What happens to employees when a company goes into liquidation or administration

What happens to employees when a company goes into liquidation?

When a company goes into liquidation, its employees are usually made redundant straight away, because a liquidator's job is to close the business and sell its assets, and they then claim redundancy pay, notice pay, unpaid wages and holiday pay from the Redundancy Payments Service.

A liquidation does not end the employment contracts by itself. Unless the business is to keep trading for a short while, the liquidator, or the Official Receiver in a compulsory liquidation, will normally dismiss the staff at the outset, and a dismissal caused by the business closing counts as a redundancy under section 139 of the Employment Rights Act 1996.

Their statutory entitlements are then paid by the Redundancy Payments Service, part of the Insolvency Service, from the National Insurance Fund, within weekly caps and week limits set by statute. Having paid, the Redundancy Payments Service takes over the employees' claims in the liquidation for those amounts. Staff claim in the same way whether the directors chose a creditors' voluntary liquidation or a creditor forced the company into compulsory liquidation.

What happens to employees when a company goes into administration?

When a company goes into administration, its employees are not automatically dismissed: the administrator decides whether to keep them working while the business trades, transfer them to a buyer under TUPE, or make them redundant, and anyone made redundant claims from the Redundancy Payments Service.

An administration aims first to rescue the company and, failing that, to get a better result for creditors than a liquidation, often by selling the business as a going concern. That usually means keeping some of the staff to run it, and employees who keep working are paid as the business trades. Wages and salary under contracts the administrator adopts, which cannot happen in the first 14 days after appointment, rank ahead of the administrator's own fees and expenses under paragraph 99 of Schedule B1 to the Insolvency Act 1986.

The GOV.UK guidance for staff adds one limit. Anyone who keeps working can still claim redundancy pay and other money they are owed if they are made redundant later, but the Redundancy Payments Service will not pay wages, holiday pay, bonuses or commission owed for the time between the date of the insolvency and the date they are dismissed.

Both procedures count as insolvency for the Redundancy Payments Service. A company that is simply struck off does not.

What can employees claim from the Redundancy Payments Service?

Employees of an insolvent company can claim up to £22,530 of statutory redundancy pay from the Redundancy Payments Service, plus up to 12 weeks' notice pay, 8 weeks' unpaid wages and 6 weeks' holiday pay, all capped at £751 a week from 6 April 2026.

Those are the statutory figures for anyone made redundant on or after 6 April 2026, when the weekly cap rose from £719. They are reviewed every April, so check the current amounts on GOV.UK before relying on them. To claim at all, a person must have been an employee, which rules out self-employed contractors, and must be a UK or EEA national or have permission to work in the UK. Redundancy pay needs at least two years' continuous employment, and notice pay at least one month.

Anything the contract gives beyond these statutory amounts, such as enhanced redundancy pay, a longer notice period or pay above the weekly cap, is claimed from the liquidator or administrator as a creditor of the company. Contractors who were never employees register as creditors for everything they are owed.

These figures apply in England, Wales and Scotland. Northern Ireland has its own scheme and limits.

How do employees claim from the Redundancy Payments Service?

Employees claim from the Redundancy Payments Service online at GOV.UK using a case reference number beginning CN, which the insolvency practitioner or Official Receiver gives every eligible employee once the company has entered liquidation or administration.

No claim can be made without the CN number or before the date of the insolvency, and redundancy pay must be claimed within six months of dismissal under section 164 of the Employment Rights Act 1996. Staff should also apply for Universal Credit or New Style Jobseeker's Allowance straight away. The Redundancy Payments Service deducts the benefits a person could have received during their notice period from their notice pay, even if they never applied.

From appointment to payment, a claim runs in this order.

Are employees preferential creditors in a liquidation or administration?

Employees are ordinary preferential creditors in a liquidation or administration for up to £800 each of pay earned in the four months before the insolvency, all their accrued holiday pay and unpaid pension deductions, so those sums rank ahead of HMRC and the unsecured creditors.

Preferential debts are listed in Schedule 6 to the Insolvency Act 1986. They are paid after fixed-charge creditors and the costs of the procedure but before the holder of a floating charge, such as a bank, and before unsecured creditors. The date that fixes them is the "relevant date" in section 387: the date of the winding-up resolution in a creditors' voluntary liquidation, the date of the winding-up order (or of an earlier provisional liquidator) in a compulsory liquidation, and the date the company entered administration.

In practice the Redundancy Payments Service usually pays these sums first and then stands in the employees' place for what it has paid, preferential status included, under section 189 of the Employment Rights Act 1996. Redundancy pay, notice pay and any other pay beyond the £800 limit are unsecured debts, paid only if money is left after the preferential creditors. Our guide to liquidation and administration compared sets out the full order of payment. The employee claims that rank as preferential are these.

• Pay for the last four months. Wages, salary and commission for the four months before the relevant date, up to £800 per employee, under paragraph 9 of Schedule 6 and the Insolvency Proceedings (Monetary Limits) Order 1986. A protective award counts as pay for this purpose.
• Accrued holiday pay. All holiday pay built up before the relevant date by an employee whose job has ended, with no cash limit, under paragraph 10.
• Pension deductions. Contributions taken from employees' pay in the four months before the relevant date but not paid into an occupational pension scheme, under paragraph 8 and Schedule 4 to the Pension Schemes Act 1993.
• HMRC as secondary preferential creditor. Since 1 December 2020 HMRC has ranked as a secondary preferential creditor for VAT, PAYE income tax and employee National Insurance, paid only after the employees' preferential claims.

Does TUPE apply when a business is sold out of administration or liquidation?

TUPE, the Transfer of Undertakings (Protection of Employment) Regulations 2006, usually applies when a business is sold out of administration, including a pre-pack, so employees move to the buyer on their existing terms, but it does not usually apply to a sale by a liquidator.

The difference comes from regulation 8. Regulation 8(7) switches off the automatic transfer of staff (regulation 4) and the protection against dismissal because of a transfer (regulation 7) where the seller is in insolvency proceedings "instituted with a view to the liquidation of the assets" under an insolvency practitioner, which describes a creditors' voluntary liquidation and a compulsory liquidation. A buyer of assets from a liquidator therefore takes on staff only if it chooses to employ them.

Administration is treated differently because its first aim is rescue. It counts as "relevant insolvency proceedings" under regulation 8(6), so TUPE applies to a sale out of administration, including a pre-pack administration, with these adjustments.

• Debts the government covers stay behind. Unpaid wages and holiday pay owed at the transfer, up to the usual limits, and statutory redundancy pay for anyone dismissed are met from the National Insurance Fund instead of passing to the buyer, and transferring staff can claim the wages and holiday pay even though they were not dismissed. Anything above those limits passes to the buyer under regulation 8(3) to (5).
• Terms can be varied to save jobs. Under regulation 9 the administrator, the seller or the buyer can agree "permitted variations" to pay and conditions with employee representatives where the aim is to keep the business going, though never below statutory minimums such as the National Minimum Wage.
• Transfer dismissals are still unfair. Dismissing staff because of the transfer is automatically unfair under regulation 7 unless there is an economic, technical or organisational reason entailing changes in the workforce.

What are the collective consultation rules when an insolvent company makes 20 or more employees redundant?

An insolvent company planning 20 or more redundancies at one establishment within 90 days must consult employee representatives under section 188 of the Trade Union and Labour Relations (Consolidation) Act 1992, at least 30 days before the first dismissal (45 days for 100 or more).

The duty falls on the company as employer, acting through its directors before an insolvency practitioner is appointed and through the administrator or liquidator afterwards. Consultation must cover ways to avoid the dismissals, reduce the numbers and mitigate the consequences, with a view to reaching agreement, and the representatives must be given written details of the reasons, the numbers and the selection method. With fewer than 20 redundancies the collective rules do not apply, though GOV.UK warns that dismissing staff without consulting them still risks unfair dismissal claims.

Four further points matter to directors.

• Form HR1. The company must notify the Redundancy Payments Service online on form HR1 before any dismissal notices are given, and at least 30 days (20 to 99 redundancies) or 45 days (100 or more) before the first dismissal takes effect, under section 193.
• Personal risk for directors. Failing to notify is a criminal offence by the company, and GOV.UK warns the fine can be unlimited. Under section 194 a director can be prosecuted personally where the failure happened with their consent or connivance or through their neglect. A 2023 Supreme Court ruling took administrators and liquidators outside that personal offence, which leaves directors as the officers at risk.
• Insolvency is not a special circumstance. Section 188(7) excuses only what "special circumstances" make not reasonably practicable, and tribunals have held since Clarks of Hove v Bakers' Union in 1978 that insolvency on its own does not qualify. Something sudden and out of the ordinary is needed, and the company must still do what it reasonably can.
• The 2025 reforms. The Employment Rights Act 2025 doubled the maximum protective award from 6 April 2026 and lets the government add a second test based on redundancies across the whole business. As at November 2026 no such threshold has been set, so the test is still 20 at one establishment.

What is a protective award and how much does the Redundancy Payments Service pay?

A protective award is an order by an employment tribunal that an employer which failed to consult on collective redundancies must pay the affected employees up to 180 days' pay each, doubled from 90 days for dismissals taking effect on or after 6 April 2026.

The tribunal sets the length of the award by how serious the failure was. Staff, their trade union or their elected representatives bring the claim, and where the company is insolvent it names both the company and the Secretary of State for Business and Trade. The claim must normally be made within six months of the last dismissal, or within three months where the last dismissal took effect before 1 October 2026. Employees covered by the judgment do not apply to the Redundancy Payments Service themselves, because it contacts them.

When the employer is insolvent, the Redundancy Payments Service pays a protective award only up to 8 weeks' pay at the same weekly cap, and those 8 weeks cover the award and any arrears of pay together. It may also deduct benefits the employee received, or could have received, during the protected period. The rest of the award is a claim in the liquidation or administration, and because a protective award counts as pay under Schedule 6, the part relating to the four months before the insolvency can be preferential within the £800 limit.

What happens to employees' pensions when a company goes into liquidation or administration?

Money already in an employee's workplace pension is held by the pension provider or the scheme's trustees, so the company's creditors cannot reach it in a liquidation or administration, and contributions the company failed to pay in the last 12 months can be claimed.

The Redundancy Payments Service pays unpaid contributions into the scheme from the National Insurance Fund under section 124 of the Pension Schemes Act 1993, but only on a claim by the scheme's trustees or managers, and it cannot make pension payments to individual employees. Staff who think contributions are missing should tell the insolvency practitioner or Official Receiver. The amounts are limited as follows.

• Employee contributions. Sums deducted from staff pay in the 12 months before the insolvency but never paid into the scheme.
• Employer contributions. The company's own unpaid contributions for those 12 months, capped at 10% of the pay of the staff concerned over the same year and, for a defined benefit scheme, at the amount an actuary certifies the scheme needs.
• Preferential status. Deductions from pay in the four months before the insolvency that were not paid into an occupational pension scheme are also a preferential debt in the liquidation or administration.
• Defined benefit schemes. If the scheme cannot pay what it promised, members are usually protected by the Pension Protection Fund, which normally pays 100% compensation to those who have reached the scheme's pension age and 90% to those below it.

Can a director who is also an employee claim redundancy pay when the company goes into liquidation?

A director who was also an employee can claim redundancy pay, notice pay, wages and holiday pay from the Redundancy Payments Service when the company enters liquidation or administration, but must prove employee status, because being a director alone does not make someone an employee.

The Redundancy Payments Service judges each director's claim under section 230 of the Employment Rights Act 1996, and the courts have held that a director's control of the company does not by itself rule out employment. Our guide to redundancy pay for directors explains eligibility and the calculation. The Insolvency Service looks closely at the following.

• Evidence of employment. After the claim is made, the Insolvency Service asks for proof such as a contract of employment, the last three years' P60s, recent payslips, 12 months of company bank statements and details of hours, holiday, pension and sickness arrangements.
• What counts as a week's pay. A week's pay counts only pay for work under the contract of employment, so dividends and director's fees are left out. If what remains is below the National Minimum Wage, the Redundancy Payments Service uses the minimum wage rate but may refer the case to HMRC.
• Loan account set-off. Money the director owes the company, including an overdrawn director's loan account, is deducted from the payment.
• Questions about notice pay. For a notice pay claim, a director is also asked who started talks with the insolvency practitioner, when that was, and when the practitioner advised a formal insolvency.

Why speak to NTF about employees in a liquidation or administration?

NTF Corporate Solutions is a specialist insolvency practice whose licensed insolvency practitioners, James Kaye and Nick Morgan, set up the Redundancy Payments Service case, send staff their CN numbers and deal with employee claims when they are appointed liquidator or administrator.

Both are licensed by the Institute of Chartered Accountants in England and Wales, and as part of the NTF group, we have helped company directors since 2009. We explain the consultation and HR1 rules before any dismissals, tell you plainly whether a liquidation or an administration is likely to give your staff the better outcome, and check whether you can claim as an employee yourself. The first conversation is free, confidential and without obligation.