The delicate issue of dealing with employees in an insolvent company

30th September 2014


One of the trickiest issues for an IP is handling the concerns and rights of employees when a company gets into financial difficulty. On the one hand any company needs its employees to help make the business a success, and yet there is often the need to reduce headcount or change the skill sets available to take the enterprise forward. In the UK we are somewhere between the US model and the EU model in handling the painful business of making redundancies.

In the early stages of a business restructuring lots of work needs to be done quickly to find out how bad things really are and indeed whether there is any underlying business model that might be able to survive. Naturally this involves looking at the people side of the business and deciding what skills are needed for the firm to move back towards profitability. 

In our experience a company’s workforce is generally aware of the employer’s difficulties although management often find it hard to discuss the true extent of a company’s troubles. They worry that the best people might leave if there is any hint of difficulties, especially as the economic cycle starts to pick up and alternative jobs become more readily available. This is especially true in sales led organisations.
Ironically the cost of redundancies can be a major reason for needing to wind up a struggling business. Which is probably why so many staff now find themselves working as contractors through their own limited companies or umbrella service providers on fixed term contracts. As the economy improves we may well see an increase in pre-packaged administrations being utilised to quickly transfer both the business and its key employees to new operators.
In an ideal world, once management become aware of the need for possible redundancies they would start the consultation process. Such matters as selection criteria, employee representation, job fairs, employability events and outplacement counselling all spring to mind. Great for a large company with lots of money to spend, but much more of a challenge for smaller cash strapped firms on the brink of insolvency. Added to the mix, from the IP’s perspective, is the need to find a buyer for the business.

Buyers can be reluctant to take on a company complete with employees who are often viewed as a bit of an unknown quantity in terms of their ability to adapt to different working conditions. Purchasers may also be unwilling to take on the perceived burdens of complying with the TUPE regulations, combined with the uncertainty or delay of perhaps a three month consultation period. All this makes it more difficult for the IP to negotiate the sale of a business.

Employment and Insolvency related issues are yet another area where the ‘one size fits all’ approach to legislation needs to be questioned. As the UK has to adopt what seem to be tidal waves of EU derived regulation, perhaps the UK should think about simplified rules for the smaller owner-managed firms?