Employee redundancy during an insolvent company liquidation

Updated: 12th February 2021

Understanding the rights of your employees in redundancy is an important part of any insolvency procedure. Here we look at what happens during various administration and liquidation processes, plus the way in which redundancy entitlement is calculated.

Staff redundancy following liquidation

Should your company be undergoing compulsory or voluntary liquidation, the end result is that your business will close down and all employees will be made redundant as part of the process.

If after realisation of business assets there are insufficient funds to pay your staff, they will be entitled to claim redundancy and other statutory entitlements via the Redundancy Payments Service (RPS). Payment will be made from the National Insurance Fund (NIF) and will be subject to a cap which currently stands at £571 per week (for redundancies after 6 April 2020).

Begbies Traynor provides professional advice to businesses entering administration or undergoing liquidation. Contact our team to arrange a free same day meeting.

Employee rights during company administration

The aim of administration is to restructure and reorganise the business with a view to attaining long-term profitability. If it is found not to be viable in its current form, the business could be sold as a going concern at some stage.

Employee rights during restructuring depend on whether their role in the company is preserved during the initial two week period, a decision which is made by the administrator. On redundancy, members of staff fall into one of two categories:

  • ‘Preferential’ creditor - if they have been retained during the first 14 days of company administration. This entitles them to receive monies directly from the sale of business assets. Should their claim not be met in full, however, they have recourse to the National Insurance Fund which should meet the shortfall.
  • ‘Ordinary’ creditor - employees made redundant immediately (if they were not retained during administration) are known as unsecured or ordinary creditors, and are placed at the bottom of the creditor ‘hierarchy.’

This creditor priority favours those retained by the administrator, but these members of staff may still find that their role is made redundant at a later date.

Pre pack administration

During a takeover or transfer some employment rights move with your employees to the new company. They are protected by specific legislation called the Transfer of Undertakings (Protection of Employment) - often abbreviated to TUPE.

These regulations ensure the adoption of employment terms by the new company, but do not include responsibility for outstanding redundancy pay owed by your company as their former employer.

Pre pack administration triggers TUPE regulations when staff employment contracts are transferred over to the newly-formed company. Prior to this, the administrator has a right to vary employment contracts to provide the best chance of survival to the business.

Called a ‘permitted variation,’ employees usually accept these amendments in order to keep their job before the transfer is carried out. Changes may include a reduction or deferment in pay, which is reclaimable as a preferential creditor if the employee is subsequently made redundant.

How is redundancy pay calculated?

Any member of staff employed continuously for a period of two years is eligible to receive statutory redundancy pay should your company enter administration or be liquidated, with the amount dependant on their age and length of service. The first £30,000 is tax-free.

Payments are calculated with regard to weekly pay and full years of employment:

  • Aged 18-21: half a week’s pay for each full year of employment
  • Aged 22-40: one week’s pay
  • Aged 41-65: one and a half week’s pay

At the time of writing there is a cap of £571 per week on the amount payable, with 20 years being the maximum length of service taken into account.

Your employees must apply for repayment from company assets within six months of the date of their redundancy, and there is also a requirement for them to make a successful application to an employment tribunal before the National Insurance Fund becomes available to them.

Large-scale redundancies require special consideration

If more than 20 members of staff face redundancy, a formal consultation process must be followed, otherwise each employee may be eligible to receive a ‘protective award’ of up to 90 days’ pay.

During this process, employee representatives or the staff members themselves are entitled to receive written details of the reasons for redundancy, the selection process and how it will be carried out. A minimum consultation period of 30 days applies if 20 to 99 redundancies are proposed.

As the largest UK business recovery practice, Begbies Traynor offers professional guidance on matters of staff redundancy. We can arrange a free initial consultation at your local Begbies Traynor office.

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