What is the impact of company closure on employees?

Uncertainty

The degree of uncertainty facing employees in this situation depends on whether the directors voluntarily place their company into liquidation or wait for a creditor to present a winding-up petition.

Entering Creditors’ Voluntary Liquidation (CVL) is the best option for all concerned – it offers some certainty for employees, as they can also commence their redundancy claims promptly.

Redundancy

All employees are automatically made redundant if their employer enters insolvent liquidation. If the directors choose not to enter CVL, but wait for compulsory liquidation by a creditor, the impact on employees’ finances is likely to be more severe as they could potentially be without an income for a longer time.

Similarly, if directors tried to close their insolvent business by dissolving it, the redundancy payment process would have to be extended unnecessarily for each employee to include an unfair dismissal claim at an employment tribunal.

Becoming a creditor

On commencing insolvent liquidation, employees become creditors of the company alongside other stakeholders, such as trade suppliers and customers. The hierarchy for repayment in these cases places employees as ‘preferential’ creditors for some payments, including arrears of wages up to £800 and holiday pay.

Preferential creditors fall below secured creditors with a fixed charge and the liquidator’s fees and expenses. For other claims, such as payment in lieu of notice, employees are regarded as unsecured creditors and lie near the bottom of the payment hierarchy.

Losing pay

Given the company’s lack of funds, it’s unlikely that members of staff will receive all of the money that’s owed to them by their employer. Fortunately, a regime exists in the UK that protects employees in this situation and ensures they receive their full pay plus other entitlements.

Staff members can claim redundancy and other statutory payments via the Redundancy Payments Service (RPS), and these are taken from the National Insurance Fund (NIF). Claims typically take around six weeks to be paid, so what are the eligibility requirements?

• If an employee has worked for the company continuously for two years or more, they’re eligible to make a statutory redundancy claim. This also applies to company directors working under an employment contract. The amount they receive is calculated using their age, length of service, and final weekly wage.
• There are caps on the amount of weekly wage and length of service – these are £700 per week and 20 years respectively

The effect of company closure on employees can be severe but directors have the opportunity to limit the impact by entering voluntary liquidation. For more information on company closure and its effect on employees, please get in touch with our expert team. Company Closure operates offices nationwide and offers free, same-day consultations.