Employee considerations in insolvency

If your company becomes insolvent, it can be a tough, worrying time for everyone. Employees will worry about their future with the company if it even survives the insolvency procedure. Employees will worry about their future with the company if it even survives the insolvency procedure. With anxieties at an all-time high, it’s important not to scare your employees with speculation of the worst-case scenario, but equally, not to give them false hope if the situation is bleak.

Know the procedure
When a company becomes insolvent, the directors should appoint a licensed insolvency practitioner to handle the process. Which process is right for the company depends on its circumstances and what the directors want, or what they can realistically do with the company.

CVA (Company Voluntary Arrangement) – A CVA involves repaying the company’s debt in monthly instalments. It is a recovery procedure used if the business is viable going forward, with the intent of keeping the company open.

In a CVA, employees may be unaffected if trading is uninterrupted, but that doesn’t necessarily mean their jobs are secure as the company will look for areas to save money.

Administration – Administration is a recovery procedure where a third-party takes control of the company. The directors have less control, and the process often includes restructuring, potentially removing unprofitable elements of the business.

MVL (Members Voluntary Liquidation) – An MVL occurs where the directors see no future in the company, so decide to close it voluntarily. In this case, assets will be sold off, all staff will be made redundant, and they can claim redundancy payments and other entitlements.

CVL (Creditors Voluntary Liquidation) – Like an MVL, a CVL will result in the closure of the company and the staff being made redundant. A CVL is carried out when a company is insolvent, with the main aim of returning maximum value to creditors.

Compulsory Liquidation – Compulsory Liquidation occurs when a creditor applies for a winding-up petition to close a company. In this case, the closure would be almost instant, leaving the directors with no control.

Whichever procedure is right for you, it’s vital to inform your staff. Each will have different timescales and implications for employees, and spelling out which process the company is going through will clear up some of the confusion.

Remember their rights
No matter which insolvency procedure the directors choose, employees will have rights for the duration, and if they’re consequently dismissed.

If made redundant, employees can claim the following: 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.

Employees must also be given notice before they’re made redundant. The period of notice will be whichever of the following was the longest: The notice period specified in their employment contracts, or the minimum statutory notice period.

Don’t promise anything additional
Avoid reassuring your employees that everything will be okay, their jobs will be secure, and the company will stay open. While you should provide everything your employees are legally entitled to, promising any additional benefits could raise false hope of recovery. Depending on the insolvency procedure, staff may or may not keep their jobs, and the business’ future could be at stake. While it might sound harsh, most employees would prefer to know the truth of the situation than have it sugar-coated with false hope, and be let down later with consequences they were unprepared for.

Think objectively when cutting back
If the company has opted for an insolvency procedure where you, as a director, maintain a level of control, you will be in charge of making potentially cost-cutting decisions to save the company. You may have to make some difficult decisions, including which employees stay on, or which departments can be cut back.

Going into liquidation is a tough time for everyone involved. However, when you see your company is insolvent, the potential consequences of not finding the right insolvency process will be much worse. As a director, employees will always come to you for answers, and the best solution is to be as honest as possible.

No director wants to let loyal employees, who may have worked for the company for many years, go. In these circumstances, however, you must remain as objective as possible and prioritise the business’ future above all personal attachments.

To summarise
The uncertainty brought on by company insolvency can make it a scary time for all affected. If your company has to go through an insolvency procedure, it would be advisable to notify your staff of the current situation, and the possible outcomes. Remind them of their rights, and what payments they’re entitled to, should the worst happen. If you have to lay people off, however harsh it sounds, you must remain objective and prioritise the business’ future over relationships with employees.

Author: Editorial Team

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