Corporate bankruptcy

information about Employer Bankruptcy

Applicable laws:

Act No. 88/2003, on the Wage Guarantee Fund.


Regulation 377/2024 on the maximum liability of the Wage Guarantee Fund.


Act No. 21/1991 on Bankruptcy etc.


The purpose of the law: to ensure that employees and pension funds receive payments for their outstanding claims in the event of the employer's bankruptcy or when the employer's estate is for public purposes and the heirs do not guarantee the obligations.


What is bankruptcy:

  • Bankruptcy is when a company/individual can no longer pay its debts or meet its other obligations. If there are assets, their value is used to pay debts.
  • A company that has entered insolvency does not have to be formally bankrupt.
  • Precursor to bankruptcy – e.g. unsuccessful foreclosure – declaration of insolvency under the Bankruptcy Act
  • When a company is declared bankrupt, a specific process, bankruptcy proceedings, is initiated, which aims to verify the company's assets and divide them among creditors according to certain rules.


Assistance to members – Efling

  • Efling assists its members in filing a claim for outstanding wages and accrued rights in the bankruptcy estate.
  • It is important that members respond quickly and bring relevant documents to us as soon as possible, because the time to file claims with the bankruptcy estate is limited.


Data for the claim statement:

  • Payslips for the last 6 -12 months.
  • Employment contract
  • Bank statement for at least 6 months showing transfers from the company.
  • Time reports
  • Withholding statement from RSK
  • Resignation letter if applicable
  • Communication with the employer
  • Other documents that may be relevant, such as a medical certificate.


The bankruptcy process:

  • The district court issues a ruling on the bankruptcy of a company/individual and appoints a liquidator.
  • The bankruptcy estate takes over all the rights and obligations of the bankrupt company, which then no longer has the right to dispose of assets, pay debts, receive payments or incur obligations.
  • The executor has all the power in the estate and handles all the work surrounding it.
  • An employment relationship ends upon the issuance of a ruling, termination, and the employee is entitled to a notice period.
  • Typically, companies have ceased operations and closed before the bankruptcy order is issued. Sometimes, operations continue after bankruptcy.
  • The bankruptcy estate effectively takes over employment contracts with the employees of the bankrupt company. –
  • The bankruptcy administrator announces claims against the estate by publishing an advertisement in the Official Gazette – RECALL. 
  • The deadline for filing claims is two months from the date of the previous announcement by the liquidator in the Official Gazette.
  • After the deadline for filing claims, the liquidator reviews the filed claims and prepares a list of claims.
  • Based on the documents attached to the claim, the liquidator will decide whether to accept or reject the claim. Therefore, it is important to submit all requested documents.
  • The executor's work on the estate, valuing assets and dividing their value among creditors according to certain rules.
  • Settlement ends 6-12 months after the ruling date, often the settlement takes longer. 


The fund's liability covers the following claims:

  • A claim for wages for the last 3 months of employment in the service of the employer.
  • Claim for compensation for loss of wages for up to 3 months due to termination of an employment contract.
  • A claim for vacation pay that has become due in the last 18 months prior to the date of the ruling.
  • A pension fund's claim for pension contributions.
  • A claim for compensation for damage caused by an accident at work and a claim for compensation for the death of an employee, provided that the employer's insurance does not cover the compensation claim.


The fund's liability is subject to the condition that the employees' claims have been recognized as priority claims by the bankruptcy administrator. The administrator is appointed by the district court at the request of creditors, who are usually tax authorities, credit institutions or pension funds.

Wage claims are priority claims in corporate bankruptcy, which means that such claims are paid first if there are any assets in the bankruptcy estate. However, if the bankruptcy estate is assetless, wage claims are guaranteed by the Wage Guarantee Fund.


Maximum liability and other payments

The maximum liability for unpaid wages or compensation due to termination of an employment contract, which are due as of April 1, 2024, is ISK 850,000 per month, cf. Regulation No. 377/2024.


If an employer has paid up the wage claims before the bankruptcy order, those payments will be deducted. Similarly, unemployment benefits paid and employment income during the notice period will be deducted from claims for compensation for loss of wages during the notice period.


The Wage Guarantee Fund is obliged to calculate withholding tax on wage claims and claims for compensation for loss of wages during the notice period and submit it to the tax collector in accordance with the Act on Withholding Taxes. If an employee does not have an unused personal allowance in the year in which the payment is made, it can be used to deduct the calculated withholding tax.


CEO/Board members

The claims of the managing director and board members are not covered by liability. The same applies to owners of a significant share in the bankrupt company.


It is also permitted to reject claims by spouses and other relatives of managing directors, board members or owners if it is shown that their claims are unjustified with regard to these relationships.


Holiday pay claims without bankruptcy

The Guarantee Fund guarantees the payment of holiday pay according to the Holiday Act in cases where the employer has not paid it, even if his estate has not been declared bankrupt. The Fund's guarantee covers the payment of holiday pay that has been earned in the last 18 months.


Directorate of Labour

An employee must register as unemployed with the Directorate of Labour as soon as the company goes bankrupt and he loses his job. Such registration is, among other things, a prerequisite for the Wage Guarantee Fund to pay out a wage claim for unworked notice periods at a bankrupt company.