What Happens To Employees In Liquidation?
Employees are inevitably impacted when a company goes into a process of liquidation and ceases trading. During a solvent liquidation, employees of the business will usually continue to be paid as normal until their final payday, at which point the company’s obligations are fulfilled and they can cease business. However, what happens to employees in liquidation is more complex if the company is insolvent.
What Happens To Employees In Liquidation If The Company Is Insolvent?
When an insolvent company has all of its assets liquidated and then ceases business, all employees will be made redundant in the process. This means that employees become preferential creditors of the business and are entitled to payments from the proceeds of the sale of business assets. If the company has enough money left after paying all of the secured creditors, employees will then be paid their arrears of pay and any other outstanding amounts (including untaken holiday pay).
However, very often the company will not have these leftover funds. In this case, how do employees get paid in liquidation? This is where the Redundancy Payments Service comes in. The IP will guide employees in correctly applying for their redundancy claims. Once the application has been accepted, the employee will then receive their claims from the National Insurance Fund (NIF).
Compulsory vs Voluntary Liquidation
So that covers what happens to employees in the liquidation of an insolvent company. But what’s the difference for an employee in compulsory versus voluntary liquidation? The bottom line is that voluntary liquidation via a creditors voluntary liquidation (CVL) is the better scenario for an employee. As voluntary liquidation is initiated by company directors rather than waiting for creditors to take action, the process is significantly sped up and it is likely that employees will be better informed throughout.
Otherwise, employees will not be paid until the company has been placed into compulsory liquidation (the date of which relies entirely on creditors and the courts). By taking control of the process through voluntary liquidation, directors can provide their employees with much more tangible information about their futures and ensure that they are informed at the proper time.
What About Other Insolvency Processes?
Administration
If a company has entered into administration then it may continue trading under the supervision of an appointed insolvency practitioner. They will determine whether or not the company can be rescued or should continue further down the line towards liquidation and subsequent closure.
At this point, employees become preferred creditors for any unpaid wages or other outstanding funds but otherwise continue work. This does not mean that employees are safe from redundancy during the administration period, so they are recommended to familiarise themselves with employee rights in liquidation and redundancy.
Company Voluntary Arrangement
A company may also find itself negotiating a Company Voluntary Agreement (CVA) with its outstanding creditors. This is a formal payment plan that is set out with amending any arrears that the company is obliged to pay.
Because a CVA is an arrangement made to remedy issues within the company to allow it to continue business, there is a good chance that employees will find themselves unaffected by the CVA. However, it is not uncommon for redundancies to be made as part of organisational restructuring and efforts to secure extra budget for these payments.
Dissolution
Dissolution is not an insolvency practice, and though it is cheaper for the company, it is also extremely difficult for an employee to secure proper compensation for their loss of work. What happens to employees in liquidation and dissolution are totally different sets of circumstances. Employees will not receive a case reference number to provide to the Redundancy Payments Service, which means that to receive reimbursement they must go through an employment tribunal to claim for unfair dismissal.
If your company is insolvent and you need advice, our expert team of insolvency practitioners is here to help. We’ll take you through your options and provide you with clear information to allow you to make the best decision for you, your company and your employees. Don’t hesitate to get in contact with us today for more information.
