Bankruptcy of companies

Information on 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.


Objective of the Act: 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 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 to Efling members

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


Documents required for filing a claim:

  • Payslips for the last 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
  • Resignation letter if applicable
  • Communication with the employer
  • Other documents that may be relevant, e.g. a medical certificate


The bankruptcy process:

  • The District Court issues a bankruptcy order in respect of the company 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 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.
  • 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 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 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 decides whether to accept or reject the claim. 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.
  • Claim for compensation for loss of wages for up to 3 months due to termination of an employment contract
  • 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 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 claim for compensation


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

The maximum liability for unpaid wages or compensation due to termination of an employment contract, which fall due as of April 1, 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.


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.


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.