What Happens to Employees When a Company Becomes Insolvent?

When a business becomes insolvent, employees can face sudden redundancy, unpaid wages and uncertainty about whether they will receive the money owed to them.

Although employees have greater protection than many ordinary creditors, insolvency law does not guarantee that they will recover everything. Directors, insolvency practitioners and employers must also comply with employment law, including redundancy consultation requirements.

What Does Company Insolvency Mean?

A company may be insolvent if it cannot pay its debts when they fall due or if the value of its liabilities exceeds the value of its assets.

Depending on the circumstances, the company may enter administration, liquidation or a company voluntary arrangement. Some procedures are intended to rescue the business, while others involve closing it and distributing its assets among creditors.

Can Employees Be Made Redundant Immediately?

Insolvency does not automatically remove an employer's duty to follow employment law. Employees should normally be informed and consulted before redundancies are confirmed.

However, an insolvent business may have little or no money available to continue trading. This can result in workplaces closing with very limited warning, particularly where an administrator or liquidator concludes that the business cannot be rescued.

The financial pressures of insolvency may help explain why consultation was limited, but insolvency does not automatically excuse a complete failure to comply with the law.

Collective Redundancy Consultation

Collective consultation rules normally apply where an employer proposes to dismiss 20 or more employees as redundant at one establishment within a period of 90 days or less.

The employer must consult appropriate employee or trade union representatives and provide information about the proposed redundancies. Consultation must be genuine and should include ways of avoiding dismissals, reducing the number of employees affected and limiting the consequences.

Consultation must normally begin at least 30 days before the first dismissal where between 20 and 99 redundancies are proposed. Where 100 or more redundancies are proposed, the minimum period is normally 45 days.

Protective Awards

Employees or their representatives may bring an employment tribunal claim where an employer has failed to comply with its collective consultation duties.

For dismissals taking place on or after 6 April 2026, a tribunal can make a protective award of up to 180 days' pay for each affected employee. The previous maximum was 90 days' pay.

The increase is intended to discourage employers from treating the cost of breaking consultation rules as cheaper than following a lawful redundancy process.

A protective award is not automatic. The tribunal will decide what period is just and equitable. Employees do not need two years' service to qualify for a protective award.

What If the Employer Cannot Pay the Award?

A tribunal award against an insolvent company may be of limited value if the company has no money or assets.

In some circumstances, the Redundancy Payments Service can pay part of a protective award from the National Insurance Fund. However, the government payment is subject to statutory limits and may be considerably less than the full amount awarded by the tribunal.

This means the taxpayer can ultimately meet part of the cost where an insolvent employer failed to consult properly. At the same time, employees may still receive less than the tribunal awarded.

What Money Can Employees Claim?

Employees of a formally insolvent employer may be able to claim certain payments through the Redundancy Payments Service, including:

■ Statutory redundancy pay
■ Unpaid wages, commission and certain other payments
■ Accrued holiday pay
■ Statutory notice pay
■ Part of a protective award following an employment tribunal decision

Claims are subject to eligibility requirements, weekly payment limits and maximum claim periods. From 6 April 2026, the weekly limit used for many insolvency-related employee payments is £751.

Statutory redundancy pay is normally available only to employees with at least two years' continuous service. The amount depends on age, length of service and weekly pay, subject to the statutory cap.

Applying for Money Owed

The insolvency practitioner or official receiver should provide employees with a case reference number. This is normally needed before an application can be made to the Redundancy Payments Service.

An application for statutory redundancy pay should usually be made within six months of the employee's dismissal. Separate procedures may apply to notice pay and protective awards.

Employees should act promptly, retain employment records and obtain advice where there is uncertainty about what can be claimed.

Are Employees Preferential Creditors?

Certain employee debts are treated as preferential debts in an insolvency. These can include limited amounts of unpaid wages and holiday pay.

Preferential status means those debts are paid ahead of ordinary unsecured creditors. However, they are not necessarily paid before secured creditors or the expenses of the insolvency procedure.

Any amount owed to an employee that does not qualify as a preferential debt may rank as an unsecured claim. Unsecured creditors often recover only a small proportion of what they are owed and may receive nothing.

What Happens to Contractors and the Self-Employed?

People described as self-employed contractors do not normally qualify for statutory redundancy pay or payments from the National Insurance Fund in the same way as employees.

They will usually have to submit a claim as an unsecured creditor for unpaid invoices. The amount recovered will depend on whether money remains after secured, preferential and other higher-ranking claims have been dealt with.

However, employment status depends on the reality of the working relationship rather than the description used in a contract. A person labelled as self-employed may legally be an employee or worker and could have additional rights.

Do Directors Escape Responsibility?

A limited company is normally legally separate from its directors. Directors are therefore not automatically personally responsible for the company's debts when it becomes insolvent.

However, directors must consider the interests of creditors when insolvency is likely. They may face investigation or personal consequences for misconduct, including wrongful trading, fraudulent trading, misusing company assets or making transactions intended to favour particular parties.

Directors can also face criminal proceedings where they fail to notify the government properly about proposed collective redundancies.

Protection for Suppliers and Customers

Suppliers, contractors and customers are commonly treated as unsecured creditors unless they have security, insurance or contractual rights over particular assets.

They are paid relatively late in the statutory order of priority and may recover little or nothing. A company's insolvency can therefore spread financial difficulty through its supply chain, particularly where small businesses depend heavily on one customer.

Does Insolvency Law Properly Protect Workers?

Employment protections have been strengthened, particularly through the increase in the maximum protective award. Nevertheless, practical difficulties remain.

A legal right is less effective where the employer has no funds to meet an award. Government payments are capped, contractors may have limited protection and employees may have to bring tribunal proceedings before receiving compensation for a failure to consult.

Insolvency law must balance business rescue, creditor rights and employee protection. However, employers should not be able to treat non-compliance with redundancy law as a cheaper alternative to consulting their workforce properly.

Obtaining Legal Advice

Employees affected by an employer's insolvency may need advice about redundancy pay, unpaid wages, notice pay, employment status or a possible protective award claim.

Employment tribunal claims are subject to strict time limits, which are often three months less one day from the relevant act or dismissal. Employees will usually need to notify Acas under the Early Conciliation procedure before starting a claim.

Early legal advice can help identify the correct claims, preserve important evidence and ensure that tribunal and insolvency deadlines are not missed.