What happens to employees (including directors) when a company becomes insolvent?


With Blockbuster following HMV, Jessops and Comet into Administration in the last three months with the loss of thousands of jobs and the threat of further job losses in the retail sector there has been considerable news coverage given to the fate of employees when their employers become insolvent. Some of the information being broadcast has been incorrect.

A Retail union representative appeared on the BBC Breakfast show and stated that employees were at the back of the queue when it came to being paid. In actual fact employees do have a measure of protection when their employers become insolvent although this is not to understate the devastating effect that redundancy can have.

What really happens

Employees do have statutory rights and may claim from the National Insurance Fund via the Insolvency Service. It should be noted that statutory rights may differ from contractual rights.

Employees are entitled to claim for arrears of pay, accrued holiday entitlement, redundancy and compensation for not receiving proper statutory notice.  These are all paid according to the statutory limit which is currently £450 per week.

A claim can be made by each employee and the Insolvency Practitioner will send out forms RP1 for completion and return.


Employees Entitlement

Employees may claim for:

  • Salary/wages owed up to eight weeks.
  • Accrued holiday entitlement, up to a maximum of 6 weeks.
  •  Compensation for Lieu of Notice up to a maximum 12 weeks.  Those with between 1 and 24 months of service receive one week
    Those with between 2 and 12 years service receive one week for each completed year. The employee has a duty to mitigate this claim by claiming whatever benefits they may be entitled to.
  •  Redundancy – Check the DirectGov website
    The length of time paid is dependent upon age:
    For those over 41 years receive 1.5 weeks of pay for each completed year of service
    For those between 22 and 40 receive one week’s pay for each completed year of service
    For those up to 21 years receive half a week’s pay for each completed year of service

This is the entitlement from the Insolvency Service through the National Insurance Fund. Once payment has been made to the employees, the Insolvency Service becomes a creditor of the insolvent company in place of the employee.

Employees can claim from the insolvency practitioner for the difference between payments made by the Insolvency Service and their entitlements under their contracts of employment. These claims may not be paid in full or indeed at all. Payment will depend upon the value of assets realised by the insolvency practitioner and the level of claims against the Company.

Directors Entitlement

Directors are also able to claim redundancy entitlements on the insolvency of their companies but to do so they must prove that they were employees of their company.

Directors will be asked by The Insolvency Service to complete an additional form to determine their employment status.

The principal questions that need to be answered are

  • Does the director have a contract of employment whether written, oral or implied?
  • Is the money claimed owed by the insolvent company?
  • Did the director work at least 16 hours per week for the insolvent company?
  • Was his/her role more than merely non-executive?

As a rule of thumb if the director was remunerated through the PAYE system then his/her claim is likely to succeed. If he/she was remunerated through dividends then their claim is likely to fail.

Transfer of Undertakings Protection of Employment (TUPE)

The Transfer of Undertakings (Protection of Employment) Regulations (TUPE) protects employees terms and conditions when a business is transferred from one owner to another. This is something that often happens to insolvent companies where the insolvency practitioner sells the whole or certain of the assets to a purchaser who will carry on the business of the insolvent company. Employees of the insolvent company will automatically become employees of the new owner on the same terms and conditions.


If your clients may be affected by this, please contact us for more information