HR gets the short straw in insolvencies

When companies go bust, is there anything that HR departments can do to ease the pain?

My first job was making books at a factory in Frome. Twenty years on, the BBC reports that the very firm, Butler and Tanner, is “history” and that nearly 287 staff are owed £400,000. It reports employees saying they had not realised how bad things were and that “hopefully” in a month they would “know what is happening”.

In addition to all the usual problems faced by those who lose their jobs, employees in an insovency situation do not know if they will ever be paid money they’re owed.

Making a difference

HR can normally make a difference to redundancies – by ensuring that an appropriate process is agreed and is implemented properly, thereby reducing risk for the employer and making things easier for staff. However, when a business goes bust things are different.

Sometimes finances can deteriorate so quickly that the HR team will not know of the problems until an insolvency practitioner has been appointed and they have lost their own jobs.

The insolvency practitioner’s job is to recover money for creditors. They will be concerned about employees only if this benefits creditors generally. They may look after employees so that something remains attractive for sale, and sometimes steps will be taken to reduce the risk of claims. But more often than not, employees will be summarily dismissed, given some forms to complete and left to it.

The employees will be preferential creditors, which essentially means that some of what they are owed (capped holiday pay, back wages, statutory redundancy pay) will be paid before debts owed to others. Whether this gives any comfort depends on how much money there is – and the insolvency practitioner should not pay staff until it has all the figures.

No quick fixes

In the meantime, employees should apply for payment of the limited debts that are underwritten by the National Insurance Fund. And employees able to make tribunal claims in relation to unpaid wages, holiday pay, unfair dismissal, redundancy pay, failure to consult, etc, should do so promptly.

The outcome of most tribunal claims will be fairly certain, as there should be documentation (good HR records will be appreciated) and the insolvency practitioner may not spend money contesting them.

Claims relating to collective consultation will be less certain, however.

Liquidators may be lulled into a false sense of security by the recent High Court decision in Day v Haine, where it was held that collective dismissal consultation claims could not be successful against a Company in liquidation if the tribunal exercised its discretion to make a protective award after the liquidation began. That decision has been sent to the Court of Appeal and the High Court’s decision is likely to be overturned.

Beyond hope

In a catastrophic business context, there is little that HR can do to help as they will probably be dismissed too, and the role of any HR manager who remains temporarily will probably be limited to paperwork.

However, insolvent businesses do not always go into immediate liquidation. There may be a period of administration and part of the business may be sold. Jobs may be saved, and the special insolvency rules in the Transfer of Undertakings (Protection of Employment) Regulations 2006 may apply. The HR team may be asked to help the transition, and there will then be scope both for reducing risk for old and new employers and for helping employees.

HR can usually make a difference where the business is sick, but not where the illness is terminal. Insolvency law is necessarily tough, but where employees are concerned it could be made a lot clearer. Those employees should not have to deal with uncertainty and the creditors should not have to pay for clarity in court.

Key points

• Employees of an insolvent business are preferential creditors
• They may be able to get some of any money owed paid via National Insurance
• If employees are able to lodge claims wage claims with tribunals they must do so promptly
• Well-kept HR records may be very useful

Useful information

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Transfer of Undertaking (Protection of Employment) Regulations 2006

Director appeals in liquidation case