Business Dissolution: Rights of Employees v Rights Of Owner

[trajan]

The following scenario is unusual but not unheard of.

A business operates in a non-protected sector, i.e. anyone with capital (substantial ~ €1.25 million) and requisite expertise may enter that sphere. Services offered by the business are toward small and medium manufacturers in that region for whom the outlay of equipment and expert staff of their own would be prohibitive compared to the cost of outsourcing it. Most client manufacturers obtain work done on a monthly, weekly or daily basis.

The 100% owner serves notice to the employees (20 professionals + 10 support staff) that he is to dissolve the business and pay them statutory redundancy. The owner rejects offers on the part of the employees en bloc to buy out the firm as a going concern; the putative buyout being funded by the company's present banks - which are also the personal banks for most of the employees' mortgages, pensions, life insurances, car-loans, etc - which see the business' revenue as liquid enough. This rejection is regardless of whether a new premises is found by the employees (effectively a bid for the company's equipment alone), so enabling the business owner to sell off the building currently housing the business. The dissolving owner likewise refuses to sell the business to rival companies in that region on the basis that the new owner retain most of the current staff complement. The owner's personal wealth and total ownership of the business allows him to make such a financially wasteful decision.

Theoretically, the existing employees could seek to buy equipment themselves to relaunch a new company. Yet in practice such equipment is highly specialized and only supplied months after an order is submitted - by which time the company's clientele would have long defected to rival service companies due to their immediate need to obtain the services. Moreover, with no ongoing business revenues after the old business' dissolution and with no more personal security than their own partly-owned homes and their modest redundancy payments, the employees en bloc would have very low borrowability status in the eyes of banks.

Do the employees en bloc have any legal case upon which to injunct the owner to stall the dissolution of the company ?

Can a court rule in such circumstances - where the employees face a fearful future of losing their jobs, homes and family security - that the owner be compelled to sell the business at fair market value to (any or all of) the employees in order to prevent totally unnecessary hardship inflicted by an owner simply because he can afford to do so ?

 

[Towger]

So in short, the owner wants (through pig headedness) to shut down the business, pay minimum redundancy and sell the building? What are they going to do with the specialist equipment, sell it for scrap?

I have experienced something like this, but the business was just sold with no offer to staff. Just a "your new boss will be here to see you tomorrow."

If I worked there, I would try to source new (or second hand) equipment and continue on with the existing clients. When you work in an specialized industry you hear about equipment being forsale or even competitors who have spare capacity. The building is 'easily' replaced.

 

[T McGibney]

.

Do the employees en bloc have any legal case upon which to injunct the owner to stall the dissolution of the company ?

In other words, can the employees of a company injunct its owner to prevent him from retiring?

I suspect the answer to that question is a firm No.

 

[trajan]

In other words, can the employees of a company injunct its owner to prevent him from retiring?

I suspect the answer to that question is a firm No.

Not quite stop the man from retiring.

Nor stop him from selling or dissolving the existing company.

But yes, stop him from dissolving it in such a vain way as to leave 30 people in grevious hardship.

 

[trajan]

So in short, the owner wants (through pig headedness) to shut down the business, pay minimum redundancy and sell the building? What are they going to do with the specialist equipment, sell it for scrap?

I have experienced something like this, but the business was just sold with no offer to staff. Just a "your new boss will be here to see you tomorrow."

If I worked there, I would try to source new (or second hand) equipment and continue on with the existing clients. When you work in an specialized industry you hear about equipment being forsale or even competitors who have spare capacity. The building is 'easily' replaced.

More through a sort of vanity, albeit a pigheaded one and one enabled by possession of plenty of capital. Many small business owners exhibit symptoms of NPD, as you may have noticed.

Equipment of this type is usually sold via industrial equipment auctioneers, normally in UK but sometimes on the continent. These types of auctioneers frequently deal in equipment repossessed from defaulters on leased or financed assets. The prices got by repossessors often seriously undershoot fair offers from interested parties locally but the process is convenient for banks, asset financers, etc as there will be a floor on the cash value obtained that is predictable, though lower than is possible with more assiduous selling. This is not to say that bargains can be had via such auctioneers: it is more a case that the margin goes mostly to the intermediary buying cheap from the auctioneer, then holding till a good margin is got from a person needing such items fast.

Obviously, existing clients must be assured that "all is normal and the matter will be worked out" - otherwise clients would defect immediately and any chance of resurrection would be lost. This seems to me to be a necessary stretching of the truth given the circumstances.

But to achieve this working out it would seem to me that a court injunction to prevent dissolution without fair and reasonable consultation with employee stakeholders would have to be applied for. No loss of retirement or disposal rights is involved in allowing existing employees to tender an independent market valuation offer for a business as an ongoing concern. Once the dissolution is stalled there is time to both explore legal options to give more consideration to the employees and all the while apply social pressure via TDs, media and wider public.

But the question is - and I accept it's an essentially industrial relations law matter perhaps - whether such an injunction be applied for on the grounds stated, i.e. reasonableness and fairness to employees who would be subjected to severe hardships otherwise.

 

[T McGibney]

Not quite stop the man from retiring.

Nor stop him from selling or dissolving the existing company.

But yes, stop him from dissolving it in such a vain way as to leave 30 people in grevious hardship.

Vanity isn't illegal, even if it is present here.

My guess is that the directors know that this business is in serious trouble and have chosen to get out when they can. The idea that they have deliberately opted to go through the painful and expensive process of closing down out of pig headedness or laziness is unlikely to have any foundation in fact. Humans are rational beings and an experienced businessman wouldn't throw away the smallest asset if there was some money to be made by selling it to someone.

There are pretty serious corporate enforcement laws to prohibit and punish reckless trading where the directors know that there are serious question marks over the continued ability of a company to meet financial commitments if it continues trading.

If an owner was to sell or even throw away such a business to employees or other third parties without disclosing any material facts to that effect, they could face future proceedings for deception and fraud.

IANAL but I'll eat my proverbial hat if there is a law anywhere that prohibits anyone from shutting down a business.

 

[trajan]

My guess is that the directors know that this business is in serious trouble and have chosen to get out when they can.

This is interesting.

So you're saying it might be a case of a business good trading position (that's what the externals like custom and pricing suggest) but one nonetheless whose net assets (perhaps due to borrowings on the the assets on the part of the owner as a private individual ?) may be seriously negative ?

Formal borrowings on the company fixed assets, i.e. premises and/or fixtures, fittings and equipment, would normally invoke a charge on such assets and a corresponding document to be submitted to Companies House. However, informal borrowings on the back of a relationship of trust between the owner and lender may not be so secured . . .

IANAL but I'll eat my proverbial hat if there is a law anywhere that prohibits anyone from shutting down a business.

Again, the injunction is not to stop the owner from shutting down a business (which is trading well actually) but more to suspend and informally but thoroughly examine the business so as to establish the viability of an employees buyout and thus protect employees from apparently unnecessary hardship. This process cannot proceed concurrent with a dissolution process so the latter must be suspended.

 

[T McGibney]

So you're saying it might be a case of a business good trading position (that's what the externals like custom and pricing suggest) but one nonetheless whose net assets (perhaps due to borrowings on the the assets on the part of the owner as a private individual ?) may be seriously negative ?

I didn't say that, so please don't put words in my mouth

What I did say was significantly more concise and easier to understand than whatever it is you're trying to express in the above paragraph.

Again if the directors of a company deem that a situation exists where the continuation of business may entail reckless trading, they have a legal obligation to cease trading in order to safeguard the interests of creditors including those relating to staff entitlements.

 

[Brendan Burgess]

Trajan

Are you asking about a specific case or is this a theoretical case?

I doubt that there is anything to stop an employer ceasing to trade and paying redundancy to his employees.

Likewise, if the employees set up a company and offers to take over the business but not the property, thus saving the employer the very high costs of redundancy, there is nothing to stop the employees from making such an offer.

There is TUPE legislation but I am not familiar with it. I doubt if an employer could make all his staff redundant and then set up in business again under a new company. He would face a claim for unfair dismissal. Or sell the building and contents to me and I set up in business from scratch without the old employees.

If it's a real situation, there is probably something else going on here. The employees may have stymied their employer over the years and now it's payback time even if it's costing the employer. But selling it to the employees might be effectively rewarding them for their behaviour.

If it's a competitive business, the customers must go somewhere. They employees should be getting ready to offer their services to competitors.

Brendan

 

[trajan]

Are you asking about a specific case or is this a theoretical case?

A bit of both.

I saw small businesses close when they were viable and the employees could have taken them over. In those cases the will wasn't in the employees to seek to continue a very good trading business. But it's eminently imaginable that cases could occur where employees would be in a bad way were such a dissolution to happen.

I doubt that there is anything to stop an employer ceasing to trade and paying redundancy to his employees.

On the face of it, an employer discharging employee obligations may well be clear to dissolve at will.

The Citizens' Information on this is scant and doesn't exclude other factors but one has to have access to the precise legal provisions (and legal advice no doubt) to form an opinion on all that. I'm not sure a business lawyer would be the best choice here as their clientele is pro-owner. Maybe more for an employment lawyer. When I can afford them .

Likewise, if the employees set up a company and offers to take over the business but not the property, thus saving the employer the very high costs of redundancy, there is nothing to stop the employees from making such an offer.

Indeed. But where an employer does not entertain an employees' takeover and where the business equipment could not be acquired within the real window of opportunity for continuance of trade, in fact where the only viable means of employees' takeover is through buying the existing equipment that the owner doesn't want to sell to them, then it seems to me that the employees' only hope lies in the legal route.

If it's a competitive business, the customers must go somewhere. They employees should be getting ready to offer their services to competitors.

For service type business, all providers will have a share of slack with regard to additional capacity. If the lost trade is mopped up by 2-3 rival companies the number of re-hired employees from the dissolved business will be small and the latter will likely have to relocate.

If it's a real situation, there is probably something else going on here. The employees may have stymied their employer over the years and now it's payback time even if it's costing the employer. But selling it to the employees might be effectively rewarding them for their behaviour.

Yes, some employees blackguard their employer. In those cases payback is in order for sure.

But some employers see themselves as a class apart, whether by virtue of their capacity to raise capital for ventures or their swashbuckling deal-making and selling. Bossing employees around for years, they tend to view employees' ambitions and managerial skill as too low to continue "their" enterprise. I've met many employers who made a point of giving no help - even a word of encouragement - whatever to anyone going out on their own. It's not a nice thing to say but most small business owners I've come across were motivated by neither the desire to bring something new to their industry nor even to make a lot of money for themselves. It seemed to be nothing more than a desire to be in control of matters around them using resources as a tool.

Not much more I can say here till legal opinion is sought. Will post if an opinion is got.

 

[time to plan]

Even if the employees could stop the owner from making them redundant and winding up the business (and I can't see how they could do more than delay it by arguing that a correct consultation process had been followed), what is to stop the owner from telling all his clients that he is tripling his prices and destroying his business model, and then making the employees redundant?

 

[T McGibney]

But some employers see themselves as a class apart, whether by virtue of their capacity to raise capital for ventures or their swashbuckling deal-making and selling. Bossing employees around for years, they tend to view employees' ambitions and managerial skill as too low to continue "their" enterprise. I've met many employers who made a point of giving no help - even a word of encouragement - whatever to anyone going out on their own. It's not a nice thing to say but most small business owners I've come across were motivated by neither the desire to bring something new to their industry nor even to make a lot of money for themselves. It seemed to be nothing more than a desire to be in control of matters around them using resources as a tool.

Horrible sentiments.

Small businesses are often treated like absolute dirt in this country. No wonder so many of them throw in the towel.

 

[trajan]

Even if the employees could stop the owner from making them redundant and winding up the business (and I can't see how they could do more than delay it by arguing that a correct consultation process had been followed), what is to stop the owner from telling all his clients that he is tripling his prices and destroying his business model, and then making the employees redundant?

All the employees could do in such a situation - and it is the critical factor in this time-sensitive situation - is to personally meet and explain the stand-off to the clients and what the employees' legal case is, assure them of business as usual for the present and for the immediate future. Good professional relations with clients are never as crucial as in situations like these since here all business logic indicates the need to change service supplier.

 

[time to plan]

All the employees could do in such a situation - and it is the critical factor in this time-sensitive situation - is to personally meet and explain the stand-off to the clients and what the employees' legal case is, assure them of business as usual for the present and for the immediate future. Good professional relations with clients are never as crucial as in situations like these since here all business logic indicates the need to change service supplier.

I work in IT an would absolutely be trying to set up business to take on the clients in this situation. But it sounds as if the equipment needed is a barrier. The employer might be open to an offer to buy the equipment. Worth a go I would say.

 

[trajan]

The employer might be open to an offer to buy the equipment. Worth a go I would say.

The employer's unwillingness to sell business equipment to employees is the chief handicap in the whole scenario.

Anyway, this matter is for legal people.

 

[time to plan]

The employer's unwillingness to sell business equipment to employees is the chief handicap in the whole scenario.

Anyway, this matter is for legal people.

I don't suppose the employees are Trade Union members.

 

[Silversurfer]

The employer's unwillingness to sell business equipment to employees is the chief handicap in the whole scenario.

Anyway, this matter is for legal people.

What is stopping the employees buying the equipment through a third party when the business closes? Failing that buy new equipment and delay the sale of the current business in the meantime.

 

[Brendan Burgess]

I doubt you are being told the full story.

He is probably refusing to sell because they have made a derisory offer. Many employees have a sense of entitlement. They think that their employer owes them a living. He is probably fed up dealing with them.

Brendan

 

[thedaddyman]

As long as the employeer adheres to the law on collective redundancy, I'm not sure what else the staff can do here. It does sound like pig-headiness and an element of "no one could run the business except me". Note if he sold the business to a competitor then TUPE would probably apply and most new buyers would not give a guarantee of employment beyond what they are legally obliged to do.

In effect, can you legally force a staff buy out- almost certainly not.

Is staying on in the building and let him retain ownership and then rent it- in effect it becomes a "pension fund" for the owner an option?

 

[trajan]

In effect, can you legally force a staff buy out- almost certainly not.

Even if that enforcement were in extreme circumstances, I realize that courts would be very worried lest they create a precedent that might in time become an on-demand expectation by future applicants. Such a ruling would also inevitably have enormous implications for management-staff trust in small businesses.

Is staying on in the building and let him retain ownership and then rent it- in effect it becomes a "pension fund" for the owner an option?

As explained earlier, the premises is not an issue as new premises are found easily for industrial letting. Most service business equipment is relocatable over a long weekend, i.e. Friday - Sunday, with a good meitheal of manpower.

The issue would be rather the refusal by the owner to sell specialist lab equipment that is not readily obtainable secondhand at short notice and has a lead time of 4-6 months if ordered new. Time is of the essence to the employees who need an income to hold their lives on course. Thus the injunction application idea.