Not being able to pay staff is a classic cash flow problem, and it raises the question of whether the business has hit a bump in the road or if the situation indicates insolvency.
In situations like this, it’s crucial to have sound financial advice, so consult your bookkeeper and accountant to really gain the best possible understanding of the bigger picture.
Will you be able to resume payroll in a few weeks, or is the overall viability of the limited company in question?
Of course, there’s also the practical matter of how your staff will react if they find they’re going to be paid late. We recommend formulating a clear plan before discussing this with them so you can explain what actions you’re taking to resolve the situation.
First Steps When You Can’t Afford to Make Payroll
Keep clear lines of communication open with employees if they’re going to be paid late. You should expect them to be worried and angry with the news, but they will appreciate being told over getting the shock of not being paid. Even if your team is close-kit and with a lot of loyalty to your firm, you should expect staff to be predominantly concerned with their own financial situation.
Consider immediate options for raising money. Directors can loan the company money personally, you can sell assets, see if a customer can pay early, or utilise invoice finance. You can take out a business loan if your company credit allows.
Try to give staff a clear idea of when they can expect to be paid via a timescale.
Contact your accountant or financial adviser to examine the ongoing viability of the company. Is this a temporary blip or is it indicative of impending insolvency? Perhaps you have other creditors looming, beyond your employees.
If you feel the company is insolvent, then you should contact a licensed insolvency practitioner such as ourselves. Insolvency means that you cannot prioritise one creditor over another – and this includes employees. An informal chat with an expert will ensure you don’t compound the insolvency by
What are Your Practical Options if You Can’t Pay Employees?
If you are unable to pay your employees, you have two main options: try to rescue the company or close it down. Company rescue involves taking steps to keep the business open and trading, such as entering into a Company Voluntary Arrangement (CVA) or administration. Formal insolvency involves closing the business down and winding it up.
Company Voluntary Arrangement (CVA)
This structured repayment plan with creditors must be proposed by a licensed insolvency practitioner. CVA’s are proposed for a proportion of the debt, so if creditors vote to accept the proposal, you will be able to pay back a reduced debt over an agreed timeframe.
Going into Administration
Suitable for larger companies, administration is a rescue mechanism whereby an administrator (insolvency practitioner) assumes the running of the company for a period of restructuring. During this period, a legal moratorium protects the company from creditor action. NB: as with other insolvency processes, administrator must offer a better return for creditors than the alternatives.
It’s also worth mentioning that if the administration results in the sale of the business, a regulation known as Transfer of Undertakings (Protection of Employment) or TUPE will mean their employment contacts transfer to the new business. This would mean the new company assumes responsibility for wage arrears.
Voluntary Liquidation
If the current cash flow problems indicate that the business simply cannot continue then your best option is to close the company as efficiently and painlessly as possible. Choosing voluntary liquidation will mean the company ceases trading and an insolvency practitioner takes over creditor communication. The IP’s job will be to sell any assets the company may have and pay creditors in order for priority.
Which Option is Right for you?
The best option for you will depend on your specific circumstances. Our experienced advisors are here to help you with free, confidential advice via live chat, telephone or email. We’ve helped thousands of directors through company debt.
