When Is The Right Time To Tell Employees Your Company Is Insolvent

As a business owner or director, facing the possibility of insolvency can be incredibly difficult. Doing the right thing at the right time can help companies avoid insolvency but as is often the case, the ‘right thing’ and the ‘right time’ are only visible through the lens of hindsight. For businesses that find themselves in a situation where a Creditor’s Volutary Liquidation (CVL) or compulsory liquidation are the only routes left, one of the most difficult decisions will be when to tell employees that the company is insolvent.

On the one hand, you want to be transparent and honest with your employees. On the other hand, you don’t want to cause unnecessary panic or make things worse by causing employees to leave in droves. Regardless, it’s important to handle the situation delicately and with consideration for your employees while also meeting your legal obligations, which is where we are going to start.

Your Legal Obligations

Conventional wisdom says that employees should be informed as soon as insolvency becomes inevitable and it’s generally accepted that the first 14 days are the most crucial. Having said that, there are actually specific laws in the UK governing when and how you must inform employees of insolvency. That said, these rules vary depending on a company’s size, the number of employees affected and other relevant factors. For example, if there are more than 20 employees operating from a single location, then the business may need to follow the legal process of collective consultation, which involves informing and consulting with employees about the situation and its potential impact on their jobs.

This is just one of many possibilities as far as employee rights in insolvency are concerned and a company’s failure to properly navigate the obligations it has towards its staff could end up making an already bad situation much, much worse. This is why we’re not going to list the legal obligations of other possible permutations (a little knowledge can be a dangerous thing) and instead recommend that you seek the advice of a licensed insolvency practitioner, lawyer, or HR consultant to advise you.

Other Considerations

In addition to legal considerations, insolvent companies also need to consider the impact on employee morale, personal finances, and trust. It’s important to be transparent and honest with your employees, but you also don’t want to cause undue panic or a mass exodus of talent that could further exacerbate the problems facing the company. Timing is critical and it’s important to strike the right balance between being proactive and responsible. That said, it’s also important to bear in mind that if you wait too long then the decision may be made for you by an insolvency practitioner, local news reporting, on a Gazette Notice, the formation of a liquidation committee, online reviews, or any number of other things.

As we’ve already touched upon, another factor to consider is the financial situation of individual employees. If your company is insolvent then there’s a very good chance that you won’t be able to pay employees their salaries or benefits. In this case, it’s important to inform employees as soon as possible so that they can begin making alternative arrangements to meet their financial obligations.

Telling employees that your company is insolvent is never easy and ultimately the decision of when to inform employees that the company is insolvent should be based on a careful balancing of the factors mentioned above. That said, it’s generally a good idea to inform employees as soon as insolvency becomes unavoidable while also being mindful of the impact on morale and individual financial situations. Of course, it’s not always possible to determine the point when insolvency becomes unavoidable so there will almost always be an element of personal judgement at play. If you’re struggling to inform your employees that the company is insolvent, it’s a good idea to seek the advice of a lawyer or insolvency practitioner as they will have the experience to navigate the situation delicately.

For more advice or assistance with telling employees that your company is insolvent, please don’t hesitate to contact us.