Who Pays Staff Their Redundancy When a Company is Insolvent?

Redundancy claims during insolvency

In the event of insolvency, a business may have different options and alternatives available, depending on how severe the situation is.

In some instances, liquidation might be the best and only option. And in other situations, the solution lies in restructuring the company through a Company Voluntary Arrangement or Company Administration.

A major problem in all cases is staff redundancy, especially when it involves funding of statutory redundancy payments.

When a business enters insolvency, who is responsible for the payment of statutory redundancy? Continue reading to know more.

Insolvent businesses

Redundancy payments (either full or part-payment) may be provided by the insolvent business if funds are generated when assets belonging to the business are sold.

In most scenarios, the company employees have a high ranking for payment during insolvency; settling employees comes after the expenses of the process, fees for office holders, and secured creditors.

In the event the employer is unable to give redundant employees their full entitlement, the employees may claim payment from the National Insurance Fund (NIF).

The NIF holds funds for statutory payments, such as state pension and redundancy. In situations where redundant employees cannot claim full entitlement from their employer during insolvency, the NIF steps in to provide the funds.

The staff make redundancy claims through the Redundancy Payments Service (RPS), an insolvency service division, and this process is usually handled by the liquidator or administrator.

Redundancy claims during liquidation

When a company is liquidated (compulsory or voluntary), all the company employees are made redundant, and only employees that qualify for statutory redundancy pay can claim what they are entitled to through the Redundancy Payment Service.

The company liquidator is tasked to offer guidance and make available relevant forms to make a claim.

To claim redundancy payment from the NIF, Form RP1 is used and returned to the company liquidator who will send it to the Redundancy Payment Service. The duration to make claims after being redundant is 6 months.

Redundancy claims following company administration

In the event a company enters administration, the redundant employees would normally fall into either:

Preferential creditors – employees retained for the first 14 days of administration
Unsecured creditors – Redundant staff during this period

As stated earlier, preferential creditors can make payment claims from money generated when business assets are sold, and the National Insurance Fund (if they did not receive their full entitlement).

Redundancy claims after pre-pack administration

When pre-pack administration is adopted as an insolvency solution, the employee’s contracts transferred over to the new firm are subject to TUPE legislation, which is the Transfer of Undertakings (Protection of Employment) regulations.

Here, the new employer is not liable for any redundancy payment owed by the insolvent business, and the employees may make claims on the NIF in a situation like this.