What Happens to Employees When a Company Goes Into Liquidation?

Assuming that the business concerned is incorporated – that is, it has gone through the formal registration process to become a limited liability company – formal liquidation will mean it no longer exists in a legal sense. As such, all staff members of a liquidated former limited company will no longer be employees. Liquidation means the permanent closure of a limited company and it is worth noting that such legal processes can happen whether a business is solvent or not.

We’ll take a closer look at what rights former employees have of a limited liability company that goes into liquidation. However, before that, it will also be worth stating what would happen in the case of an unincorporated company. If you run a business with no limited liability status, then you won’t be afforded the same legal protections under the Companies Act of 2006. What this means is that owners of such businesses are personally liable for any business debt they may have.

As such, your former employees will, in effect, be your creditors if you owe them any unpaid salaries. Your old workforce will be entitled to demand that their back pay is settled in full. If it is not, then they have a number of options open to them in law including pursuing you through the county courts for a money judgement and subsequent payment. They could also file for a bankruptcy petition which may force you to sell personal assets to pay them.

In the case of a limited liability company, directors are not liable in the same way to creditors, including former employees, as they are with unincorporated businesses. Nevertheless, employees are still entitled to be paid what is owed to them. This might not just be their back pay, holiday pay and outstanding expense payments but could also include a redundancy entitlement depending on the length of service involved. Eligible former members of staff can make a claim for redundancy pay as well as other statutory entitlements the moment that your company enters into formal liquidation proceedings.

When a limited company is solvent, it may enter a members’ voluntary liquidation, or MVL. If this is the case, then employees will continue to receive pay as they normally would until the final payday as laid out in the terms of the MVL. Generally speaking, voluntary liquidation proceedings are better for employees. They mean they can claim redundancy pay more rapidly and they won’t have to deal with the uncertainty of not knowing when the company will eventually close.

If a company is insolvent, however, there won’t necessarily be the funds available to keep the payroll going. Under such circumstances, employees should contact the Redundancy Payments Service (RPS). This is the organisation that handles claims on the National Insurance Fund, the fund that National Insurance Contributions go towards. The RPS says it aims to make eligible payments from its fund within three weeks of receiving a claim from the former employees of an insolvent company. Note that it can take longer depending on the particulars of each case, however.