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HRD's pocket guide to... liquidation

The HRD’s pocket guide series offers an explanation of areas outside day-to-day HR that business-savvy HRDs need to have a handle on

Why do I need to know about it?

According to The Insolvency Service, in 2019 company insolvency levels increased to their highest annual level (17,196) since 2013. It states this was largely driven by an increase in voluntary liquidations, which now account for 70.1% of all insolvencies.

Perhaps the most notable example was the shock collapse and subsequent liquidation of travel and tourism giant Thomas Cook in September 2019, which left thousands of British holidaymakers stranded abroad.

Another standout example was British Steel, which went into liquidation in May last year putting 5,000 jobs at risk. Luckily the business was saved by Chinese firm Jingye in a takeover deal worth between £50 million and £70 million (talks are still ongoing).

What do I need to know about it?

“A company that is unable to pay its debts is technically insolvent within the meaning of the Insolvency Act 1986,” explains Julie Hunter, a solicitor in the commercial litigation department at Stephensons. The company directors must try to reach an agreement with creditors to pay back the debts in instalments. If this isn’t possible the only solution is to put the business into voluntary liquidation, she says.

The court or the company itself then appoints a liquidator who finds and sells business assets to pay back the creditors. Any money left over after paying off debt will be distributed to employees in the following order: wages and pensions, injury payments, then annual or other leave.

“The liquidator will usually close the company very early in the liquidation process and dismiss employees. Although, in some cases, specific employees may be kept on to assist the liquidator to carry out certain aspects of the liquidation,” says Gavin Marsden, deputy chief technical advisor at The Insolvency Service.

“The liquidator will also secure company records to establish why it ran out of money, and whether any specific actions contributed or led to its demise,” he added.

Where can HR add value?

Liquidations are a time of massive upheaval for employees at every level, but particularly those on the frontline. As negotiations to save the business often continue up to the wire it can be a sudden shock for people to find out they’re no longer employed.

It’s important HR is there to comfort and advise staff, despite having lost their own jobs too.

“The loss of livelihood and future prospects with an employer is traumatic. Much depends on an individual’s circumstances affecting their ability to cope with the stress and uncertainty the liquidation has given rise to,” points out Stephen Perkins, an Emeritus professor at London Metropolitan University.

“As a minimum, one would expect HR to be involved supporting line managers in counselling the workforce; describing the steps that will be followed, including the timeline; and directing people to sources of support including practical services,” he adds.

These practical services can include help with making a claim to The Insolvency Service’s Redundancy Payments Service, which in some cases is able to provide redundancy pay, unpaid wages, overtime or bonuses owed.

Guy Pink, portfolio careerist and former executive director of HR at Addaction, agrees with the need to keep employees informed and supported, even in unusual ways.

“Having WhatsApp groups and managers with out-of-work contact details for staff – GDPR issues aside – can often be a great help as the company communications may have been disconnected,” he explains.

“This can help convey simple messages as to what is taking place if a rescue is mounted for the business, and if such an outcome occurs what then happens to staff.”

Mental health support will be just as important as practical interventions, Pink adds.

“Employees may have worked for the business for many years and liquidation can feel like a bereavement. The structure in their lives of going in to work daily is removed and their colleagues are no longer around them. Having a good EAP can provide a sound external support for staff and their families in what is a deeply upsetting time.”

Anything else?

Although liquidations can be chaotic, HR should ensure all company and employee information is up to date and accessible. This will help both the liquidator with the process and employees with any support they need to claim.