When a business enters liquidation, one of the most pressing and sensitive issues is what happens to employees. For many directors, concerns around staff redundancy, unpaid wages, and legal obligations can be a major source of stress, particularly when cash flow has already dried up. Employees, on the other hand, often face uncertainty about whether they will be paid what they are owed.
Understanding who is responsible for paying staff redundancy when a company goes into liquidation is essential for both directors and employees. The answer depends on several factors, including the financial position of the company, the type of liquidation, and the nature of the employees’ claims.
This article explains how redundancy pay works in liquidation, who ultimately pays it, and what directors and employees need to know under UK insolvency law.
What Happens to Employees in Liquidation?
When a company enters liquidation, it usually means the business has ceased trading or is about to stop trading. In most cases, employees are made redundant because the company can no longer continue operations.
Redundancy occurs because the employer no longer has a need for employees to carry out work. Liquidation is recognised in law as a valid reason for redundancy, provided the correct process is followed.
Once liquidation begins, employees’ contracts are typically terminated either immediately or shortly afterwards by the appointed liquidator.
Are Employees Automatically Entitled to Redundancy Pay?
Not all employees qualify for redundancy pay. To be eligible, an employee must generally:
- Be classed as an employee (not a contractor or freelancer)
- Have at least two years of continuous service
- Be dismissed because the company is insolvent and ceasing or reducing its activities
If these conditions are met, employees may be entitled to statutory redundancy pay, along with other employment-related payments.
What Payments Might Employees Be Owed?
When a company goes into liquidation, employees may be owed several types of payments, including:
- Statutory redundancy pay
- Arrears of wages (up to a capped amount)
- Accrued but unused holiday pay
- Payment in lieu of notice (statutory notice pay)
These payments are treated differently depending on whether funds are available within the company.
Who Pays Redundancy When a Company Has No Money?
In many liquidations, particularly insolvent liquidations, the company does not have enough assets to pay employees what they are owed. When this happens, redundancy and certain other employee claims are paid by the government through the Redundancy Payments Service (RPS), which is part of the Insolvency Service.
Employees can claim statutory payments from the RPS if their employer is insolvent and in a formal insolvency process such as liquidation.
What Does the Redundancy Payments Service Cover?
The Redundancy Payments Service can pay eligible employees for:
- Statutory redundancy pay
- Up to 8 weeks of unpaid wages (subject to a weekly cap)
- Up to 6 weeks of accrued holiday pay
- Statutory notice pay (after taking benefits and new earnings into account)
These payments are subject to statutory limits, meaning employees may not receive their full contractual entitlements if those exceed the legal caps.
What Does the Company or Liquidator Pay?
If the company has sufficient assets, the liquidator may be able to pay some employee claims directly from the company’s funds.
Certain employee claims, such as unpaid wages and holiday pay (up to specific limits), are treated as preferential claims. This means they rank ahead of many other unsecured creditors when assets are distributed.
However, redundancy pay itself is not paid directly by the company in most insolvent liquidations. Instead, it is usually paid by the Redundancy Payments Service, which then becomes a creditor of the company and may recover some of the cost if assets are available.
Does the Type of Liquidation Matter?
Yes, the type of liquidation can affect how redundancy is handled.
Creditors’ Voluntary Liquidation (CVL)
In a CVL, the company is insolvent and unable to pay its debts. Employees are usually made redundant, and most statutory payments are claimed from the Redundancy Payments Service.
This is the most common scenario where the government steps in to pay redundancy.
Members’ Voluntary Liquidation (MVL)
In an MVL, the company is solvent and able to pay all its debts in full. If employees are made redundant as part of an MVL, the company itself is responsible for paying redundancy, notice, wages, and holiday pay in full.
Compulsory Liquidation
In a compulsory liquidation, redundancy claims are handled in a similar way to a CVL. Employees usually claim statutory payments from the Redundancy Payments Service.
Are Directors Liable for Redundancy Pay?
In most cases, directors are not personally liable for redundancy pay, provided they have acted properly and have not given personal guarantees.
However, directors must ensure they do not continue trading while insolvent in a way that worsens the position of creditors. Failure to act responsibly can lead to personal liability for other reasons, such as wrongful trading, but this does not usually extend directly to redundancy payments.
Directors who are also employees of the company may themselves be entitled to redundancy pay, provided they meet the eligibility criteria and can demonstrate an employment relationship.
What Is the Liquidator’s Role?
The liquidator plays a key role in the redundancy process. Their responsibilities include:
- Formally terminating employee contracts
- Providing employees with information needed to claim from the Redundancy Payments Service
- Submitting required insolvency documentation
- Assessing employee claims against the company
- Distributing any available funds in line with insolvency law
Employees cannot usually make redundancy claims until the liquidator has been appointed and confirmed the insolvency.
Why Early Advice Matters for Directors
Staff redundancy is not just a financial issue but also a legal and emotional one. Mishandling redundancy can expose directors to complaints, claims, or criticism from employees and regulators.
Understanding obligations early allows directors to act decisively, minimise risk, and ensure employees are treated fairly and lawfully.
This is where professional insolvency guidance is critical.
Professional Insight and Support
Simple Liquidation was designed to provide directors with a clear, straightforward route through the liquidation process. Their Insolvency Practitioners are authorised by the Insolvency Practitioners Association and the Institute of Chartered Accountants in England and Wales.
Jamie Playford FABRP MIPA and Alex Dunton MABRP are licensed Insolvency Practitioners regulated by the ICAEW and bring over 30 years of combined experience in dealing with both solvent and insolvent liquidations. They are also members of R3, the Association of Business Recovery Professionals.
While every case is different, having experienced professionals guide directors through employee matters, including redundancy obligations, can significantly reduce stress and ensure legal compliance.
Conclusion
When a business goes into liquidation, staff redundancy is usually unavoidable. In insolvent liquidations, redundancy and other statutory payments are typically paid by the government through the Redundancy Payments Service, not directly by the company or the directors personally. In solvent liquidations, the company itself must meet these costs in full.
For directors, understanding who pays, what employees are entitled to, and when to act can make a difficult situation more manageable. For employees, knowing their rights ensures they can access the support available to them during a challenging time.
Professional advice at the right moment can make all the difference in ensuring the process is handled correctly, lawfully, and with clarity for everyone involved.