Redundancy When a Business Becomes Insolvent

Employees in England and Wales normally have statutory rights when made redundant, including the right to redundancy pay, notice and other monies owed by their employer. However, when the employer becomes insolvent, the process for claiming these entitlements changes significantly. This article explains what insolvency means, how redundancy operates in that context, what payments employees can claim, how to claim them, relevant time limits, and how disputes are handled. All guidance is drawn from authoritative UK government and legal sources.

What Insolvency Means for Redundancy

Insolvency occurs when a business cannot pay its debts and enters formal procedures such as administration, liquidation or bankruptcy. An insolvency practitioner or official receiver is usually appointed to manage the process and employees are informed about how their employment is affected. If the business is closing and your role ends, this is treated as redundancy under employment law.

Under the Employment Rights Act 1996, the termination of employment due to an employer going out of business is considered redundancy for legal purposes. This means employees may be entitled to statutory redundancy pay and other payments, subject to qualifying criteria.

Who Can Claim Payments After Insolvency

You can apply for payments from the Redundancy Payments Service (a service of the Insolvency Service) if:

• You were an employee (not a contractor).
• Your employer is insolvent and unable to pay what it owes.
• You were dismissed because of redundancy following insolvency.
• You apply within statutory time limits.

If a business is sold and continues trading, employees may transfer to the new employer under TUPE and generally cannot claim insolvency payments from the government. However, if the insolvency occurs before or during a transfer, there may be scope to claim certain outstanding money.

Payments You Can Claim

When redundancy follows insolvency, the government can pay several amounts, each subject to statutory caps and eligibility rules:

1. Statutory Redundancy Pay

You are normally entitled to statutory redundancy pay if:

• You were an employee at the business.
• You were dismissed as redundant.
• You had at least two years' continuous service by the date of dismissal.

Redundancy pay is calculated using age, length of service and average weekly pay, with weekly pay capped (for redundancies on or after 6 April 2025) at £719 per week and a maximum of 20 years' service used in the calculation.

2. Statutory Notice Pay

You can claim statutory notice pay if you did not work your notice or were not paid for it. This is usually one week's pay for each year of service up to a maximum of 12 weeks.

3. Holiday Pay

You can claim for:

• Holiday you accrued but did not take in the 12 months before insolvency.
• Holiday you took but were not paid for.
  Payments for holiday are capped at payments for up to six weeks of holiday and at the current weekly pay cap.

4. Unpaid Wages and Other Money Owed

You can apply for up to eight weeks of unpaid wages and other contractually owed sums such as overtime or commission, subject to the weekly pay cap.

Interactions Between Payments

Claims for statutory redundancy, notice pay, holiday pay and other owed money are made through a single application process. Each category is assessed separately, and deductions (such as benefits you have received) can affect payment amounts.

How to Claim Payments

To start a claim after your employer becomes insolvent:

1. The insolvency practitioner or official receiver will inform you about how your job is affected and provide a case reference number (‘CN').
2. Use the CN number to apply online for redundancy pay, statutory notice pay, unpaid wages and holiday pay with the Redundancy Payments Service.
3. You must apply within six months of your dismissal date for redundancy pay; statutory notice and holiday pay must usually also be claimed within six months.
4. After you apply, it may take several weeks to process the claim; the service will check employer records and pay what you are entitled to, subject to caps.

If your application is rejected, you can contact the Redundancy Payments Service for information about the rejection and, if appropriate, pursue a dispute.

Continuous Employment and Insolvency

For redundancy pay, continuous employment counts up to the date your job ends. Time worked before the insolvency process still usually counts, provided there was no break in employment. Service with an insolvent employer counts in the same way it would if the business had remained solvent.

If an employee continues to work for the business after it becomes insolvent - for example during administration - and is made redundant later, they can still claim redundancy pay and other entitlements when their employment genuinely ends, subject to the same eligibility rules.

Unfair Dismissal and Consultation

Even in insolvency, employers (through the insolvency practitioner) are expected to follow fair redundancy procedures, including consultation about why redundancies are happening and whether alternatives are available. Failure to consult properly may lead to employment tribunal claims for protective awards (compensation for lack of consultation), although the practical viability of such claims can be affected by the insolvency process.

If you believe you were dismissed unfairly - for example, if the redundancy was not genuine or the process was flawed - you can make a claim to an employment tribunal, naming the Secretary of State for Business and Trade and the former employer as respondents.

Priority of Claims and Insolvency Proceedings

In a formal insolvency process, employees' redundancy claims and other employment debts are typically paid from the National Insurance Fund via the Redundancy Payments Service, rather than directly from the employer's assets. If the business has assets or is being sold, employees may also register as creditors for amounts exceeding statutory caps.

Assets realised by an insolvency practitioner are distributed to secured and preferential creditors before unsecured ones. Redundancy payments made by the Redundancy Payments Service may be recoverable from the employer's estate depending on the circumstances and legal rules.

Time Limits and Practical Steps

• Apply for statutory redundancy pay and other payments within six months of your dismissal date.
• Keep records of your employment history, pay records and correspondence with the insolvency practitioner.
• If you have queries about your claim or the process, contact the Redundancy Payments Service or seek advice from Acas, Citizens Advice or a solicitor experienced in employment law.

In cases where the insolvency process is delayed or uncertain, seeking timely advice can help ensure that statutory deadlines for claims are not missed.

Common Questions

Am I entitled to redundancy pay if I had less than two years' service?
No. Statutory redundancy pay generally requires at least two years' continuous employment by the date you are dismissed.

What happens if I transferred to a new employer?
If your job transferred under TUPE before insolvency, you normally cannot claim from the Redundancy Payments Service. If the transfer occurred after insolvency, you may still claim.

Can I claim compensation for unfair dismissal?
Yes, if there were procedural failures in the redundancy process. Tribunal claims may allow protective awards for lack of consultation.

Is pension loss covered?
Pension contributions are not paid via the Redundancy Payments Service; contact the insolvency practitioner about missing contributions.

Key Takeaways

When a business in England and Wales becomes insolvent, employees dismissed as redundant can claim statutory redundancy pay, statutory notice pay, unpaid wages, holiday pay and other amounts through the Redundancy Payments Service if they meet eligibility criteria. Claims must be made within statutory time limits and are subject to caps on weekly pay. Continuity of service usually counts towards entitlement, and fair redundancy processes remain important even in insolvency. Where disputes arise, employment tribunals provide a forum for protective awards and other remedies, and registering as a creditor may be necessary for amounts exceeding statutory limits. Proper documentation and prompt action help protect employees' legal rights in insolvency situations.