Dealing with Redundancy to Employees During a CVA

Employees are the lifeblood of any business and are legally entitled to appropriate remuneration for their work and time of service. This not only includes their income, but also their entitlements should the position no longer be available, and employees are made redundant. You may be wondering in the case of insolvency, if a company enters a CVA (company voluntary arrangements), and avoids paying redundancies, what happens to employee rights?

Can a Company Avoid Paying Redundancy?

While it may seem counterintuitive that an insolvent company is still responsible for employee payments if an employee is made redundant, that is the case. A company cannot avoid paying redundancies because it has entered a CVA.

Consider for a moment the way a CVA works. A company voluntary arrangement requires the reasonable belief that the company (though experiencing financial difficulty) is still essentially sound and can be restructured to turn around viability of the company while also dealing with money owed to creditors.

The insolvency practitioner (the nominee for the CVA) will carefully review and consider all debts owed by the company, and any restructuring of the company required for the turnaround. If redundancies are required, the financial obligations the company owes to their employees will be factored into the proposal made to creditors.

A CVA cannot go ahead unless 75% of creditors approve the proposal. As such, in dealing with redundancy to employees during a CVA, the insolvency practitioner is not likely to make a proposal to creditors unless it’s reasonable to believe the CVA could be successful.

If a company enters company voluntary arrangements and avoids paying redundancies, they may well find themselves facing allegations of unfair or wrongful dismissal and having action taken against them at an employee tribunal. This could in turn affect how favourable creditors are towards the CVA proposal. A professional insolvency practitioner will not submit a CVA proposal that deliberately avoids obligations to employees.

What If My Company Is Unable to Afford Redundancy Payments?

What does it mean when you’re dealing with redundancy to employees during a CVA and your company is unable to afford redundancy payments?

The UK Government has systems in place that ensure employee rights are not lost if a company is unable to afford redundancy payments. The cost of redundancy payments for each employee is included in the CVA proposal meaning that once approved, employees receive their redundancy payments in a timely fashion from the Insolvency Service, and the company repays that money to the government over the life of the CVA.

So, if you hear people stating Company Voluntary Arrangements avoids paying redundancies, that is not actually correct. The redundancies are still paid to employees, but it is the government making those payments and then recouping that debt from the company over time through the CVA. It becomes a fair outcome for employees while also creating a more viable outcome for the company.

Professional Advice when Dealing with Redundancy to Employees During a CVA.

Insolvency can be a concerning time with employee rights to consider as well as honouring debts and seeking to improve the long-term viability of your company. Contact Irwin Insolvency today for professional, tailored advice when dealing with redundancy to employees during a CVA.