Summary
- When a business closes, employees retain their legal rights, including entitlements to redundancy pay, notice pay, unpaid wages, and accrued holiday pay, regardless of whether the closure is solvent or insolvent.
- Directors must follow statutory redundancy and consultation procedures, and failure to do so can result in personal liability, criminal offences, or protective awards.
- Where a company cannot meet its obligations, employees may claim statutory payments through the Redundancy Payments Service, funded by the National Insurance Fund.
- This article is a plain-English guide to employment law obligations on business closure in Australia, written for business owners and directors.
- The content has been prepared by LegalVision, a commercial law firm that specialises in advising clients on employment law and business closure.
Tips for Businesses
Act early. Identify your employee obligations before beginning any closure process. Calculate all outstanding entitlements, issue required documentation, and submit the HR1 form where 20 or more redundancies are proposed. In insolvency, work closely with your appointed liquidator to ensure employee claims are handled correctly and in the right order of priority.
When your business closes, particularly due to insolvency, you face significant legal obligations towards your employees. Closure does not remove employment law rights, and as a director, you remain legally responsible for handling redundancies, payments, and processes correctly. This article introduces the key employment law issues you need to consider when closing a business, with a focus on insolvency scenarios.
Closing an Insolvent Business
Your company becomes insolvent when it cannot pay its debts as they fall due or when its liabilities exceed its assets. If your company cannot recover, you can close it through a formal insolvency process, such as a creditors’ voluntary liquidation (CVL) or a compulsory liquidation.
In a CVL, you place the company into liquidation and appoint a liquidator, who will dismiss employees as part of the winding-up. Compulsory liquidation involves the court issuing a winding-up order that automatically terminates employment contracts. In both cases, your business permanently closes, and your employees lose their jobs.
The law sets a strict priority order for employee claims. Certain entitlements, such as unpaid wages and holiday pay up to the statutory limit, rank as preferential debts and must be paid ahead of unsecured creditors. Redundancy pay and statutory notice pay normally rank as unsecured claims and are only paid if funds remain after preferential and secured creditors have been satisfied. Where funds are insufficient, your employees can claim statutory amounts directly from the National Insurance Fund. Insolvency changes the payment mechanism but does not remove your employees’ rights.
Redundancy Duties and Consultation Requirements
When your business closes permanently, you will normally dismiss employees by reason of redundancy. You must follow the required statutory procedures even where closure cannot be avoided, and you must give employees notice or payment in lieu of notice in accordance with their contract or the statutory minimum, whichever is greater.
Where you propose to make 20 or more redundancies within 90 days, you must carry out collective consultation and notify the Secretary of State by submitting an HR1 form before any dismissals take effect. This duty applies in insolvency, and insolvency practitioners will typically handle this in practice. Failing to submit the HR1 form is a criminal offence, and failing to consult can result in protective awards that employees may claim, with payments potentially made through the National Insurance Fund if your company cannot pay.
You must also calculate and pay final wages, accrued holiday pay, and any commissions or bonuses owed up to the last day of employment. You must issue P45 forms, payslips, and written termination notices to enable your employees to make their claims.
Learn how to manage employment disputes and protect your business from legal action.
Call 0808 196 8584 for urgent assistance.
Otherwise, complete this form, and we will contact you within one business day.
Pensions and Employment Records
If your business has a workplace pension, you must follow the required steps to close or transfer the scheme and inform your employees how their pension rights are protected. Where you have a defined benefit scheme, and your company is insolvent, the Pension Protection Fund may step in to pay benefits.
You must maintain accurate records, as your employees will need these to support their claims. Only employees, not contractors, can claim from the National Insurance Fund, and where a worker’s status is unclear, the relevant authority will assess it.
TUPE and Business Closure
The Transfer of Undertakings (Protection of Employment) Regulations (TUPE) may apply when your business transfers to a new owner as a going concern. Still, they do not apply where your company is closing permanently through liquidation. In compulsory liquidation and most CVLs, employment does not transfer, and you will instead make employees redundant. However, if you sell the business or its assets as a going concern before closure, where the business continues to operate, TUPE rules may apply. If your company is ceasing to exist completely, TUPE will not apply.
Directors’ Duties in Insolvency
Once your company becomes insolvent, you must prioritise your creditors’ interests and stop trading if continuing would worsen their position.
Closing a Solvent Business
Your company may also close while remaining solvent, typically through a Members’ Voluntary Liquidation (MVL), for example, where you wish to retire or restructure. You must still comply with all employment obligations in full during the closure process. In an MVL, an insolvency practitioner manages the process, settles all employee payments, and distributes any surplus funds to you as a shareholder.
When you close a solvent business, your employees are entitled to the same statutory and contractual payments, including redundancy pay for those with two or more years’ service, notice pay, unpaid wages, and accrued holiday pay. As your company has sufficient funds to meet these obligations, you pay these amounts directly, and your employees do not need to claim through the Redundancy Payments Service.
Even in a solvent closure, you must comply with redundancy law.
Key Takeaways
When your business closes permanently, your employees’ employment will end. You must follow the correct legal processes, consult with staff where required, and issue the correct documentation. Seeking professional advice early can help you address employee rights properly and reduce the risk of liability or claims.
LegalVision provides ongoing legal support for businesses through our fixed-fee legal membership. Our experienced disputes and regulatory lawyers help businesses manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 0808 196 8584 or visit our membership page.
Frequently Asked Questions
Employees do retain their legal rights even when the business closes. For example, they may claim redundancy pay, notice pay, unpaid wages and holiday pay.
Employees can claim statutory payments through the Redundancy Payments Service, which the National Insurance Fund funds. Statutory caps and eligibility criteria will govern the amount paid, and the employee may still claim any remaining balance in the insolvency as an unsecured debt.
You must close or transfer any workplace pension scheme and inform employees of their rights. The Pension Protection Fund may cover defined benefit schemes if the company is insolvent.
Yes. In a Members’ Voluntary Liquidation, the company must pay all employee entitlements in full, including redundancy pay, notice pay, and accrued holiday pay, before distributing funds to shareholders.
We appreciate your feedback! Request your free consultation now.
