Legal

How HR can prepare for insolvency

26 Oct 2020 By Raoul Parekh and Ben Smith

Raoul Parekh and Ben Smith explain what people professionals need to consider when faced with potential administration buy-outs

Covid-19 continues to affect almost all sectors, with economic forecasts making for grim reading. Some high-profile corporate scalps have already been claimed, and more are unfortunately likely as businesses try to navigate the ‘new’ normal, particularly with restrictions being reintroduced. On 30 September, the current relaxation of rules on insolvent trading, which may have insulated some businesses from insolvency so far, will end, likely triggering a spike in insolvencies.    

It’s not all bad news – businesses (or parts of businesses) are frequently bought out of administration. This can present challenges even for the most experienced HR professionals who are well used to M&A transactions and business integrations. Insolvent purchases happen fast, often without the time to get a full picture of the liabilities of the insolvent company. While insolvency can take many forms, there are some key things HR, whether for the buyer or seller, should consider in any form of insolvency to get ahead of any risks.

Top tips for seller HR

Maintain records. Keep an up-to-date spreadsheet of employees with job titles, salary, bonus/incentives, benefits, start date, notice period and date of birth. All other HR records should also be in good order. 

Redundancy consultation. The tricky (but important) assessment of whether and when to start redundancy consultations and notify potential redundancies to the government. Keeping good records of redundancy processes is also key as the purchaser will want this information. Expert advice should be taken.

Analyse shared services. In a partial sale, the buyer will assess which employees will transfer under TUPE and will need information, particularly about ‘shared service’ employees. HR will play a key role in determining whether these employees transfer.  

Top tips for purchaser HR

Many of the tasks here will be similar to the standard process when integrating new employees after a purchase. In the insolvency context though, everything is heightened: incoming employees may be (understandably) distressed after the insolvency process and HR will be trying to reconcile differences in benefits, job titles and other terms, as well as thinking about possible redundancies, often needing to act very quickly. HR should consider: 

Support claims under the National Insurance Fund (NIF). The NIF steps in where employees of an insolvent business are owed money by their employer that it cannot pay – such as wages, benefits or unpaid statutory parental payments such as statutory maternity pay. Generally, the NIF will cover only a fraction of what employees are owed so hardship grants or advance payments may be appropriate. HR should be on hand to provide information and support for employees to make their claims.

Quickly assess pre-transfer breaches. Employment law breaches may have occurred as a business approaches insolvency, from forced pay cuts to withholding of benefits. The new employer will generally inherit liability for these, with limited exceptions. It pays to react to this quickly and take risk-mitigation as needed. 

Plan ahead. The fallout of an insolvent purchase can be messy – unexpected employees claiming to have transferred or workers dismissed by the seller may try to claim they are now the buyer’s problem. These can’t be prevented, but an early risk assessment can help you get ahead of the issues. 

Raoul Parekh is a partner and Ben Smith an associate at GQ|Littler

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