Closing a Loss-Making Company While Managing Employee Debt and Legal Risks
In a real-world scenario familiar to many struggling businesses, a company operated at a loss for two years before its owners decided to close its doors. However, the process was not as straightforward as filing for bankruptcy or simply shutting down. Small payments from an ongoing client contract kept coming in, complicating closure procedures, and delaying final decisions.
On top of this, none of the employees had formal employment contracts. When they were informed of the company’s closure, they requested severance pay equivalent to three months’ salary—a fair expectation under typical circumstances. However, with the company already in a financially fragile state, meeting this demand was simply impossible. The employees, feeling entitled to compensation, threatened to file a complaint with the Ministry of Labor if their demands were not met.
Possible Consequences:
Negotiations: The Ministry of Labor would first arrange negotiations between the company and the employees to try to reach an agreement.
Court Proceedings: If negotiations failed, the case could move to court, where the company would undergo a thorough audit. This would include:
Financial Audit: An independent audit may reveal unpaid taxes or other financial issues.
Legal Consequences for the Director: If issues are uncovered, the director would be held responsible, even if the company employed a General Manager. This is because, legally, the General Manager is an employee and does not bear primary legal responsibility.
Risks to the Company:
Potential fines for tax violations.
Legal proceedings with consequences for the director, depending on the outcome of the audit.
Our Approach: We stepped in as mediators to negotiate with the employees, aiming to avoid lengthy court proceedings and reduce risks for the company. Each meeting was carefully documented, recording:
Discussion summaries.
Meeting outcomes, including agreements or unresolved issues.
Signatures from both parties.
Identification of the negotiation initiator.
These records were essential, demonstrating the company’s commitment to resolving the issue amicably, which could benefit any potential legal proceedings.
Results of Our Efforts: Our financial review confirmed the company’s losses over two years. According to legal guidelines, a company experiencing long-term losses is only required to provide half a month’s salary as severance pay. This proposal was accepted by the employees in negotiations.
All payments were made from the company’s official account, and employees signed an agreement confirming no further claims against the company. Additionally, we ensured that employees returned company assets, such as laptops and phones.
Our mediation helped the company avoid a costly and time-consuming court case, resolving the conflict with employees peacefully. This approach minimized financial losses and protected the director from potential legal repercussions.
