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  • What Does Voluntary Liquidation Mean for Employees
What Does Voluntary Liquidation Mean for Employees
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Emily Wilson
March 2020
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When the directors and owners of a company decide to close their business because they can’t pay their creditors, this process is called a Creditors Voluntary Liquidation(CVL).

In order for this to happen, a company needs to be insolvent which basically means it is bankrupt and it is unable to pay debts owed.

This commonly requires a meeting of the shareholders and creditors who need to pass suitable solutions and appoint a liquidator.

 

Sad to say, in a CVL one of the most affected of all the stakeholders are the company’s employees and it is an extremely anxious and worrying time for them.

So, in any formal insolvency procedure, it is vital to consider the rights of the insolvent company’s employees. In this article, you will get a clear insight into how the process of a Voluntary Liquidation works and what it means for employees.

Voluntary and Compulsory liquidation

It is vital for employees to understand the difference between these two processes.

They are both insolvency proceedings but have different implications for the directors and for the company itself. Before we get to that, first we have to understand what liquidation is.

Liquidation is a formal insolvency process where a liquidator(insolvency practitioner) ends up all the company’s affairs. All of the company’s assets, including property are sold and proceeds go to creditors. At the of the liquidation process, a company is completely dissolved and removed from the housing register.  Also, the Insolvency Service will investigate the management of the company’s directors, seeking examples of wrongful or fraudulent trading. 

Compulsory liquidation

 A Compulsory Liquidation is enforced on a company by creditors and this usually happens after a winding-up petition in court.  After the court approves the liquidation, the Official Receiver will take over and bank accounts will be frozen and an investigation will begin on what led the company into insolvency.

In order to cover the costs of liquidation, a liquidator will be appointed if there are any assets to be recovered. All of the remaining funds will naturally go to creditors, though it is unexpected that they will receive the full amount they are owed. Also, an investigation will be carried out by the Official Receiver into the director’s conduct, whether there is any evidence of wrongdoing.

 

Voluntary Liquidation

Unlike Compulsory Liquidation, a CVL starts when the directors and owners decide to close their business because they cannot pay their creditors. Also, the company needs to be insolvent for this to happen and a meeting of shareholders and creditors is held in order to pass appropriate resolutions and to appoint a liquidator. Determining insolvency can sometimes be complicated. So, if you’re not sure if your company should go into liquidation, experienced firms like DW advisory can help you and give you professional legal advice on whether your company is experiencing signs of insolvency.

 

The main advantage of a CVL for employees is that it is much quicker than compulsory liquidation. Employees can only start making claims for redundancy and other statutory entitlements when the company is formally set into liquidation.  Because of this, directors are often eager to accelerate this process, therefore, allowing their employees to start receiving redundancy pay on time.

 

If a business decides to go into voluntary liquidation, the directors will be in control when the liquidation will happen. On the other hand, if they decide to wait for creditors to wind up the business(Compulsory Liquidation) this can take many months and employees won’t have a chance to make a claim during this time.

Employee entitlements

Commonly, the liquidation of a company means the termination of the employment of staff.

If there are any funds left after the payment of the fees and expenses of the liquidator, employees have the right to be paid their outstanding entitlements in priority to other unsecured creditors. Employee entitlements are grouped into classes and are paid in the following order:

  • Outstanding wages and superannuation

  • Outstanding leave of absence

  • Retrenchment pay

 

Each class must be paid in full before the next class is paid. However, if there are insufficient funds to pay a class in full, the available funds are paid on a pro-rata basis.

If the liquidator continues to trade for a short period of time in order to help in the winding up, employee entitlements growing during this period are paid out of available assets as a cost of the winding-up.

 

Avoiding employee entitlements 

It is illegal to enter into an agreement or transaction with the purpose of avoiding employee entitlements of a company.

When a company is in the process of liquidation, and if employees suffer damage or loss as a consequence of a person entering such an agreement or transaction, that person is inclined to pay compensation for the loss suffered. Keep in mind that employees have priority to any compensation that is recovered by the liquidator.

 

Final word

Remember that this article provides only basic information about the liquidation process, and it does not cover the whole of the law regarding this topic.  So, it is a priority that you seek professional help and understand that there is no substitute for professional advice. 

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