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Who pays staff redundancy when a business is insolvent?

Who Pays Staff Redundancy When A Business Is Insolvent

If a business has entered insolvency, there may be routes and options open to it depending on the severity of the situation. Restructuring via a Company Voluntary Arrangement (CVA) or company administration might be the best step, for example, or liquidation might be the only option.

In all cases staff redundancy is a key issue, particularly the funding of statutory redundancy payments. So where does the funding for statutory redundancy payments come from when a business is insolvent?

Insolvent businesses

Payment or part-payment of redundancies may come from the insolvent business if sufficient funds are available from the sale of assets. In most cases, employees are placed relatively high in the rankings for payment in insolvency, falling after the costs of the process and the office-holder’s fees, and secured creditors.

If redundant employees don’t receive their full entitlement from their employer, however, they may make a claim from the National Insurance Fund (NIF).

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National Insurance Fund

The National Insurance Fund holds monies for statutory payments, such as redundancy and the state pension. It provides the funds when redundant members of staff cannot claim their full entitlement from the insolvent employer.

Employee claims are made through the Redundancy Payments Service (RPS), which is a division of the Insolvency Service, and are usually dealt with by the liquidator or administrator initially.

Redundancy following company administration

Employees of a firm that has entered administration typically fall into two creditor categories with regard to redundancy:

  • Preferential creditors – those retained for the first 14 days of administration
  • Unsecured creditors – employees made redundant during this period

As we mentioned earlier, preferential creditors are eligible to claim payments from funds generated by the sale of business assets, with any shortfall claimable from the National Insurance Fund.

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Redundancy and pre pack administration

If pre pack administration is used as the route out of insolvency, the contracts of employees transferred over to the new company are subject to TUPE legislation – this is the Transfer of Undertakings (Protection of Employment) regulations.

The new employer is not responsible for any redundancy pay owed by the insolvent company, and members of staff may need to make a claim on the National Insurance Fund in this instance.

Redundancy following liquidation

In the case of company liquidation, whether voluntary or compulsory, all employees are made redundant, and those eligible for statutory redundancy pay will claim their entitlement through the Redundancy Payments Service.

The liquidator should offer guidance and provide the necessary forms for making a claim. Form RP1 is used to claim redundancy pay from the National Insurance Fund, and should be returned to the liquidator who will forward it to the RPS. Claims must be made within six months of being made redundant.

If you would like more information on paying staff redundancy that is tailored to your business, call one of the team at Redundancy Claims UK. We can offer you a same-day consultation free-of-charge to quickly establish your needs. RCUK are Authorised and Regulated by the Financial Conduct Authority. Authorisation No 830522. You can check our registration here.

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