When a company is liquidated, employment contracts usually end and staff are made redundant, though a liquidator can keep some employees on briefly to help wind down the business. Most employees stop being paid by the company straight away and must claim unpaid wages, holiday pay and redundancy through the government's National Insurance Fund. This guide sets out what happens to employees when a company is liquidated, what they are owed, and where a director's duties lie.
For a director, this is often the hardest part of closing a company down. Staff have been loyal, and telling them the business is ending feels personal. Understanding the process helps you handle it calmly and fairly.
What happens to employees when a company is liquidated
In most liquidations, employees are dismissed by the liquidator shortly after their appointment. This applies whether the company enters creditors' voluntary liquidation (CVL) or compulsory liquidation following a winding-up petition.
A small number of staff may be retained temporarily if the liquidator needs help collecting assets, finishing urgent work or preparing records. Everyone else's employment ends on, or very close to, the date the liquidator is appointed.
- Dismissal is usually immediate once the liquidator takes control.
- Employees become unsecured creditors for anything they are owed.
- The employer named on any dismissal letter is the company, not the director personally.
Notice of the liquidation itself is placed on the public record and advertised in The Gazette, which employees and other creditors can check to confirm the appointment of the liquidator.
Redundancy and notice explained
Redundancy happens because the job itself has gone — the company has stopped trading, so there is no work left to do. This is different from being dismissed for performance or conduct.
Employees with at least two years' continuous service are entitled to statutory redundancy pay, calculated using age, length of service and weekly pay (subject to a statutory cap). Notice pay — either worked or paid in lieu — is also usually due under the contract or statutory minimum notice periods.
Both redundancy pay and notice pay are among the amounts employees can claim if the company cannot pay them directly, which we cover in more detail in our guide to redundancy pay when a company is liquidated.
Claiming unpaid wages, holiday and redundancy
Once dismissed, employees do not chase the company for money it no longer has. Instead, they submit a claim to the Insolvency Service, which pays eligible amounts from the National Insurance Fund on the government's behalf.
Typical claims include:
- Arrears of pay (up to a set number of weeks, subject to a weekly cap).
- Statutory notice pay.
- Unpaid holiday pay accrued but not taken.
- Statutory redundancy pay, where eligible.
The liquidator will normally give staff the information and reference numbers they need to submit an online claim through GOV.UK. Our article on what employees are owed when a company closes sets out each category and the current caps in more detail.
The role of the government redundancy scheme
The National Insurance Fund exists precisely so that employees are not left unpaid simply because their employer has become insolvent. It is administered by the Insolvency Service, an executive agency of the Department for Business and Trade.
Employees apply directly, using details from the liquidator, rather than waiting for the liquidation to be finalised. Payments are usually made within a matter of weeks once a claim is verified, though this depends on the complexity of the case and how promptly information is supplied to the Insolvency Service.
Guidance on eligibility and how to apply is published on GOV.UK's redundancy your rights page, which explains the scheme step by step.
Where employees rank as creditors
Liquidation follows a strict order for paying creditors, set out in the Insolvency Act 1986. Employees are not first in line, but they are treated more favourably than most other unsecured creditors.
- Secured creditors with a fixed charge (for example, over property).
- Costs of the liquidation itself.
- Preferential creditors — this includes certain employee claims, such as arrears of wages and holiday pay up to statutory limits.
- Secured creditors with a floating charge.
- Ordinary unsecured creditors, including any employee amounts above the preferential limits.
Because company assets are often limited, employees frequently rely on the National Insurance Fund rather than a dividend from the liquidation itself for most or all of what they are owed.
A director's duties to staff
Directors have legal and practical responsibilities to employees even as a company heads towards liquidation. These sit alongside the wider duties owed to creditors once insolvency becomes likely.
- Comply with collective consultation rules if 20 or more redundancies are proposed at one establishment within 90 days.
- Notify the Insolvency Service of proposed collective redundancies using the correct form, where the threshold applies.
- Provide accurate employment records to the liquidator so wages, holiday and service dates can be verified quickly.
- Avoid making promises about pay or timing that the company cannot keep.
Failing to consult where required can expose the company (and, separately, is a matter the liquidator or Insolvency Service may look into) to a protective award claim. If you are considering making staff redundant when closing a company, it is worth understanding these obligations before any announcement is made.
Handling the conversation with your team
There is no perfect way to tell staff a company is closing, but honesty and clarity help. Most employees want to know three things: when their employment ends, what they are owed, and how to claim it.
- Explain the liquidation process in plain terms, without guessing at outcomes you cannot control.
- Give staff the liquidator's contact details as soon as they are available.
- Point employees to the National Insurance Fund claims process rather than promising the company will pay directly.
- Where possible, provide references and confirm continuous employment dates, which staff will need for their claim.
A calm, transparent approach reduces confusion for employees and tends to make the liquidator's job — and yours — more straightforward.
Frequently asked questions
Do employees get paid when a company is liquidated?
Employees do not usually get paid directly by an insolvent company. Instead, they claim unpaid wages, holiday pay, notice pay and statutory redundancy pay from the National Insurance Fund, administered by the Insolvency Service.
How do employees make a claim after liquidation?
The liquidator provides staff with reference details, and employees submit a claim online via GOV.UK. Claims are assessed and paid from the National Insurance Fund, separate from any dividend the liquidation itself might produce.
Are employees preferential creditors in a liquidation?
Certain employee claims, including arrears of wages and holiday pay up to statutory limits, rank as preferential debts under the Insolvency Act 1986. This puts them ahead of most ordinary unsecured creditors, though behind secured creditors and liquidation costs.
Does a director have to consult staff before liquidation?
Collective consultation obligations apply where 20 or more redundancies are proposed at one establishment within a 90-day period. Below that threshold, individual consultation duties may still apply depending on the circumstances.
Can staff claim redundancy pay if they have less than two years' service?
Statutory redundancy pay generally requires at least two years' continuous service. Employees with shorter service may still be able to claim unpaid wages, accrued holiday and notice pay from the National Insurance Fund.
This article is general information, not legal, financial or insolvency advice, and every company's circumstances are different. If you are a director facing liquidation and want to understand your options and your duties to staff, Harbourfirst can introduce you to a regulated insolvency specialist — start an enquiry.