What to do if your Employer Becomes Insolvent

When the decision is taken to liquidate, it is a reluctant acceptance that nothing more can be done. Employees face redundancy, quite often, without notice.  To find oneself unemployed without any notice and, subsequently without an income, can be incredibly worrying for employees. However, they are entitled to receive statutory payments even if their employer is no longer in a position to pay them. The Insolvency Service can offer a degree of support.


What happens to employees when a company becomes insolvent?

The last people who may become aware of the closure of a company are quite often the employees, the very people who have been tirelessly working to keep things moving.

Employees who are often living hand to mouth suddenly have no income.  This can have far reaching consequences and can obviously be a hugely worrying and stressful time for them.

Employees do have statutory rights and may claim from the National Insurance Fund, through the Insolvency Service. The employee’s statutory rights may differ from their contractual rights. The Insolvency Service will pay the employee the redundancy payment that they would normally have been entitled to, although this is capped at the statutory amount. The amount that they will receive will be the same as a Statutory Redundancy Payment. If the contract of employment promised more than the statutory minimum, unfortunately this will not be payable.

Employees are entitled to claim for any unpaid salary, accrued holiday entitlement, redundancy pay and compensation for not receiving statutory notice.  These are all paid according to the statutory limit, which is currently capped at £489 per week. Any payments over and above this amount will be a claim against the employer in the insolvency proceedings and shall rank pari-passu with other creditors.

A claim can be made by each employee and the Insolvency Practitioner will send out forms RP1 for completion and return. The time limit is 6 months from the redundancy for any redundancy payments owing.


Money You Can Claim from the Insolvency Service

Salary/wages owed up to eight weeks’ pay. The maximum weekly limit applies.

If your normal pay is more than the maximum weekly statutory limit of £330, you will only be paid up to the limit by the Insolvency Service. You can make a request as a creditor for whatever remains above the limit and this will then be treated as one of the debts the business owes.

The administrator appointed to oversee the insolvency will make a list of the company’s debts, including payments owed to staff, and will attempt to pay as many of them as possible by selling off whatever assets the company has. Quite often, there are not enough assets to pay off all the debts. Some debts are given higher priority than others. For example, unpaid wages, are considered preferential debts and will therefore be given a high priority. Although there is a good chance that the company’s assets will not be sufficient to pay its debts in full, you may receive only a partial payment, or nothing at all.


Accrued holiday entitlement

 At the time that you are made redundant, if you have accrued any holiday entitlement which you have not yet taken, the Insolvency Service will also compensate you for that, up to a maximum of 6 weeks’ pay.


Compensation in Lieu of Notice up to a maximum 12 weeks’ pay.

Those with between 1 and 24 months’ service will receive one weeks’ pay.

Those with between 2 and 12 years’ service will receive two weeks’ pay for the first two years plus one weeks’ pay for each completed year of service (up to a maximum of 12 weeks).

The employee has a duty to mitigate this claim by claiming whatever benefits they may be entitled to. Note that if you have income from another source during the notice period, for example if you start work in another job right after your first one ends, your income will be deducted from the amount you would have received from the Insolvency Service. Benefit payments you receive, or could have received if you had applied for them, will also be deducted.

Redundancy. Check the DirectGov website


The amount paid is dependent upon age:

Those aged over 41 years’ will receive 1.5 weeks’ pay for each completed year of service;

Those aged between 22 and 40 will receive one week’s pay for each completed year of service; and

Those aged up to 21 years’ will receive half a weeks’ 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 a bid to reclaim monies paid from the National Insurance Fund.

Employees are treated as preferential creditors (in respect of arrears of pay up to £800 and all accrued holiday). The Insolvency Service has rights of subrogation if they have made payment to the employee.

How to Apply for Money from the Insolvency Service

The Insolvency Practitioner appointed to handle your company’s redundancy will issue you with information about the procedure and then you would submit your claim online.

Please note that the time limit for any Redundancy pay is 6 months from the date of the employee’s job ending.