for further advice on how your business and employees could be affected by liquidation and insolvency? Contact us today.

Authored by Gemma Roberts

Gemma Roberts

Licensed Insolvency Practitioner & Senior Insolvency Manager