insolvency

insolvency

What to tell employees if you’re insolvent

No business wants to find itself insolvent, unable to pay its debts and with its future in doubt, it can be a stressful time for everyone involved. If your business does become insolvent, you should aim to keep your employees as well informed on what is going on as possible. There will be a level of anxiety in your workforce as they think about their future. As your employer, you should help them understand the situation while not giving them false hope.

Remember their rights

Even if the company is insolvent, in the hands of an insolvency practitioner, undergoing a recovery procedure or closing through liquidation, your employees maintain their legal rights for the procedure’s duration, and if you have to dismiss them.

If for example, you liquidate the company, employees can still claim wage arrears (up to eight weeks’ worth from the Redundancy Payments Office), holiday pay (unpaid, or up to six weeks), any unpaid pension contributions, and pay in lieu of notice.

If you have to make employees redundant, you’ll have to give them a period of notice before dismissing them. That period of notice is either specified in their employment contracts or the minimum statutory notice period, whichever is longest.

Know what insolvency procedure you’re going through

Once the directors have engaged a licensed insolvency practitioner, they will determine which insolvency procedure would provide the best outcome for the business. They will take the company’s circumstances into account, what the directors want, and what you can realistically do with the company.

In the UK, the insolvency practitioner may recommend the following procedures:

Company Voluntary Arrangement (CVA) – A CVA is an arrangement in which the company pays a set monthly amount to the insolvency practitioner, who distributes it to the creditors. This procedure may be a viable option if the company structure has the potential to succeed if unencumbered by its debts. Employees may not even notice the effects of a CVA, as trading can continue uninterrupted. However, their jobs could be in a precarious position as the directors will still be looking to save money where they can.

Administration – In an administration, a third-party takes control of the company and will make the necessary savings with less input from the directors. There could be an increased risk of redundancies, as parts of the business deemed unprofitable are likely to be cut to make the savings required to stay operational. A lender who has a debenture over a client, which is effectively a floating charge over various assets such as stock, raw materials or fixtures and fittings, can also in some scenarios place that said company into administration, if the charge covers the majority of the company assets.

Creditors’ Voluntary Liquidation (CVL) – If the directors can’t see a future in the company, they can apply for a CVL to close it voluntarily. The assets are sold, and all staff will be made redundant. Subsequently, they can claim redundancy payment and other entitlements. In most circumstances, the bulk of the money gained from the selling off will go to the creditors, who will want the highest return possible.

Compulsory Liquidation – Where a CVL is a voluntary procedure chosen by a director or insolvency practitioner to liquidate the company, Compulsory Liquidation is forced on the company when a creditor applies for a winding-up petition. The company’s bank accounts are frozen, the closure would be instant, and the directors will have no control over what happens next.

Whatever procedure the company is going through, you should keep your staff informed of their intricacies and potential impacts. Doing so will clear up some confusion and help them decide what to do next.

Avoid overpromising

While it may be tempting to offer reassurance to concerned employees, you should temper what you say to restore confidence. It would help if you always kept your employees informed as to what they’re legally entitled to. What you should avoid is providing false hope of recovery, promise them job security, or additional benefits you wish you could, but might not physically be able to provide for them. Though employees may react badly to negative news, most of them would rather be prepared for the worst-case scenario than be caught off guard while expecting everything to sort itself out.

Make sensible savings

A benefit of applying for a CVA, is directors retain some control of the business and any potential cost-cutting. While it’s still not a pleasant job deciding which employees need laying off or which departments need disbanding, and you’ll have to remain as objective as possible, you’ll at least have control over the process.

While admitting that your company can’t pay its debts isn’t a pleasant prospect in any sense, it’s your responsibility as a director to act in the company’s best interests. Your employees will look to you, or the HR department for answers, and not deciding on the process best for your business could result in more damaging consequences.

Summary

When a company becomes insolvent, you can help minimise your staff’s anxieties by keeping them well informed as to what the company is going through, and how the directors intend to rectify the situation. You should also remind them of their rights if they’re made redundant and what payments to which they’re entitled. When deciding which departments and staff you can afford to keep in the most difficult times, remain objective and keep the business’ best interest at the forefront of your decisions.