When a business “goes bust” (meaning it can no longer pay its debts and has become insolvent) it can be an unsettling time for everyone involved. Employees may suddenly find themselves out of work, while employers and company directors are left navigating a difficult legal process.
One of the most common questions in this situation is: how can staff claim the redundancy pay they’re entitled to if the company no longer has the funds to pay it?
This guide explains how statutory redundancy pay works when an employer becomes insolvent, what steps affected employees can take, and what employers need to know about their legal obligations.
Understanding statutory redundancy pay
Under UK law, employees who are made redundant may be entitled to statutory redundancy pay. This applies when they:
- Have worked continuously for the employer for at least two years, and
- Are dismissed because the business closes, relocates, or reduces its workforce.
The amount an employee is entitled to depends on their age, length of service, and weekly pay (capped at a statutory maximum).
As of April 2025, the weekly pay cap is £700. The basic formula is:
- 0.5 week’s pay for each full year worked under age 22
- 1 week’s pay for each full year worked aged 22–40
- 1.5 weeks’ pay for each full year worked aged 41 or older
If a business can afford to redundancy pay that is handled directly between the company and its employees. But when the company becomes insolvent, a different process applies and the government’s Redundancy Payments Service (RPS) gets involved.
What happens when a company becomes insolvent?
When a company “goes bust”, it usually enters one of several formal insolvency procedures such as liquidation or administration.
At this point, an insolvency practitioner (IP) is appointed to manage the process. Their role includes assessing the company’s assets, paying creditors, and informing employees of their rights.
In many cases, the company simply doesn’t have enough money left to pay wages, holiday pay, pay in lieu of notice or redundancy pay. To make sure employees don’t lose out completely, the government steps in through the Insolvency Service, which runs the Redundancy Payments Service.
According to GOV.UK, “You can apply to the Redundancy Payments Service (RPS) for money your employer owes you if they cannot pay because they’re insolvent.”
How employees can claim redundancy pay?
If an employer cannot afford redundancy pay because of insolvency, affected staff can make a direct claim to the Redundancy Payments Service.
Here’s how the process works:
Wait for confirmation from the insolvency practitioner
Once appointed, the IP will provide employees with a case reference number and confirm that the company is officially insolvent. This is needed to start a claim.
Apply online through GOV.UK
Employees can then complete an application at gov.uk/claim-redundancy. They’ll need:
- Their case reference number
- Their National Insurance number
- Details of employment (such as start date and final pay)
Claim for other owed money
Alongside redundancy pay, employees can also claim:
- Unpaid wages (up to 8 weeks)
- Holiday pay (up to 6 weeks)
- Statutory notice pay (if they didn’t receive notice)
Timescales
Employees normally have six months from the date of redundancy to make a claim for statutory redundancy pay. The RPS usually processes claims within a few weeks, although complex cases can take longer.
How much will the RPS pay?
The Redundancy Payments Service pays statutory amounts only. This means:
- Weekly pay is capped at the government limit (£700 in 2025).
- Length of service is capped at 20 years.
- Any enhanced or contractual redundancy pay that was promised by the employer (beyond the statutory minimum) won’t be covered by the RPS, employees become creditors of the company for that remaining amount.
If employees are owed additional money beyond statutory limits, they can register as a creditor in the insolvency process. However, recovery of these sums depends on whether the company has any remaining assets.
What employers and company directors need to know
For employers, it’s important to understand that statutory redundancy pay remains a legal entitlement under the Employment Rights Act 1996, even if the business cannot meet its obligations.
Once an insolvency practitioner takes control, they must:
- Inform employees of their redundancy and explain how to make a claim to the RPS
- Provide accurate employment and payroll information to support those claims
Directors of limited companies are not usually personally liable for redundancy payments, but they must cooperate fully with the insolvency practitioner. Failure to provide information can delay payments for staff and may lead to investigation by the Insolvency Service.
Typical timescales for payments
Once an employee submits a valid claim, most redundancy pay is received within three to six weeks.
Claims for unpaid wages and holiday pay are usually processed at the same time.
Payments are made directly into the employee’s bank account and include a breakdown showing how each element has been calculated.
Where to find further advice and support
Redundancy during insolvency can be stressful, but free, reliable support is available:
- Citizens Advice – What to do if your employer goes bust
- Insolvency Service helpline – for questions about ongoing claims: 0300 678 0015
Employers facing insolvency should also seek professional guidance from an insolvency practitioner or employment law adviser to ensure that legal obligations to staff are met correctly.
Final thoughts
Redundancy is never easy, but when a company goes bust, it’s reassuring to know that a clear process exists to help employees recover at least their statutory redundancy pay.
The government’s Redundancy Payments Service provides a safety net when businesses can’t pay, ensuring workers still receive the payments they’re legally entitled to.
For employers, understanding this process can make a difficult situation a little more manageable helping you support your staff, meet your responsibilities, and close your business with integrity.
Do you have any questions about today’s blog, need help in becoming legally compliant with contracts/policies or can we support you in taking away any people pains to give you peace of mind?
If you answered yes to any of the above, just give us a call at CUBE HR on 01282 678321, or book in a FREE 30 Minute HR Health Check here FREE HR Health Check and we’ll happily give your business a full HR overview with our personal recommendations absolutely FREE!
Why not also check out last weeks blog What is job hugging and how does it impact on your company culture?
We also have a YouTube channel with loads of handy videos outlining various HR related scenarios.
