What are an employer’s responsibilities to employees when a business becomes insolvent?

If a business becomes insolvent, one of the biggest concerns is the welfare of staff. Although this situation will be stressful for everyone involved, even in insolvency there is still a chance that the business could be saved and many or all of the employees could keep their jobs.

It could be that the business can be successfully restructured and continue to trade. Alternatively, the business may be sold as a going concern, in which case, the Transfer of Undertakings (Protection of Employment) Regulations (TUPE) will safeguard jobs.

Even if the business cannot be saved or sold as a going concern, there are statutory provisions in place which can ensure that if the business is liquidated, employee claims for wage arrears and redundancy will be paid.

Employees will have the right to claim monies they are owed regardless of whether the company is wound up or it enters into a restructuring process.

Employees not made redundant within the first 14 days of a formal insolvency procedure like administration become preferential creditors of the company. That means, if they are made redundant at a later date, they have more chance of receiving the money they are owed from the sale of assets. A maximum of eight weeks’ wage arrears can be claimed, as well as holiday pay. These claims will usually be made through the insolvency practitioner.

If there’s not enough money in the pot to pay all employee claims then employees can use form RP1to make a claim from the National Insurance Fund. Claims can be made for:

• up to eight weeks of wage arrears
• up to six weeks of outstanding holiday pay
• pay in lieu of notice
• some unpaid pension contributions
• redundancy pay
• the right to claim redundancy pay

Employees who have worked under a contract of employment for a period of two years have a statutory right to claim redundancy pay. The same can be said for company directors. These redundancy payments are capped at a maximum of £538 per week and are based on:

• age
• length of service
• weekly wage