Employees’ Rights in a Liquidation Process

What are the rights of my employees during insolvency proceedings?

There is a distinct difference between your company entering liquidation, and calling in administrators. Liquidation signifies the end of your business with the unavoidable loss of jobs for all employees, whereas administration is a process that could see jobs saved and the company restructured.

Either way, your employees have a right to claim monies owed to them by the company. How this is claimed depends largely on their status as creditors. Preferential creditors are entitled to receive money from the sale of business assets, but ‘ordinary’ creditors lie further down the ‘hierarchy’ and may have to make a claim on the National Insurance Fund.

Begbies Traynor is the leading UK insolvency practice for business recovery. We can provide professional advice and guidance regarding employees’ rights and your responsibilities as a director on the liquidation or administration of your company.

You have called in administrators to attempt a business rescue

Employees retained during the initial 14-day period of administration become preferential creditors, and have priority over those made redundant straight away. This priority creditor position provides entitlement to payment from the sale of business assets on liquidation, but it is often the case that a shortfall in monies occurs.

Preferential creditors are entitled to receive:

• outstanding salary (including commission) for the previous four months, up to a maximum of £800 in total
• Accrued holiday pay of up to six weeks
• Some occupational pension payments.

The National Insurance Fund (NIF)

The National Insurance Fund covers payments such as redundancy, salary and holiday pay not recouped from the sale of company assets. Preferential creditors should initially request a claim form from the Insolvency Practitioner, and claim from the NIF for any outstanding payments due.

Claims can be made on the National Insurance Fund via the Redundancy Payments Service (RPS), usually in the following circumstances:

• By employees made redundant within the first 14 days of administration
• By those who have lost their jobs on company liquidation
• By preferential creditors (members of staff) who were retained during the initial administration period, but who have been unable to claim all monies owed to them from the sale of business assets.

Employees made redundant immediately on administration/on liquidation
Members of staff not retained by the administrators within the initial 14 days of the process, and those made redundant on the company’s liquidation, become ‘ordinary creditors’.

Unfortunately, this places them at the bottom of the list for receipt of outstanding wages and holiday pay but, as mentioned above, they are entitled to make a claim via the Redundancy Payments Service.

It is worth noting the eligibility criteria for redundancy claims. Your employee must have worked for you continuously for two years, and the amount of redundancy pay is based on their age and length of service.

For most other monies, or those that were owed more than four months prior to the administration process, your employees will be treated as ordinary creditors and will have to claim using the National Insurance Fund as above.

One exception is when statutory sick pay is owed, in which case claims are made through the Department of Work and Pensions, with statutory maternity, paternity or adoption pay being claimed via HMRC.

What about employment contracts if the company is sold on?

At the end of the administration process, employment contracts may be transferred if a new company has purchased the business. Employment rights may be protected by the Transfer of Undertakings (Protection of Employment) (TUPE) regulations in this instance.

One exception may be if your administrators have used their right to vary contracts of employment in order to offer the business the best chance of survival. This is called a ‘permitted variation’ and may have to be accepted by your employees in order to retain their jobs prior to transfer.

Large-scale redundancies

Specific requirements exist for large scale redundancies of more than 20 members of staff from a single company. There are minimum consultation periods that should be adhered to in these instances and if these requirements are not met your former employees will be entitled to claim monies via employment tribunals.

You need to have undertaken a collective consultation, either with your employees or with the union should there be one. Failing to do this means that you may become liable to pay each employee up to 90 days’ salary as a ‘protective award.’