Employee Rights in Insolvency

Where businesses become insolvent employees may find themselves owed sums arising out of their employment or its termination which an employer is unable to pay. The effect of commencement of insolvency proceedings varies according to the type of procedure:

  • Compulsory liquidation and court receivership – automatic dismissal
  • Voluntary liquidation, Administration, Administrative Receivership, CVAs – no automatic dismissal – potential adoption of contracts and liability of insolvency practitioner for: PAYE and NICs
  • Other debts will be the responsibility of the insolvent company including: wages, notice pay, redundancy payments

Such debts will be recoverable in accordance with the usual priority of debts in a liquidation. Salary, sick pay, overtime and commission rank as a preferential debt and are recoverable more easily by employees up to a maximum of £800 per employee for sums owed in respect of the four months before the insolvency.

Accrued holiday pay is also recoverable as a preferential debt without limit or cap. Other debts are recoverable by employees as unsecured debts provided they are ‘provable’ and the company has sufficient funds.

Alternatively or in addition employees may seek a redundancy payment from the National Insurance Fund (NIF) provided that:

  • They are an employee
  • The employer has become insolvent
  • The employer is liable to make a redundancy or equivalent payment
  • The employee has taken all reasonable steps to recover the payment
  • Different rules apply to claims for other payments

Employees should apply to the NIF on forms RP1 or 2. If payment is not made in full the employee continues to be entitled to claim in the insolvency as an unsecured creditor.

Always take legal advice!

These comments are provided for guidance only. Each situation has to be examined on its own merits and circumstances and you should not, therefore, rely upon the above without taking specific legal advice in relation to any particular matter.

Specialist advice can be obtained from 
Alan Matthew in our Dundee Office (tel: 01382 200 000) or
from Emma Allan in our Perth Office (tel: 01738 637 311)

February 2013

If you would like to speak to us about any services or have and questions please contact us by filling out the form. 

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Perth Office

Legal Office: 01738 637311
Estate Agency Office: 01738 630222

Dundee Office

Legal Office: 01382 200000
Estate Agency Office: 01382 200301

Crieff Office

Legal Office: 01764 655151
Estate Agency Office: 01764 670077