Bankruptcy of companies

information ON Employer Bankruptcy

Applicable laws:

Law 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.


Purpose of the law: To guarantee wages and pension funds payments for claims arising from outstanding wages.


What is bankruptcy:

  • Bankruptcy is when a company or an individual can no longer pay their debts or meet their other obligations. If there are any assets, the proceeds from their sale are used to pay the debts.
  • A company that has become insolvent does not necessarily have to be formally bankrupt.
  • A precursor to bankruptcy, for example an unsuccessful distraint action or a declaration of no attachable assets 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 for members Efling

  • Efling assists members in filing claims against the bankruptcy estate for outstanding wages and accrued entitlements.
  • It is important that members respond quickly and provide the appropriate data to us as soon as possible, because the time to file claims in the bankruptcy estate is limited


Documents required for filing a claim:

  • Payslips for the past 6-12 months
  • Employment contract
  • Bank statements covering at least the past 6 months, showing transfers from the company.
  • Time records
  • Withholding tax statement from RSK
  • Termination letter if applicable
  • Communication with the employer
  • Other documents that may be relevant, e.g., medical certificates


Bankruptcy separation process:

  • The District Court issues a bankruptcy order in respect of the company and appoints a liquidator
  • The bankruptcy estate takes over all rights and obligations of the insolvent company, which therefore no longer has the right to dispose of assets, pay debts, receive payments or create obligations
  • The liquidator handles all matters relating to the bankruptcy estate.
  • The employment relationship terminates when the bankruptcy order is issued, and the employee is entitled to a notice period.
  • Generally, companies have ceased operations and closed for the appointment of a bankruptcy trustee. Sometimes the business continues after bankruptcy proceedings
  • The bankruptcy estate essentially takes over employment contracts with the staff of the bankrupt company
  • The liquidator calls for claims against the bankruptcy estate by publishing a notice in the Official Gazette (Lögbirtingablaðið) — Notice to Creditors. 
  • The time limit for filing claims is two months from the date of the liquidator’s first notice in the Official Gazette (Lögbirtingablaðið).
  • After the claim filing period ends, the shift manager takes over the listed claims and prepares a claim register
  • Based on the data accompanying the claim filing, the arbitrator decides whether to accept the claim or dismiss it. Therefore it is important to submit all requested documents
  • The liquidator’s role is to sell the assets and distribute the proceeds among creditors in accordance with established rules.
  • The winding-up of the estate is generally completed within 6–12 months of the date of the bankruptcy order, but it may take longer.


The fund's liability covers the following claims:

  • A claim for wages for the last three months of employment with the employer.
  • Kröfu um bætur vegna launamissis í allt að 3 mánuði vegna uppsagnar á ráðningarsamningi
  • A claim for holiday pay that fell due during the 18 months preceding the date of the bankruptcy order.
  • A pension fund’s claim for pension contributions.
  • A claim for compensation due to damage caused by a workplace accident and the claim of the person entitled to compensation for the death of an employee, since the employer's insurance does not cover the compensation claim


The Fund’s liability is subject to the condition that employees’ claims have been recognised by the liquidator of the bankruptcy estate as priority claims. The liquidator is appointed by the District Court at the request of creditors, who are generally the tax authorities, financial institutions or pension funds.


Wage claims are priority claims in the event of a company’s bankruptcy, which means that such claims are paid first if there are any assets in the bankruptcy estate. If, however, the bankruptcy estate has no assets, wage claims are covered by the Wage Guarantee Fund.

Maximum liability and other payments

Maximum liability for unpaid wages or penalties for termination of an employment contract, which is payable from 1 April 2024, is ISK 850,000 per month, cf. regulation no. 377/2024.

If the employer has made any payments towards the wage claims before the bankruptcy order was issued, those payments are deducted. Likewise, any unemployment benefits paid and any earnings received during the notice period are deducted from claims for compensation for loss of wages during the notice period.

The Wage Guarantee Fund is required to calculate withholding tax on wage claims and on claims for compensation for loss of wages during the notice period, and to remit it to the tax collector in accordance with the Act on Withholding of Public Charges. If the employee has any unused personal tax credit in the year in which the claim is processed, it may be applied to reduce the calculated withholding tax.

Executive/board members

Claims of executives and board members are not liable. The same applies to owners with a substantial stake in the insolvent company.

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

Claims for holiday pay without bankruptcy proceedings

The Wage Guarantee Fund guarantees payment of holiday pay in accordance with the Holiday Allowance Act in cases where the employer has failed to pay it, even though the estate has not been subjected to bankruptcy proceedings. The Fund’s liability covers holiday pay accrued during the last 18 months.

The Directorate of Labor (Vinnumálastofnun)

The employee must register as unemployed with the Directorate of Labour as soon as the company goes bankrupt and they lose their job as a result. Such registration is, among other things, a condition for the Wage Guarantee Fund to pay a wage claim in respect of an unworked notice period with a bankrupt company.