Making Employees redundant in a CVA

Written by Keith Steven Managing Director 19 March 2020


What if I cannot afford to pay redundancy- can a CVA help?

Making redundancies for a company in a CVA is cost free as the government pick up this cost.  This is especially useful if you feel your business could only survive if you could cut headcount quickly by 25%, but you think this is too expensive and impossible to do.

When a company has a cash flow crisis the biggest cost suddenly looks critical. This is usually staff.

It is easy to get emotional about staff, but if the business goes into liquidation as a result of its debts then everyone will be out of a job. If it goes into administration you will lose control of the process.

A CVA is an insolvency event that qualifies for employees to receive their redundancy from the Government. This means, in essence, that any arrears of salary and holiday can be paid, up to a maximum of £538 pw, and statutory redundancy entitlements will be paid as well. However, we do advise our clients to pay arrears of salary and holiday in our CVAs.

If any employees claim unfair dismissal then any claim, if successful, will be an unsecured debt bound by the CVA.

If you find having to do this particular part of the restructuring particularly difficult then we can do it for you. As your chosen advisors to lead the turnaround, we will do everything that is necessary to try and save the business. If this involves making people redundant then so be it. We do have lots of information on this site to advise employees who have been made redundant.

If the business is in administration then the administrator will be able to make everyone redundant at a stroke but you will not be part of that decision.

In the past, pre-pack administrations were used as a way to shed staff by transferring the assets but not the employees, of the old company to a new one while the old company was put into administration. However, recent case law has meant that TUPE does apply so the new company has to take on the employment contracts of the old one. As such, if the company has shed its debt and been bought, it will be hard to then argue that staff must now be cut. In the event an employment tribunal finds unfair dismissal, the new company will have to pay all the compensation if awarded.

What are the rights of employees made redundant in a CVA?

Once a CVA has been approved, employees of the company can claim the following from the Redundancy Payment Office (RPO):

  • Unpaid wages for up to eight weeks
  • Holiday pay due up to six weeks
  • Payment in Lieu of Notice
  • Statutory Redundancy pay i.e after at least two years’ continuous service
  • Unpaid pension contributions

The amount of compensation is set at £538 per week of pay.

For more information on making employees redundant read this page.

Be aware that you can lay off staff without resorting to redundancies. For more information on this see the Government site.

Categories: CVA, What is a CVA or Company voluntary arrangement?, Redundant Employee?

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Please note that the guide was mostly written pre Covid-19 and there have been some changes to insolvency legislation that limits creditors actions and relaxes rules regarding wrongful trading.  A new 20 day moratorium for distressed businesses has also been introduced. 

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