Preferential Claims for Employees in Company Insolvency

When a company becomes insolvent and cannot pay its debts, employees often face financial loss from unpaid wages, holiday pay and other sums owed. UK insolvency law recognises that workers should receive some priority over other unsecured creditors. This article explains how preferential claims operate, what rights employees have, how claims are treated in practice, and what steps workers can take following an employer's insolvency.

1. What is Company Insolvency?

Insolvency occurs when a company cannot pay its debts as they fall due or its liabilities exceed its assets. In England and Wales, formal insolvency procedures include:

• Liquidation – where a company's assets are realised to pay creditors and the company is dissolved.
• Administration – where an administrator manages the company's affairs to rescue the business or achieve a better result for creditors.
• Company Voluntary Arrangement (CVA) – where creditors agree to accept a repayment plan.

Insolvency law sets a statutory order of priority for paying company debts from realised assets. This determines who gets paid first and who may receive only part or none of what they are owed.

2. Creditor Priority in Insolvency

When a company enters formal insolvency, funds realised from selling assets are distributed in a fixed order. Typical priority is:

1. Fixed-charge secured creditors – creditors with security over specific assets.
2. Costs and expenses of the insolvency process – fees of administrators or liquidators.
3. Preferential creditors – a class that includes certain employee claims.
4. The prescribed part – a fund set aside for unsecured creditors in some liquidations.
5. Floating charge secured creditors – those with security over general company assets.
6. Unsecured creditors – includes most trade creditors and non‑priority employee claims.
7. Shareholders / members – last in line, often with nothing left.

Employees with preferential claims are therefore ahead of most unsecured creditors and secured creditors with floating charges. 

3. Which Employee Claims are Preferential?

The Insolvency Act 1986 and related rules identify which debts owe preferential status. For employees, preferential claims include:

3.1 Arrears of Wages

Employees can claim unpaid wages for work done in the four months immediately before the insolvency. The amount of such wages that qualifies as preferential is capped at £800 per employee. 

This includes wages, salary, commission and contractual bonuses that accrued in that period, up to the cap.

3.2 Accrued Holiday Pay

Holiday pay that accrued but was not taken before the insolvency is treated as a preferential debt, with no statutory cap on the amount. 

3.3 Pension Contributions

Unpaid employee pension contributions accrued within four months before insolvency may also qualify as preferential. Employer contributions and other pension arrears generally do not. 

3.4 Protective Awards

Financial awards (known as protective awards) made by Employment Tribunals because an employer failed to consult staff about redundancies are treated as preferential. This applies even if the award is made after insolvency proceedings have begun. 

Claims that do not rank as preferential include:

• Redundancy pay
• Statutory notice pay
• Wrongful dismissal damages
• Other contractual claims beyond the statutory categories

These must generally be claimed from the state or treated as unsecured in the insolvency. 

4. State‑Assisted Payments and Subrogation

When a company enters liquidation, employees can apply to the Redundancy Payments Service (RPS) for certain sums owed by their employer. The Employment Rights Act 1996 allows the RPS to pay:

• Unpaid wages and holiday pay
• Statutory notice pay
• Statutory redundancy pay
• Some other statutory entitlements

Eligibility for these payments has specific conditions and time limits, often including minimum employment service requirements for redundancy pay. After paying an employee, the Secretary of State is subrogated to the employee's rights. This means the Secretary of State stands in the employee's position for recovery of sums from the insolvent estate, often as a preferential creditor. 

Subrogation ensures that amounts paid by the RPS may be reclaimed from the company's estate if there are sufficient assets, subject to the priority rules.

5. Time Limits and Deadlines

Employees must generally submit a proof of debt to the insolvency practitioner handling the case. The practitioner will specify deadlines for submitting claims. Failing to submit within this window may mean loss of entitlement to any dividend paid to creditors.

For state claims, statutory time limits apply for benefits such as redundancy or notice pay. It is important to check the exact deadlines relevant to your situation.

6. How Payments Are Made in Practice

Once the insolvency practitioner has realised assets, claims, and the order of priority:

1. Preferential employee claims are calculated and paid in full up to statutory limits.
2. If there are insufficient funds, employees share pro‑rata with other preferential creditors.
3. Secondary preferential claims (such as certain HMRC tax debts) are paid only after employee preferential claims. 
4. Any remaining sums are paid to other classes of creditor in turn.

Where the company does not have enough assets to pay all preferential claims in full, employees may receive only a proportion of what they are owed.

7. Practical Steps for Employees

If your employer enters insolvency:

• Check your employment status and dates – only debts that accrued on or before the insolvency date count for preferential claims. 
• Submit a proof of debt promptly when notified by the insolvency practitioner.
• Apply to the Redundancy Payments Service for statutory payments where eligible.
• Keep records of pay, holiday accrual and communications with your employer.
• Consider contacting Citizens Advice or a solicitor experienced in insolvency and employment law for guidance specific to your situation.

8. Common Questions

Is redundancy pay treated as preferential?

No. Statutory redundancy pay is typically paid by the Redundancy Payments Service and does not count as a preferential claim in the insolvency distribution itself. 

Can directors claim as employees?

Directors may not be eligible for employee preferential claims in some circumstances if their role precludes treatment as an employee under insolvency law or statutory definitions. Relevant tests are fact‑sensitive. 

What if I have a tribunal award?

Certain awards, such as protective awards, are treated as preferential. Other awards may need to be enforced separately or claimed via the RPS. 

Conclusion

Preferential claims give employees a statutory priority for certain unpaid sums when a company becomes insolvent. These include arrears of wages (up to a limit), unpaid holiday pay and some pension contributions. Insolvency law balances the interests of workers with other creditors, placing certain employee debts ahead of most unsecured creditors and some secured creditors. Understanding preferential claims, state support mechanisms, and deadlines for submitting claims is essential for employees seeking to recover money owed by an insolvent employer.