When a business becomes insolvent, it’s a difficult and emotional time - not just for directors and owners, but for employees whose futures hang in the balance.
As a company director, you may be asking: “What are my employee rights if a company is insolvent?” Understanding your obligations and the entitlements of your team is key to managing the situation responsibly - and legally.
At McAlister & Co, we know how hard it is to face these challenges. That’s why we’ve written this blog to provide a clear, compassionate guide on what happens to your staff during insolvency and how you can support them, whilst also protecting your business where possible.
Understanding Insolvency and Its Impact on Employees
Insolvency occurs when a company can no longer pay its debts as they fall due or has liabilities exceeding its assets. This triggers a formal process such as administration, liquidation, or a company voluntary arrangement (CVA), and the treatment of employees varies depending on the chosen route.
1. Administration
If your business enters administration, the administrator takes over the management of the company with the aim of rescuing it as a going concern, achieving a better outcome for creditors than liquidation, or realising assets to repay creditors.
Employee impact:
Employees are not automatically dismissed. Those kept on for more than 14 days after the appointment of an administrator become "adopted employees", which means the administrator takes on their employment contracts, including the obligation to pay wages and holiday pay.
If redundancies are necessary, they may happen quickly - particularly if the business is not viable. Employees made redundant are then entitled to claim for unpaid wages, holiday pay, redundancy, and notice pay from the Redundancy Payments Service (RPS).
2. Liquidation
In compulsory or creditors' voluntary liquidation (CVL), the company ceases trading, and a liquidator is appointed to sell off assets to repay creditors.
Employee impact:
In this case, employment contracts are typically terminated on or shortly after the liquidator’s appointment. Employees become creditors and can claim outstanding entitlements from the National Insurance Fund via the RPS, including:
- Statutory redundancy pay
- Up to 8 weeks of unpaid wages
- Up to 6 weeks’ holiday pay
- Statutory notice pay
It’s important to note that claims are capped and only apply to statutory entitlements, not enhanced or contractual terms.
3. Company Voluntary Arrangement (CVA)
A CVA allows a business to continue trading while repaying debts over time. It can be a powerful tool to preserve jobs and stabilise operations.
Employee impact:
Generally, staff remain employed as usual, although cost-cutting measures such as wage freezes or reduced hours may be introduced. Communication is crucial here: keeping your team informed can help maintain morale during uncertain times.
Important Note:
If a CVA ultimately fails and the company enters liquidation after more than six months, employees may lose their right to claim from the Redundancy Payments Service. This is because statutory claims such as redundancy pay, notice pay, and unpaid wages must be made within six months of the original insolvency event.
If this deadline is missed due to the length of the CVA, those claims could be rejected. It’s essential to seek professional advice early to avoid this situation.
Director Responsibilities to Staff During Insolvency
As a director, you're legally obligated to act in the best interests of creditors once your company becomes insolvent. However, that doesn’t mean you can ignore the needs of your staff. Your key responsibilities include:
- Fair treatment: Avoid discriminatory practices when selecting staff for redundancy.
- Statutory notices: Provide proper notice periods (or pay in lieu) where possible.
- Consultation duties: If 20 or more employees are to be made redundant within 90 days, you must engage in a formal consultation process, including notifying the Insolvency Service.
Failing to meet these obligations can lead to personal liability, penalties, and employment tribunal claims.
Supporting Your Team Through the Process
Your employees may understandably feel anxious or even angry. Being transparent and empathetic can make a world of difference. Here's how you can support them:
- Provide information about entitlements: Help them understand what they can claim from the RPS.
- Signpost to advice services: Direct them to Acas, Citizens Advice, or employment law specialists.
- Engage an insolvency practitioner: A licensed professional can manage the process with minimal disruption and ensure compliance with all legal requirements
Practical Steps to Take Now
If you're concerned that your business may be heading toward insolvency, taking early action can make a significant difference. Here's what we recommend:
- Identify early warning signs: Cash flow problems, increasing debt, and missed payments are red flags.
- Speak to an expert: The sooner you consult an insolvency professional, the more options you’ll have.
- Communicate with employees: Be honest about the situation, even if the full outcome isn’t yet clear.
- Prepare for contingencies: If redundancies become necessary, start compiling information required for RPS claims, such as staff start dates, salary levels, and contract types.
- Explore rescue options: Consider whether a company voluntary arrangement, time-to-pay agreement with HMRC, or other restructuring solution might help.
How McAlister & Co Can Help
Facing insolvency is daunting, but you’re not alone. At McAlister & Co, we specialise in business rescue and recovery. Our expert insolvency practitioners can help you assess the viability of continuing to trade, understand your obligations to employees, navigate redundancy processes lawfully, and implement strategies to protect as many jobs as possible
When insolvency becomes a reality, understanding what happens to your staff is vital - not just to ensure compliance with employment law, but also to treat your team with the fairness and respect they deserve.
If you’re wondering “what are my employee rights if a company is insolvent?”, the answer depends on the insolvency route taken, but employees are generally protected through statutory schemes. As a director, your responsibility is to handle the process correctly and compassionately.
At McAlister & Co, we provide empathetic, expert guidance to help you manage your responsibilities and find the best path forward for everyone involved. Need help understanding your next steps? Contact McAlister & Co today for confidential advice and practical support. Let’s work together to find the best solution for your business and your team.