Voluntary liquidation is one of the most significant decisions a business can make, marking the end of its operations and the beginning of a formal winding-down process. For company directors, the process is often centred on legal obligations, creditor claims, and financial outcomes. For employees, however, the immediate concern is much more personal: What will happen to their jobs, their pay, and their future?
We take a closer look here at how voluntary liquidation affects employees. We’ll explain the process, outline the rights and entitlements staff can expect, and highlight the protections available under UK law. While liquidation can be unsettling, employees do have statutory rights and avenues for support. Understanding these rights is vital for planning the next steps with clarity and confidence.
Understanding Voluntary Liquidation and Its Impact on Staff
Voluntary liquidation occurs when the directors and shareholders of a company decide to close the business and appoint a licensed insolvency practitioner (the liquidator) to manage its affairs. This usually happens because the business cannot pay its debts (creditors voluntary liquidation, or CVL) or, more rarely, because shareholders choose to close a solvent company (members voluntary liquidation, or MVL).
For employees, the most relevant scenario is a creditors’ voluntary liquidation, where insolvency forces the business to shut down. In this situation, once the liquidator is appointed, they take control of the company’s assets, deal with creditors, and oversee the closure of the business.
Employment contracts are usually terminated at this stage. Staff may find themselves redundant almost immediately, which creates uncertainty over wages, redundancy pay, notice periods, and holiday entitlement. Although the process can feel abrupt, UK employment law provides safeguards to ensure employees are not left without recourse.
Employment Status During Liquidation
One of the first consequences of voluntary liquidation is the termination of employment contracts. In most cases, employees are dismissed when the liquidator formally takes control of the company. This means:
- Contracts of employment come to an end.
- Staff are usually made redundant, regardless of their length of service.
- Future wages cannot be guaranteed once the company ceases trading.
While this termination is often automatic, employees are not left without protection. Redundancy and other employment rights continue to apply, even when the employer cannot pay. These protections ensure employees can claim certain payments through statutory schemes if the insolvent company’s assets are insufficient.
It is important to recognise that the timing of dismissal can vary depending on the company’s situation. If a business stops trading immediately, staff are likely to be dismissed without delay. In some cases, however, a liquidator may temporarily keep certain employees on to help with the winding down of operations, for example, assisting with stock clearance, administrative tasks, or asset sales. These employees will eventually face redundancy once their role is no longer required, but they may benefit from short-term wages paid during this transitional period.
For employees, understanding whether they have been formally dismissed or retained temporarily is crucial. A clear dismissal letter, typically issued by the liquidator, serves as confirmation and forms the basis for any claims to redundancy pay, notice pay, or other entitlements. Employees should keep this documentation carefully, as it will be required when submitting claims through the Redundancy Payments Service (RPS).
The Notice Period: Legal Obligations
Employees are entitled to a notice period when their employment ends, whether through redundancy or liquidation. The statutory notice period is:
- One week’s notice for each year of service, up to a maximum of 12 weeks.
Contracts of employment may set out longer notice periods, which remain valid unless the company is unable to meet them.
In practice, many insolvent companies cannot continue trading during liquidation, meaning staff are dismissed without working their notice. When this happens, employees are still entitled to notice pay. If company funds are not available, they can apply for statutory notice pay through the Redundancy Payments Service, part of the Insolvency Service.
Written notice should always be provided. Employees should keep copies of letters, emails, or communications confirming their dismissal, as these are required when submitting claims for payments.
The rules around notice pay can feel complex, particularly when distinguishing between contractual notice and statutory minimums. For example, an employee with 15 years’ service whose contract promises a 16-week notice period may only be able to claim the statutory maximum of 12 weeks’ pay from the RPS. The additional four weeks may become an unsecured claim against the insolvent company’s assets, which could mean no payment if funds are insufficient.
Employers and liquidators have a responsibility to communicate these nuances clearly. Staff should be informed not only of their notice period but also of how much of it is likely to be covered by government support if company funds cannot stretch. Clear, early communication helps employees plan financially, apply for benefits promptly, and avoid the distress of unexpected shortfalls.
Employee Entitlements in a Voluntary Liquidation
Even though a business may be insolvent, employee entitlements remain protected by law. The following can usually be claimed:
- Redundancy pay (for employees with at least two years’ continuous service).
- Arrears of wages (up to eight weeks of unpaid wages).
- Holiday pay (for accrued but untaken holiday).
- Notice pay (in lieu of the statutory notice period).
- Unpaid pension contributions (where relevant).
These payments are not always made directly by the company, particularly if assets are limited. Instead, employees can make a claim to the RPS, which provides a government-backed safety net.
It is important for staff to understand that these entitlements are not unlimited. Redundancy and notice payments are subject to statutory caps on weekly pay, and only certain amounts of unpaid wages and holiday pay can be claimed. For example, if an employee has 10 weeks of unpaid wages, only eight weeks may be eligible for payment under the scheme.
Entitlements also have a hierarchy in liquidation. Employees enjoy “preferential creditor” status for certain claims, meaning they are paid ahead of most unsecured creditors, but behind secured creditors like banks. In practice, this often means employees rely on the RPS for their payments rather than the insolvent company’s remaining assets.
By understanding exactly what can be claimed, employees can act quickly to safeguard their rights. Seeking impartial advice from trade unions, employment advisers, or Citizens Advice can also help ensure nothing is missed during this process.
Redundancy Pay Explained
Redundancy pay is often the entitlement employees are most concerned about. To qualify for statutory redundancy pay in the UK, staff must:
- Have at least two years’ continuous service with the employer.
- Be classed as an employee (not a contractor or freelancer).
- Be dismissed due to redundancy rather than other reasons.
The calculation for statutory redundancy pay is based on:
- Age:
- Half a week’s pay for each year worked under age 22.
- One week’s pay for each year between ages 22 and 40.
- One and a half weeks’ pay for each year over age 41.
- Length of service: Up to a maximum of 20 years.
- Weekly pay: Capped at the statutory maximum (this figure changes annually).
For example, an employee aged 45 with 10 years of service and a weekly pay of £500 (subject to the statutory cap) would be entitled to redundancy pay based on the higher multiplier for years worked over age 41.
If the company cannot afford to pay, employees can claim redundancy pay from the RPS.
It is also worth noting that redundancy payments are tax-free up to £30,000, which can be a small relief during a period of financial stress. Employees should also check whether their contract offers enhanced redundancy terms above the statutory minimum, as some employers provide more generous packages. However, in insolvency, enhanced payments are unlikely to be honoured unless company funds are sufficient, so statutory rights remain the main guarantee.
Employees should act quickly to make claims, as there are strict deadlines. Typically, redundancy claims must be submitted within six months of dismissal. Delays may put entitlements at risk, so prompt action is vital.
Wages, Holiday Pay, and Other Entitlements
Alongside redundancy, employees may be owed unpaid wages and holiday pay at the time of liquidation. The law provides that:
- Up to eight weeks’ unpaid wages can be claimed.
- Up to six weeks of holiday pay can be claimed (for holidays accrued but not taken).
- Certain pension contributions may also be recoverable.
As with redundancy pay, these claims are often processed through the RPS when company funds are insufficient. Employees must submit the required forms, supported by evidence such as payslips, contracts, or holiday records.
A common point of confusion arises around bonuses, commission, and overtime. While regular overtime and contractual commission may count towards wages, discretionary bonuses often do not. Employees should check carefully what type of payments they can legitimately include in their claims.
Holiday pay is another area that requires attention. Employees are entitled to payment for holiday accrued up to the date of dismissal. If, for example, a staff member has built up 10 days of unused holiday, the value of those days can be claimed as part of their entitlements. Accurate records of holiday taken and accrued are essential in supporting such claims.
By being thorough and organised when making claims, employees can maximise the support available to them and minimise delays in receiving payments.
Claiming Through the Redundancy Payments Service
The RPS is designed to protect employees when employers cannot pay what they owe. To make a claim, employees generally need:
- A copy of their redundancy or dismissal letter.
- Records of employment (such as payslips or contracts).
- Details of wages, holiday entitlement, and service length.
Claims are made online via the Insolvency Service. Once approved, payments are usually processed within weeks, although timescales can vary.
It is important to note that statutory limits apply. For instance, redundancy pay and notice pay are calculated up to the statutory maximum weekly wage, even if the employee’s normal pay is higher.
Employees should be aware of the time-sensitive nature of these claims. Missing a deadline could result in losing entitlement to certain payments. Typically, redundancy pay must be claimed within six months of dismissal, while claims for unpaid wages and holiday pay may allow slightly longer.
Keeping detailed records can make the process much smoother. Employment contracts, payslips, P60 forms, and holiday records all serve as vital evidence. Employees should also retain copies of any correspondence with the liquidator, as this may be requested during the claims process.
If a claim is rejected (for example, due to a lack of evidence about continuous employment) employees have the right to request a review or appeal the decision. Providing detailed evidence such as wage slips, employment contracts, and correspondence can significantly increase the chances of a successful claim.
The Role of Insolvency Practitioners and Liquidators
The liquidator is central to the voluntary liquidation process. Their duties include:
- Taking control of company assets.
- Communicating with creditors and employees.
- Providing necessary documentation for employees to claim entitlements.
- Ensuring statutory processes are followed.
Employees should expect communication from the liquidator about their dismissal and the process for claiming payments. While the liquidator cannot always guarantee immediate settlement, they play an important role in guiding employees through the necessary steps.
Insolvency practitioners are bound by strict professional and ethical standards. They act impartially on behalf of all stakeholders, which includes creditors and employees. For employees, this impartial role means the practitioner cannot favour staff over creditors, but they must still ensure that employee claims are handled in line with the law.
In some cases, the liquidator may arrange group briefings or provide FAQs to help employees understand their rights. Others may issue detailed letters outlining claim processes. Either way, employees should engage promptly with these communications to avoid missing out on entitlements.
Special Situations
Directors and Employees
In some companies, directors are also employees. Directors who are on the payroll and meet eligibility criteria may be able to claim redundancy pay, provided they have an employment contract and receive wages through PAYE.
Contractors and Freelancers
Self-employed contractors and freelancers are not entitled to redundancy pay through the RPS. Their claims are treated as those of creditors.
TUPE Transfers
In rare cases, part of a business may be sold during or before liquidation. If so, employees may transfer to the new employer under the Transfer of Undertakings (Protection of Employment) Regulations (TUPE). This preserves their continuity of service and employment rights.
Fixed-term, Part-time, and Apprenticeships
Fixed-term employees may still be entitled to redundancy pay if they meet the two-year service requirement. Part-time workers have the same rights as full-time staff, though based on their part-time earnings. Apprentices, meanwhile, can be especially vulnerable, as losing a placement can interrupt their training. They may not always qualify for redundancy pay if employed for less than two years, but unpaid wages and holiday pay can still be claimed.
The Human Side of Liquidation: Stories from the Workplace
Behind the legal processes and financial terminology, voluntary liquidation has very real consequences for people’s lives. Employees often react differently depending on their role, circumstances, and length of service.
Take the case of a long-serving warehouse worker who has been with a company for 25 years. While redundancy pay may offer some financial support, the emotional impact of losing what has been a lifelong career can be profound. Contrast this with a younger employee in a customer service role who has only been with the company for two years; while the redundancy payout may be smaller, they may find it easier to transition into new employment.
Middle managers, who often act as a link between directors and staff, can also face unique challenges. They may be responsible for delivering redundancy news to their teams while also dealing with their own job loss. Balancing professionalism with personal feelings is not easy in these circumstances.
Sharing anonymised examples like these highlights the varied human experiences of liquidation. While laws and entitlements provide a safety net, the personal toll should not be overlooked. Acknowledging the emotional and financial impact on employees at all levels can help businesses close with empathy and respect.
How Employers Can Support Employees During Liquidation
Even when a business cannot continue trading, employers and directors still have an opportunity to support their workforce through the process. Good communication is at the heart of this. Staff should be informed clearly and promptly about what is happening, why the company is entering liquidation, and what this means for their employment.
Employers can also provide practical support such as:
- Issuing reference letters to help staff secure future employment.
- Providing employees with detailed instructions on how to submit claims to the Redundancy Payments Service.
- Hosting Q&A sessions or group meetings so employees can voice concerns and receive answers directly.
- Signposting staff towards government programmes, trade unions, or local organisations that offer retraining and employment support.
In addition, employers who treat staff fairly during closure often benefit in the long term. Directors may wish to start new businesses in future, or take on senior roles elsewhere, and their reputation for fairness can influence these opportunities. Treating employees with dignity not only helps staff during a difficult transition but also preserves the professional credibility of the company’s leadership.
Alternatives to Liquidation and What They Mean for Employees
Liquidation is not the only insolvency process available, and in some cases, alternatives may provide more protection for employees.
- Administration: A company may enter administration to protect itself from creditor action while an insolvency practitioner attempts to rescue the business. During this time, jobs may be preserved if parts of the company can be sold or restructured. Employees may transfer to a new employer under TUPE regulations if a business sale takes place.
- Company Voluntary Arrangement (CVA): A CVA is an agreement between a company and its creditors to pay off debts over time while continuing to trade. For employees, this can mean greater job security, as the business avoids immediate closure. However, restructuring under a CVA may still involve redundancies if the company needs to cut costs.
- Business Sales or Mergers: Sometimes, selling part of the business before liquidation can save jobs. Employees in the transferred part of the company may continue under their existing terms and conditions, providing continuity of employment.
Understanding these alternatives helps employees see that liquidation is not always the inevitable outcome. In some cases, directors may explore these options first, and where they succeed, jobs and livelihoods can be preserved.
Emotional and Practical Support for Employees
Redundancy through liquidation is not only a financial issue but also an emotional one. Many employees face stress, uncertainty, and a sudden need to find new work. Useful sources of support include:
- Jobcentre Plus and local employment agencies.
- Citizens Advice, for free and impartial guidance on rights and benefits.
- Trade unions, for advice and representation.
- Financial advisers, for support with budgeting during transition.
Employers and liquidators are encouraged to communicate openly and compassionately, providing information about available resources and offering references to assist staff in securing new employment.
Beyond financial claims, employees may also need to think about long-term career prospects. Retraining and upskilling can be an important step. Government-backed schemes, such as the National Careers Service, offer free advice on career changes, CV writing, and interview preparation.
Local councils and charities may also provide grants or low-cost training courses for individuals seeking to move into new industries. With many sectors facing labour shortages, such as healthcare, construction, and technology, redundancy can sometimes be reframed as an opportunity to pursue new career paths.
Online platforms now also provide affordable or free training in areas ranging from digital marketing to coding, offering employees the chance to develop new skills at their own pace. Taking advantage of these resources can help employees rebuild confidence and position themselves strongly in the job market.
Protecting a Business Legacy While Closing Responsibly
Although liquidation is primarily a financial and legal process, the way it is managed has a lasting effect on reputation. Companies that communicate clearly, treat employees fairly, and document their actions carefully are more likely to maintain goodwill with staff, creditors, and the wider community.
For directors, this means:
- Ensuring all redundancy and dismissal processes follow the law.
- Providing timely and accurate communication to staff.
- Maintaining clear records of entitlements, notices, and payments.
A responsible approach to liquidation acknowledges both the financial and human impact, leaving a legacy of fairness even in difficult circumstances.
Responsible directors often recognise that how a company closes can be just as important as how it operated in better times. By prioritising transparency, fairness, and compassion, directors safeguard their own reputations as well as the dignity of their workforce. Such an approach also builds trust with creditors, regulators, and potential future partners.
Even if jobs cannot be saved, treating employees with respect, by offering clear information, reference letters, and guidance on claims, can soften the blow and help staff transition to new opportunities. In this way, voluntary liquidation becomes not just a financial process but a chance to demonstrate integrity, leaving behind a legacy of professionalism and care.
Frequently Asked Questions About Voluntary Liquidation and Employees
Do all employees lose their jobs during voluntary liquidation?
In almost all cases, yes. Once a company enters voluntary liquidation, employment contracts are terminated, and staff are made redundant. Occasionally, a small number of employees may be retained temporarily to assist with closing down operations, but this is usually short term.
Can I still claim redundancy pay if I only worked part-time?
Yes. Part-time employees are entitled to redundancy pay in the same way as full-time employees, provided they meet the two-year continuous service requirement. The calculation is based on actual weekly pay, even if this is lower than full-time hours.
What happens if my employer owes me more than the statutory limits?
Employees may submit claims for the statutory maximum amounts to the Redundancy Payments Service. Any amounts owed beyond this become unsecured creditor claims against the company’s assets. Unfortunately, in many insolvency cases, unsecured creditors receive little or nothing once assets are distributed.
How long does it take to receive redundancy or notice pay?
Claims to the Redundancy Payments Service are usually processed within three to six weeks, though timescales vary depending on case complexity and the completeness of documentation. Delays can occur if forms are incomplete or if further evidence is required.
Are directors entitled to redundancy pay?
Yes, if they are also employees of the company. A director must demonstrate that they had a contract of employment, were paid through PAYE, and worked under terms similar to other employees. Each case is assessed individually, and evidence such as payslips and board minutes may be required.
Can apprentices or trainees make claims?
Apprentices and trainees may not qualify for redundancy pay if employed for less than two years, but they can still claim for unpaid wages and holiday pay. In some cases, training providers may assist apprentices in securing a new placement to complete their qualification.
What Employees and Employers Should Take Away
Voluntary liquidation can feel overwhelming, particularly for employees who have invested years of service into a company. Losing a job is rarely just about income; it can also mean the loss of routine, community, and personal identity. Acknowledging this reality is important when understanding the full impact of liquidation.
The protections in UK law, including redundancy pay, notice pay, arrears of wages, holiday pay, and the role of the Redundancy Payments Service, provide vital reassurance. While statutory limits mean that not every employee will recover everything they are owed, these schemes prevent staff from being left entirely unsupported.
For employees, the practical steps are clear: keep documentation safe, act quickly to submit claims, and seek impartial advice where needed. For employers and directors, the responsibility lies in treating staff with dignity, maintaining transparency, and ensuring the legal process is followed correctly.
Voluntary liquidation does not have to end with bitterness or confusion. By handling the process fairly, both staff and directors can move forward with clarity. Employees can secure what they are owed and look ahead to new opportunities, while directors can close their business with professionalism and integrity, leaving behind a reputation for fairness even in difficult times.
