When’s the Right Time to Tell Your Staff the Company is Insolvent?

There are indicators employees may notice when a company starts becoming insolvent. It’s a difficult conversation for anyone to have with their employees, whether you’re a company director, a sole trader, or even an experienced insolvency professional.

Nobody likes to be the bearer of bad news, but the sad fact is more and more of us are experiencing redundancy or have colleagues or family members who have suffered. Choosing the right time to tell staff your insolvent, is very difficult. Employees are relying on their monthly salary to pay for commitments such as rent, mortgage payments, utilities and child care, to name a few.

Being open about insolvency

In an ideal world, employers would be open and transparent with their employees from the outset, ensuring everyone is fully aware of the circumstances. This is the fairest approach, and if things don’t work out for the company, it gives employees the best chance to prepare themselves financially.

If the directors feel there is still a chance the business can be saved, informing staff will be relevant for turnaround and repayment strategies. However, it’s vital the workforce is aware of the whole situation, even during procedures such as administration or a Company Voluntary Arrangement (CVA), there are still staff redundancies, a freeze on raises or even pay cuts.

Could it affect productivity?

Directors and business owners should recognise the workforce can be the backbone of a company, and they should be treated with respect and integrity. However, there is usually a commercial angle to consider, to maximise the value of a company and its assets. It can be challenging to deal with these matters, taking into consideration an ethical, legal and moral point of view.

Without full knowledge of the facts, employees may jump to their own conclusions regarding the future of the company; which could result in widespread low morale and a lack of motivation. Employers that keep their staff “in the loop” could benefit from a workforce willing to pull together and demonstrate loyalty to them, as they’ve engaged staff in the process.

There are indicators employees may notice when a company becomes insolvent. Such as being “on stop” with suppliers, or receiving wages after the due date. Employees that handle the incoming post may become concerned with final demands for payment and other threatening correspondence. Without full knowledge of the facts, employees may jump to their own conclusions regarding the future of the company; a result of which could be widespread low morale and a lack of motivation. Employers that keep their staff “in the loop” could benefit from a workforce willing to pull together and demonstrate loyalty to employers who have engaged staff in the process.

However, some circumstances require the cooperation of employees to ensure projects are completed and the company’s goodwill is preserved before insolvency. A counter-argument could be staff who don’t know there are problems, will continue to carry out their duties in the usual manner, ensuring there is no disruption to the day to day running of the company.

What does the law say?

The legal basis for notifying employees of insolvency proceedings varies depending on the type of insolvency procedure the company is going through. Employment law can be a minefield, potentially resulting in tribunal related claims from employees. A licensed Insolvency Practitioner can advise you on your legal obligation when dealing with the employees of a potentially insolvent company.

In summary

Breaking the news that a company is insolvent is never easy. If the company is to undergo significant changes to stay in business, employees must find out at some point. You may want to be open with your employees from the outset, so nobody jumps to their own conclusions.

With that in mind, it’s worth considering whether staff knowing will affect their productivity while work continues; on the one hand, staff with knowledge of the situation could work harder and closer together to get through tough periods. On the flip side, they could become demoralised and demotivated if they feel closure is imminent.