What happens to employees when a business becomes insolvent?

Business insolvencies in early 2025 have risen 11% from last year, with many companies facing financial distress. For HR professionals, understanding the employment implications of insolvency is crucial. Here’s what happens when a business goes into administration, is sold out of administration, or enters liquidation.

Administration: A temporary measure

Administration is meant to protect a company from creditors while attempting a rescue or sale. An insolvency practitioner takes control, often keeping the business running to maximise value. Employees usually stay in their roles, but redundancies may occur if cost-cutting is needed.

If 20 or more redundancies are proposed, collective consultation obligations apply, and insolvency alone is not a defence for failing to consult. Employers should follow proper processes where possible to limit liability. Redundancy procedures should be reviewed to ensure compliance.

Sale out of administration: what happens to employees?

If the business is sold as a going concern out of administration, the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) may apply, transferring employees to the new employer. However, in insolvency there are a few tweaks to the impact of TUPE:

• Employees can claim wages and holiday pay (up to 8 weeks, capped at a week’s pay per week as per statutory redundancy figures) from the Insolvency Service. Any excess liability usually transfers to the buyer.
• Normally, TUPE prevents contract changes, but in administration, terms can be renegotiated if agreed by employee representatives to help the business survive.
• Consultation with employees remains mandatory, though there is a limited special circumstances defence. HR should make every effort to consult even within tight timeframes.

Liquidation: the end of the road

Liquidation means the company ceases trading, and all employees are dismissed. Employees can claim for unpaid wages, notice pay, redundancy pay, and holiday pay through the Insolvency Service. However, payments are capped, and employees may not recover the full amount owed.