Employees get paid in Liquidation and Administration

This article looks to provide you with the knowledge you need to advise your clients on the rights of employees, should they need to close their Company but can’t afford the redundancy costs.  If this is the case for you then it should be stated that technically you are considered to be insolvent and therefore you should be considering placing your Company into Liquidation or Administration.  However, all is not lost, particularly for employees of an insolvent company, as they have a right to claim their entitlements from the government where if paid, the government then becomes the creditor within the Liquidation or Administration for the sums they have paid out to the employee.  The rules are however different for Pre-Pack Administrations therefore contact me for further advice if this process is being considered by you.

What can an employee of an insolvent company claim for?

• Arrears of Pay – if the employee has unpaid wages then they can claim for anything up to 8 weeks worth of arrears at their rate of pay (but up to a maximum rate of £571 per week). If the employee is owed more weeks than 8 weeks wages then their highest earning 8 weeks can be claimed as the weeks claimed do not need to be consecutive. This is however taxable.

• Holiday Pay – An employee can claim for whatever holiday days that they have accrued in their current holiday year (up until the point of insolvency) less what they have taken already. Again, this is at their rate of pay (but up to a maximum rate of £571 per week) but this time can only be for anything up to 6 weeks pay. This is also taxable.

• Pay in Lieu of Notice – This is claimable if the insolvent employer either hasn’t paid them their contractual notice pay in full or hasn’t given them full notice of their employment ending (where they work their notice period). Again this is claimable at their rate of pay (up to a maximum statutory rate of £571) but will be reduced by taxes and whatever money the employee goes on to earn during their notice period in new wages or from signing on.

• Redundancy Pay – Employees can claim this if they have worked for the insolvent Company for more than 2 years. It is calculated based on the employee’s age and length of service where between half a week’s pay and one and a half week’s pay is paid to the employee for every full year they have worked for the Company but is capped at 30 weeks. The weekly rate is as per their rate of pay (up to a maximum of £571).

What process do employees follow to claim entitlements?

An employee of an insolvent company cannot claim and get paid the above entitlements unless the Company is placed into an insolvency process and the Insolvency Practitioner helps them submit claims to the government.

The claims submitted must be verified by additional forms which the Insolvency Practitioner submits, based on the Insolvent Company’s records, and if different, are usually paid out based on what the Insolvency Practitioner has stated.

The claims are usually paid out between 3 to 6 weeks from when submitted, which is at its earliest, the date of the appointment of the Insolvency Practitioner. Therefore, if the Company is going into a Creditors Voluntary Liquidation then you need to also factor in the lead time up until the appointment of the Insolvency Practitioner of approximately 1 month.

Can I get paid if I am a shareholder or director of the Company?

The short answer to this is YES, however The Redundancy Payments Office (being the government department responsible for considering and paying out employee claims from the National Insurance Fund) will have to establish whether that director/shareholder can be considered an employee.  They look at variables such as

• Is the rate of pay being received less than the national minimum wage – if yes, they may consider that as a typical employee would not accept payment below the national minimum age then the director/shareholder is not entitled to claim as they are not a standard employee.
• Does the director/shareholder have a contract of employment – One would need to be in place if all other employees have one.
• Is the shareholder a salaried member of staff or do they receive only the tax free maximum plus dividends which have since stopped? – Salaries directors/shareholders are considered more favorably by the RPO.
• Are there multiple shareholders and are they different to the directors? – different shareholders to directors gives the directors a better chance of receiving their claims and similarly, if there are multiple shareholders, each shareholder is answerable to some extent to the other shareholders so again, there is a better change of being paid if many are in place rather than one or a husband and wife team.
• Has the director/shareholder worked regular hours and for a similar number of hours to the other employees?
• Has the director/shareholder taken a reduction in salary or a break in payment of their salary but other employees have not. Again if they have then, despite it being unfair for them not to receive payment of their claim, the RPO are likely to consider them to be in charge of things and not standard employees and therefore not entitled to claim as it would be rare for standard employees to accept no payment of wages.
• General duties and day to day responsibilities are also considered.

Once the above are all considered, some of which is answered by the director/shareholder on additional forms etc, then the RPO will either accept their claim or reject it and the director/shareholder would then need to appeal the ruling if their claim is rejected but they consider it to be unfair.

This office often refers directors onto an independent employment specialists UK ELC whom advice directors independently and assist them with their claims for a percentage of the sums paid out. Our experience in these dealings is that directors maximise their claim values and chances of receiving a payout if specialists are used so they can be contacted directly if you are unsure.

Alternatively, feel free to call this office on 0800 612 6197 and we would be happy to assist.

Categorised in: Administration News, Insolvency Reviews & Advice, Latest Insolvency News, Liquidation News