What happens to staff and suppliers during a business insolvency?

When a business enters insolvency, it’s not just the owners or directors who are affected. Employees and suppliers often face uncertainty and disruption too. Understanding what happens can help you prepare and support those involved as best you can.

Here’s what you need to know if your business is approaching or entering insolvency.

What happens to staff?

If your company goes into administration or liquidation, the impact on staff will depend on the type of insolvency and whether there’s a chance of the business continuing.

• In administration, employees may be kept on while a buyer is sought or the business is restructured.
• In liquidation, employment usually ends as the company ceases trading.

In either case, employees have rights. These include:

• Redundancy pay (if they’ve worked for at least two years)
• Wages owed, including holiday pay and notice pay

If the company can’t afford to pay these, employees can make a claim through the Redundancy Payments Service, which is part of the government’s Insolvency Service.

It’s important to keep communication open and respectful. Staff may have questions or concerns, and honest conversations go a long way during a difficult time.

What happens to suppliers?

Suppliers are classed as creditors. Once a company is insolvent, it can’t legally pay some suppliers in preference to others – this would be seen as a ‘preferential payment’ and could have consequences for directors.

If the company owes money to suppliers at the point of insolvency, they’ll need to submit a claim to the insolvency practitioner. The practitioner will review all claims and distribute any available funds in line with legal priorities.

Some suppliers may be essential to keeping operations running temporarily, in which case new agreements might be put in place. But in most cases, outstanding debts from before the insolvency will remain unpaid unless there are enough funds to go around.

Handling these conversations

Speaking to employees and suppliers during an insolvency is never easy. But being honest, respectful, and informed can help maintain trust and dignity.

If you're a director, you’re not expected to have all the answers. That's where we come in.

Need help?

If you're concerned about the impact of insolvency on your employees or suppliers, we’re here to guide you through the process with clarity and compassion. We’ll explain your options and help you communicate them appropriately.

Get in touch by emailing enquiry@larking-gowen.co.uk or give us a call on 0330 024 0888 and ask to speak to our insolvency team.

Lee Green