A company is considered to be insolvent when it is unable to pay its debts as and when they fall due, or if it has insufficient assets to meet all its debts.
Under these conditions, a company may be placed into administration to see if it can be “rescued” that is, by going into a Company Voluntary Arrangement with its creditors, or by selling all or a portion of the company as a going concern. If this is not possible then the company can close or be liquidated. This means the company’s assets are sold to pay off creditors. Subsequently, this will end its business, and cause its employees to be dismissed by reason of redundancy.
Preferential creditor employees
Employees retained during the first 14 days of administration become “preferential creditors”. This signifies that they are ranked higher in the hierarchy of creditors. The order of priority for creditors is as follows: secured creditors; preferential creditors; creditors with floating charges; and unsecured creditors.
Whether or not creditors receive the full payment of monies owed to them will mainly depend on the value of assets owned by the insolvent company. It is often the case that a shortfall in monies occurs.
The following benefits are available to preferential creditor employees
- Outstanding salary (including contractual bonuses and commission) for work carried out in the four months prior to the date of the insolvency order, up to a total maximum of £800.
- Pay in lieu of notice and redundancy pay calculated by reference to the employee’s employment contract.
- Uncapped holiday pay accrued for a maximum of six weeks.
- Some occupational pension payments.
If employees with preferential creditor status are owed anything beyond these payment limits, the money must instead be claimed under ‘ordinary unsecured creditor’ status from proceeds from the sale of any assets. This also applies to any claim by employees who do not hold preferential creditor status.
Employees made redundant immediately on administration/liquidation
Employees who are let go during the first 14 days of the procedure and those laid off during the company’s liquidation become “ordinary” (i.e., unsecured) creditors.
This places them at the bottom of the list for receipt of outstanding wages and holiday pay. However, they are entitled to make a claim via the Redundancy Payments Service (see below).
There is an exception in the form of statutory sick pay, which is payable through the Department of Work and Pensions. Statutory maternity, paternity and adoption pay is claimed through HMRC.
The National Insurance Fund and Redundancy Payment Service
Claims to the National Insurance Fund via the Redundancy Payments Service can be made by employees, usually in the following circumstances:
- Employees made redundant within the first 14 days of administration.
- Those who have lost their jobs due to company liquidation.
- Employees who were preferred creditors and were retained during the initial administration period, but were not able to receive all of the money that was owed to them from the sale of the company’s assets.
If the National Insurance Fund is not reimbursed through the sale of business assets, it may pay the following expenses:
- If eligible redundancy pay (based on statutory entitlement)
- Salary: Workers and employees can claim with the National Insurance Fund for up to eight weeks’ worth of unpaid wages. There is a cap of £700 per week on wages.
- Holiday pay: Employees can only claim for holidays taken in the 12 months before their employer became insolvent. Employees/workers can claim up to £700 per week in holiday pay for a maximum of six weeks.
- Notice pay: Employees are entitled to claim up to 12 weeks’ statutory notice pay, capped at £700 per week.
Other outstanding payments
Employees may be able to file a claim against their employer if further monies owed by the company to them are not recovered using the aforementioned means. This would be for any debts or unpaid amounts which are owed under their employment contract with their employer. These can be made as a claim directly to the insolvent company. Where the amounts in dispute are not clear, or result from a claim, employees may need to obtain a finding from the Employment Tribunal or court. Feel free to contact our solicitors if you need legal advice on employee rights and claims during company insolvency.
Charlotte Grew is a senior employment law solicitor at DPH Legal. Charlotte advises employers and employees on a wide range of employment issues, including unfair and wrongful dismissal, redundancy, work-related stress, bullying and harassment, discrimination, disciplinary and grievance issues, and claims at the Employment Tribunal. She also has extensive experience in preparing and advising on settlement agreements, employment contracts, service agreements, consultancy agreements and employment handbooks and policies. Charlotte is a member of the Employment Lawyers Association, The Law Society and The SRA. To contact Charlotte, visit the Contact Us page. For media enquiries: info@dphlegal.com