Overview

Upon the company entering a formal insolvency procedure, staff will be entitled to claim redundancy pay, along with a host of other statutory entitlements such as arrears of wages, overtime, or commission, pay for untaken holiday allowance, and notice pay. Ordinarily, the company making the redundancies is liable for ensuring these entitlements are paid to dismissed staff; however, when it comes to an insolvent company, there is rarely enough money left in the business to cover these amounts owed.

In this scenario, payments will be made from the government’s National Insurance Fund (NIF) which is administered by the Redundancy Payments Service.

A comprehensive guide to your rights as an Employee can be found here.

Creditors Voluntary Liquidation vs Compulsory Winding Up

When it comes to companies with employees, one of the main advantages of opting for a CVL over waiting for compulsory liquidation action to begin is the timescales involved. As employees can only start to make their claims for redundancy and other statutory entitlements once the company has been formally placed into liquidation, directors are often keen to accelerate this process thereby allowing their staff to receive their redundancy pay in a timely manner.

With voluntary liquidation, directors are in control of when the liquidation will happen. Should they decide to wait for a creditor to initiate the winding up, however, this could take many months to happen; meanwhile their employees are unable to claim during this time.

Unfair Dismissal

According to Transfer of Undertakings (Protection of Employment) (TUPE) regulations, dismissed employees are permitted to file a wrongful dismissal claim against their employer, but only in certain situations. Employees can only bring a wrongful dismissal claim against an employer if they can establish that:

• They were dismissed without being given adequate notice, according to the statutory minimum period of notice;
• They were dismissed in breach of contract or
• As a result of dismissal they have suffered a loss.

Even if the wrongful dismissal claim is honoured, any amount due will be ranked as an unsecured debt, and will therefore rank low down in the queue for payment. In fact, many employees who file a wrongful dismissal claim against an employer have a slim chance of receiving any compensation which may have been awarded. You can read more about the order of payment to creditors during an insolvency procedure here.

If the employee is not eligible to file a wrongful dismissal claim but the company owes unpaid wages, payment in lieu of notice, redundancy pay, or holiday pay, then the employees may be able to receive compensation by submitting an application to the Redundancy Payments Service.

While a wrongful dismissal claim is paid out of company funds, statutory redundancy payments will be made through the Redundancy Payments Service. This means that employees who are owed redundancy will be able to receive this regardless of the financial position of the company they are being made redundant from. Applications for redundancy claims will be reviewed by a case officer and they aim to pay out any money owed within 6 weeks.

Administration and Company Voluntary Arrangements

While the end result of any liquidation process is the ultimate closure of the company, things are not always so clear cut when it comes to other insolvency procedures.

Emplooyees will rank as preferential creditors for unpaid wages, holidays, and notice pay, should the company subsequently enter liquidation. It is important to remember that employees are still at risk of redundancy while the company is in administration.

This is because administration can be seen as a sort of holding stage while the company’s future is being decided. A company cannot remain in administration indefinitely and sooner or later an exit route must be agreed upon. Depending on the company’s viability as a trading entity, the company may be restructured, sold, or even liquidated.

For employees this may mean their job remains unaffected, is transferred to a new owner through a process known as TUPE, or is their position is made redundant.

As the aim of this procedure is continuation of business and preservation of employment, employees may well find themselves unaffected by their employer entering into a CVA.

However, it must be remembered that a CVA is an opportunity for a business to reduce costs wherever possible, which for some companies may mean making cuts to the existing workforce. Therefore it is not unusual for a CVA to go hand-in-hand with a spate of redundancies. Any redundancies made must be done using the correct procedures while adhering to redundancy legislation; a CVA does not remove the obligations of employers when it comes to treating their staff fairly when making redundancies.

It is important to note that as a CVA is a formal insolvency event, any employees who lose their job during the process will be able to submit a claim for redundancy and other statutory entitlements. Employee claims for redundancy as a result of a CVA will typically be paid by the government’s Redundancy Payments Service in the first instance in order to limit the waiting time for the employee. The government will then become a creditor in the CVA as it looks to recoup this money.