One of the hardest parts of company insolvency is not the law, the paperwork, or even HMRC. It’s the people.
When a business is in trouble, directors often spend weeks focused on cashflow, creditors, and survival. Meanwhile, employees can see the same signs you are … late wages, rumours, reduced hours, whispered conversations in the office, and an uneasy feeling that something is wrong.
How you handle staff in that period matters legally, practically, and morally.
I’ve been around insolvency long enough to know this: directors rarely regret being too clear, too humane, or too organised with employees. They do regret drift, mixed messages, and false reassurance.
So this post is about the people side of insolvency … what employees can claim, what directors should be saying, and how to handle a very difficult moment properly.
What employees are entitled to know
If an employer becomes insolvent, employees may be made redundant, asked to keep working, or transferred to a new employer if the business is sold.
That means directors should not assume insolvency automatically equals everyone is finished today. Sometimes staff are retained for a period. Sometimes a sale saves jobs. Sometimes redundancies happen immediately. The point is that employees need timely, truthful communication, not guesswork.
What employees may be able to claim
Where the employer is insolvent, employees may be able to claim from the government for:
- a redundancy payment
- holiday pay
- unpaid wages, overtime and commission
- statutory notice pay
That is important, because many directors wrongly assume that if the company has no money, employees will simply have to join the unsecured creditor queue and hope. In many cases, they have a separate route through the Insolvency Service’s redundancy payments process. (GOV.UK)
There is also a point directors often miss when they themselves are employees of the business. GOV.UK says a company director can claim too, but only if they were genuinely an employee as well, and the Insolvency Service will ask for evidence. (GOV.UK)
What directors should say … and what they should not
This is where tone matters.
Do not tell staff everything is fine if it plainly is not. That only destroys trust later.
Do not make promises you cannot honour, especially around pay dates, jobs, or ‘buyers who are definitely coming in’.
And do not disappear.
A better approach is simple:
- acknowledge there is a serious financial issue
- explain that professional advice is being taken
- tell staff what is known, and what is not yet known
- give a realistic timeline for the next update
- point employees towards the official insolvency and redundancy claim guidance if appropriate (GOV.UK)
Clarity calms people. Vagueness usually does the opposite.
The director’s legal position
Directors remain legally responsible for company records, accounts and overall performance, even if they use accountants or advisers. And if the company becomes insolvent, directors’ responsibilities shift toward creditors.
That matters when dealing with employees, because staff costs are often one of the biggest ongoing outgoings in a distressed business. Directors need to be honest with themselves about whether continuing to employ staff, or continuing to trade at all, is reducing losses overall or simply increasing the hole.
That is not an argument for a cold or mechanical response, it is an argument for facing reality early and handling people decently once you do.
Practical tips for directors
Here’s what I advise in real cases.
1. Get your facts straight before the meeting
Know:
- whether wages will be paid
- whether work will continue
- whether redundancies are likely
- whether an insolvency appointment is imminent
- who staff should contact next
If you do not know the answer to something, say so plainly.
2. Use one clear message
Mixed messages between directors, managers and HR create chaos. One agreed script is better than five inconsistent conversations.
3. Keep a record of what was said
This is not about hiding behind paperwork, it is about avoiding later disputes over who was told what and when.
4. Point staff to official claim routes
If insolvency is happening, do not leave employees to work it out themselves. The official insolvency rights guide and redundancy claim service are there for a reason. (GOV.UK)
5. Be especially careful if you are a director-employee
If you may wish to claim yourself, keep in mind that the Insolvency Service will want evidence of genuine employment status, not just the title of a director. (GOV.UK)
Where this fits with the earlier blogs
This post sits naturally alongside the earlier articles in this series on:
- the first 7 days after insolvency becomes likely
- 13-week cashflow forecasting
- wrongful trading
- preferences and undervalue transactions
- misfeasance claims
Why? Because employee communication is not separate from those issues. It is part of the same discipline. Once a company is in real trouble, directors need to deal not only with creditors and cash, but with people whose livelihoods depend on what happens next.
Takeaway checklist
If your company is in serious financial difficulty, ask yourself:
- Do we know whether wages can be paid on time?
- Have we decided whether staff are needed to continue working?
- Are we being honest with employees about the position?
- Have we recorded what has been communicated?
- Do staff know where to find the official insolvency and redundancy claim guidance?
- If any directors may claim as employees, do they have proper evidence of employee status? (GOV.UK)
Final thought
Insolvency is never easy. But one of the things people remember for years is how they were treated when the business was under real pressure.
Staff do not expect miracles. They do expect honesty, structure, and basic decency.
Handled properly, even very bad news can be delivered in a way that preserves dignity and trust. Handled badly, it creates unnecessary anger, confusion, and sometimes legal fallout as well.
That is worth getting right.
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