Business owners who believe their Company may be insolvent are often extremely concerned about what could happen to their employees. Directors will commonly form strong professional relationships with their employees, and often personal ties too, so it’s natural that they would be concerned for their future welfare. If your Company is insolvent, what will happen to your employees can sometimes depend on which insolvency procedure you choose to follow.
What is the difference to my employees if I call in the Administrators or the Liquidators?
Administration is a key insolvency tool which provides immediate protection from creditors whilst a plan for the rescue and survival of the business is formulated. The appointment of an Administrator does not automatically mean your employees will be made redundant. In fact, it is often quite the opposite, with staff being retained in order to continue to trade the business whilst a recovery plan is being created.
If employees are asked to continue to work, this does not affect their rights to redundancy pay if the business ultimately closes down. If your business is eventually sold to someone else, your staff’s employment rights remain protected, including any pay that is owed to them.
Liquidation on the other hand is the permanent closure of the Company. If your Company is forced into a compulsory liquidation, it must immediately cease to trade and all your employees will be laid off.
Ultimately, there is little difference to your employees should your business end up closing. In both cases, your employees will still have the same right to claim for statutory or contractual rights against your Company.
Who will pay my employee’s wages?
During a liquidation, all the assets of the Company are collected and distributed amongst the Company’s creditors. The type of creditor a person or Company is will determine where they stand in the liquidation ‘pecking order’ of whose claims the liquidators will consider first.
Under the Insolvency Act 1986, employees are entitled to be treated as preferential creditors in respect of unpaid wages owed in the four months before the date of the insolvency, up to a maximum of £800. This would put £800s worth of each of your employees’ wages ahead of the claims of unsecured creditors, such as suppliers, contractors and customers, but behind the claims of secured creditors, such as banks, lenders and finance providers. Any unpaid wages claim over and above the £800 limit would be treated as unsecured.
More often than not during a liquidation, there will not be enough money to satisfy all of the creditors’ claims. If you are the Director of a limited Company, you will be relieved to hear that any shortfall in wages will not come out of your personal pocket. If your employees’ outstanding wages cannot be paid out of the proceeds of the liquidation, your employees will be able to make a claim to the National Insurance Fund.
What can my employee’s claim from the National Insurance Fund?
The National Insurance Fund (NIF) is funded by contributions from employees, employers, the self-employed and interest on various investments. The fund is used to pay for social security benefits such as state retirement pensions. If your employees will not receive their full outstanding wages from the liquidation, they may be entitled to make a claim against the NIF for:
- Redundancy pay;
- Up to 8 weeks’ wages;
- Up to 6 weeks’ holiday pay;
- Statutory notice pay;
- Basic award for unfair dismissal; and
- Unpaid pension contributions.
All claims will be subject to statutory limits.
How can Focus Insolvency Group Help?
Here at Focus Insolvency, we pride ourselves on having the correct blend of expertise, experience and professionally qualified staff to deliver all the necessary services and products, but with the traditional bespoke personal service of a local and friendly Company. We understand that a Company can find itself in financial difficulty for a variety of different reasons and we will always take the time to meet with Directors to understand what has happened within the Company and how we can help. Our team will work with the management to identify the available options, understand their implications and agree a course of action designed to result in the best possible outcome.
If you have any queries about employee’s rights, administrations, liquidations, or anything else that has caught your eye in this blog post, please contact our Director Andy Platt on 0161 214 7913 or email firstname.lastname@example.org.