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How will liquidation affect my employees and who pays?

If your company has unmanageable debts or cash flow problems that are reaching crisis levels, you may have no choice other than to liquidate. When you liquidate a company, the Insolvency Practitioner who acts as the liquidator will wind up its affairs and make all the employees redundant before removing the company from the official register.

Understandably, this can be devastating for the employees, but they are entitled to certain payments to reduce the financial impact. However, if your business is being liquidated because it’s insolvent and cannot pay its debts, who pays your employees’ redundancy?

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How does liquidation affect company employees?

One of the liquidator’s first jobs is to dismiss the employees. They will become a creditor of the company. The liquidator will then sell the company’s assets and distribute the proceeds among the creditors in a strict order.

The company’s employees are preferential creditors of the business for some payments and unsecured creditors for others. That means they are paid after secured creditors with a fixed charge but also after creditors with floating charges for certain entitlements.

By the time those creditors are paid in full, sometimes there isn’t enough money left for the employees. In that case, the Redundancy Payments Service covers the payments and liability does not fall on the company.

What redundancy payments can employees claim?

Employees who are made redundant when a company enters liquidation are entitled to claim the following:

  • Wage arrears
  • Unpaid holiday pay
  • Outstanding pension contributions
  • Redundancy pay
  • Notice pay

Employees are preferential creditors for outstanding wages, holiday pay and pension contributions but are unsecured creditors for notice pay and redundancy claims.

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How much redundancy pay can employees claim on liquidation?

Wages arrears

Staff can claim up to eight weeks of outstanding pay at a maximum rate of £643 per week. Tax and NI will be deducted from the payment.

Unpaid holiday pay

Employees are entitled to up to six weeks of holiday days taken but not paid and holiday days not taken. Payments are capped at £643 per week and tax and NI are deducted. 

Outstanding pension contributions

Employees can claim money that was deducted from their wages but not paid into a workplace pension scheme. They can claim unpaid pension contributions for 12 months before the liquidation and the money will be paid directly to the pension provider. 

Redundancy pay

Employees can claim redundancy pay if they have worked for the business for at least two continuous years under a contract of employment. They are entitled to weekly pay of up to £643 for a length of service that’s capped at 20 years. The amount they receive is dependent on their age. 

Employees can receive:

  • Age 18-21: half a week’s pay for every full year worked
  • Age 22-40: a week’s pay for every full year worked
  • Age 41-65: a week and a half’s pay for every full year worked

Unlike holiday pay and wages, redundancy pay is tax-free.

Notice pay

It’s not usually possible to give an employee notice when entering liquidation. Instead, they can claim notice pay of one week’s salary (capped at £643 per week) to a maximum of 12 weeks for every year’s service. Notice pay is subject to tax and NI.

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How do employees claim redundancy pay in Liquidation?

If there are sufficient funds, the liquidator will pay the employees from the proceeds of the sale of the company’s assets. However, if all the money is spent repaying creditors further up the hierarchy, the employees can claim money from the National Insurance Fund via the Redundancy Payments Service.

The liquidator will advise employees whether they are eligible to make a claim, hand them form RP1 to complete and provide the case reference number (called a CN number) they’ll need to make their claim. The Redundancy Payments Service will calculate an employee’s entitlement based on their age, rate of pay and length of service and make the payment usually within six weeks.

Can company directors claim redundancy pay after liquidation?

Something that’s often overlooked is that company directors may also be able to claim redundancy pay. As long as you have worked as an employee of the company for at least two years, worked 16 hours a week or more and were paid a regular salary under PAYE, you should qualify.

Director redundancy payments in the UK average around £10,000. That can help you meet the costs of the liquidation and provide some financial stability while you consider your next steps.

Need advice?

If you would like more information about staff redundancy in liquidation or want to know more about the liquidation process generally, we can help. Get in touch with Scottish Liquidators for a free, same-day consultation or arrange an in-person meeting at one of our offices throughout Scotland.

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