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What happens to employees after a company is wound up?

In the event of a winding up petition, what happens to the employees?  When a petition to liquidate a company is announced, employees will naturally worry about what will happen to them: are they made redundant, and if so when? Do they receive their full redundancy payments and will they be paid for any wages still due to them? For how long will they be continue to paid as employees of the company?

This is always a very worrying time for employees whose livelihood depends upon the company for which they are working.  It is not easy, particularly in the current economic climate, for employees to find jobs that relate to their experience with their current firm. They will therefore be concerned about the impact of a winding up petition on them and their families.

What happens to employees is a very important aspect of any company that is being wound up, although not all directors give the question much concern. Many directors tend to regard employees as unfortunate as they are, without giving consideration to the fact that not only do they earn a great deal less and therefore save less, but that the company is their only source of income. Employees are usually the innocent victims when a company has to fold, although not always.

However, putting aside the reasons for a company going to the wall, what happens to employees in the event of a winding up petition?  They are generally not as familiar with the legal aspects of their situation as directors and more senior managers may be, and they will normally need advice as to what steps are needed for them to receive as much of the statutory payments due to them as possible.

The bald fact of the matter is that once a company is closed, all employees will be made redundant - not by the company, but by the appointed liquidator. A few employees may be retained for a limited period, but only if there is still work being undertaken that can be completed to increase the value of the company.  This will allow more cash to be made available to pay creditors, which is one of the liquidator's main functions. Generally, however, this will only be temporary and these employees will also be made redundant.

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It should be understood that if a company is being liquidated, it will not have many funds available, and it will be unlikely to be able to meet the costs of redundancy of its entire workforce.  Nevertheless, their situation is respected in law, and once the liquidator's fees have been paid employees' redundancy payments will be given priority over any other claims on the company's assets. Each employee will be regarded as a preferential creditor up to a maximum of £800 total redundancy payment

For employees that have been working with a company for a number of years, this is a woefully small package, but that is the maximum that the law permits. Any sum owed above that £800 is regarded as an unsecured debt, and the employee will join the list of unsecured creditors.  This could mean that employees could be paid very little, if any, of the payments due to them for redundancy over £800, back pay due and holiday pay.

However, although their company might not be sufficiently knowledgeable to offer employees good advice, there is a scheme operated by the Government whereby certain sums can be paid to employees that have been victims of liquidation of their firm. There is a maximum of course, but they can claim up to 4 months unpaid back pay prior to the date the liquidation started. That sum also includes statutory notice of termination of employment, any holiday pay due and redundancy.

That maximum is currently £310 gross (before tax and NI) per week - for four months. This sum is paid by the Department of Trade and Industry and proof must be provided that they sum claimed is genuine. Directors' payments are included, just is if they were also employees of the company, although if a director is also a controlling shareholder this payment may be challenged.

The liquidator will inform all employees in writing of these statutory rights along with a form for them to complete.  Processing time for claims is usually around 6-8 weeks, but perhaps longer if there is any question as to its validity. 

In general then, after a winding up petition what happens to employees is that they lose their jobs, and can expect to receive little from their firm other than the £800 maximum payment.  However, they are advised to take legal advice over claiming from the Government (the DTI) the statutory sum for which they may qualify.

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