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What rights do employees have and how are they affected?

Liquidating your company allows you to move on and start something new, but it can also be a stressful experience. Regardless of whether your business is solvent or insolvent, the reality is that your staff will all lose their jobs, and when you’ve built up close relationships, that can be distressing. 

The good news is that employees have legal rights in liquidation that will give them some financial protection. Here we discuss what those rights are and how your employees are likely to be affected.

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What is the liquidation process and how does it affect employees?

Liquidation is the process of closing down a solvent or insolvent limited company. The directors appoint a liquidator who makes all the employees redundant before selling the company’s assets and distributing the funds to the company’s creditors or shareholders. The liquidator then strikes the business off the official register at Companies House and it ceases to exist.

Employees are usually made redundant almost immediately after the liquidator is appointed, although it can take days or even weeks. Employees will be formally notified about the redundancy and receive details of their redundancy and pay entitlements in writing. The liquidator will also provide information about how and when those payments are likely to be made.

How does the process differ in solvent and insolvent liquidations?

In a solvent liquidation, known as a Members’ Voluntary Liquidation (MVL), the company will continue to pay the employees up until their final payday as per their contract. If they have been employed for two years or more, they are also entitled to redundancy pay, which the company can pay from the sale of assets. The liquidator will then distribute the remaining funds among the shareholders.

When a company cannot pay its debts, it is insolvent. Insolvent companies can enter liquidation voluntarily via a Creditors’ Voluntary Liquidation (CVL) or be forced into Compulsory Liquidation by their creditors. In an insolvent liquidation, the situation for the employees is less clear, as the company is unlikely to have the money to make redundancy payments or even pay the employees’ wages.

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How are employees treated in insolvent liquidation?

In an insolvent liquidation, the liquidator will usually dismiss the employees immediately, and as the company is in debt, there are unlikely to be any funds available for unpaid employee wages, holiday pay, pension contributions or redundancy payments.

When the company enters liquidation, the employees can make a claim for the money they are owed and become creditors of the company. Once the liquidator has sold the company’s assets, they will repay the creditors, such as commercial finance providers, trade suppliers, HMRC and the employees, in a strict order of priority.

Employees are either preferential or unsecured creditors, depending on the type of payment they are due. As there are other creditors ahead of them in the repayment hierarchy, there are often insufficient funds to pay the employees in full, and sometimes they may not receive any money from the company at all.

In that case, employees can apply to the Insolvency Service for unpaid wages, holiday pay, pension contributions, notice worked but not paid, commission and statutory redundancy pay. The liquidator will offer advice on eligibility, give them an idea of payment timescales and provide a claim form.

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While all three closure options have their advantages and disadvantages, the right one for you will depend on a number of factors including the current financial position of the company and your plans for the future.


Why is voluntary liquidation in the best interests of your employees?

When a company is insolvent, the directors can liquidate it voluntarily via a Creditors’ Voluntary Liquidation (CVL) or wait for a creditor to force it into Compulsory Liquidation. Taking the voluntary route is in your employees’ best interests as it speeds up the claim process.

When you enter a CVL, you’ll receive a case number. Employees can use that case number to go on the Government website and claim the money they are owed. On the other hand, if you wait for a creditor to force the company into Compulsory Liquidation, your employees may have to wait for months to make their claim, worsening their financial position and increasing their uncertainty.

The same can be said if you try to dissolve your insolvent business. Company Dissolution is a cost-effective way to close a business, but it’s only appropriate for solvent companies. If you try to dissolve an insolvent business, it makes it more difficult for employees to receive the money they are owed. Rather than simply claiming through the Insolvency Service, they’ll have to claim unfair dismissal through an employment tribunal, which can be time-consuming and expensive.

In that case, employees can apply to the Insolvency Service for unpaid wages, holiday pay, pension contributions, notice worked but not paid, commission and statutory redundancy pay. The liquidator will offer advice on eligibility, give them an idea of payment timescales and provide a claim form.

Need advice?

If your business is struggling financially and you’re worried about the impact company liquidation will have on your employees, contact our team of licensed Insolvency Practitioners for a free, same-day consultation.

We provide expert guidance and support throughout the process, from deciding whether liquidation is the right choice for your business to protecting you and your employees every step of the way.

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