What happens to staff when a company enters an insolvency process?

When confronted with the possibility that a company may need to enter a formal insolvency process,
one of a director’s main concerns will naturally be for the company’s staff. A director might worry
about what happens to the staff if the company ceases trading or it can’t afford to pay them for work
done. Concern about the staff may even cause the director’s conscience to urge them to continue
trading the company in order to keep paying the staffs’ wages or to avoid the agony of telling staff
that they’re being made redundant.

A director might persuade themselves that if they can make enough money to pay the staffs’ wages
in the meantime, a change in the company’s fortunes might be just over the horizon. As valiant a
sentiment as this may be, a director needs to be aware of their fiduciary duties to all parties with an
interest in the company, and they should not continue to trade a company when it has become
apparent to them that it will not avoid an insolvency process.

Although advising staff that they are being made redundant will never be a pleasant prospect or
experience, for the director or the employee, there are statutory provisions that can mitigate the
financial loss an employee faces when a company enters an insolvency process. For all concerned,
this could make the insolvency process less of an ordeal that it otherwise might be.

What if a company doesn’t have money to pay sums owed to its employees?

You might point out that if the company is insolvent and must cease trading, it may not have enough
money to pay sums it owes to the employees. That may be the case, but when a company enters a
formal insolvency process there is a safety net to ensure that a company’s employees receive certain
monies owed to them by the company. This safety net is known as the National Insurance Fund,
which is a taxpayer-funded, government reserve administered by the Redundancy Payments Service
(‘RPS’). The RPS will make payments to a company’s former employees even when there will not be
any funds to reimburse the RPS for those payments from the company’s insolvency process.

What will the RPS pay to the former employees?

Employees may be owed the following by an insolvent company:

  • wages for work done;
  • pay in respect of holidays they have accrued but did not get an opportunity to use;
  • pay in the absence of adequate notice from the company of the termination of their contract of employment (also known as pay in lieu of notice); and
  • statutory redundancy pay.

Employees will be given the opportunity to claim sums owed under each of these headings from the

The amounts that can be claimed from the RPS by employees under each of the headings noted above
are capped, but employees who are owed more than the capped amounts can submit a claim in the
company’s insolvency for the amounts due to them that are not paid by the RPS. The RPS only
acquires a former employee’s claim in the insolvency process to the extent that it makes a payment
to the employee for sums owed to them.

An insolvency practitioner can work with the director(s) of the company to establish from the
company’s records what is owed to each employee and explain to each employee how much they
can claim from the RPS. They can also assist with handling the delicate matter of advising staff of
their redundancy. The insolvency practitioner will let the RPS know that the employees will be making
claims to them in due course. This means that money can be paid by the RPS to employees as soon
as possible when the company enters the insolvency process. Once formally appointed, the
insolvency practitioner will be on hand to assist the company’s employees with the submission of their
claims to the RPS and to advise them at each step of the process.

What next if I’m a company director in this position?

If you are a company director who is putting off seeking insolvency advice because of concern for
what will happen to your staff, the best thing you can do for you and your staff is to seek advice now.

At FD Business Rescue, we aim to advise and assist businesses that are experiencing financial
difficulty. It is not always easy to see what the next steps are and what options are available. So don’t
delay reaching out if your business is struggling. Please get in touch or simply call 0800 652 0002 for
free advice and peace of mind.

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If you require help, get in touch or download our FREE guide with some top-tips you may not have considered.

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If you require help, get in touch or download our FREE guide with some top-tips you may not have considered.