Cannot Pay The Staff Wages: So What Can Be Done?

Can’t pay staff wages? That is a clear sign that a company is insolvent. When that happens, the director’s Creditor Duty takes effect, and the responsibility of the directors shifts from the interests of shareholders to those of the creditors. If the problem is too deep to be managed internally, then a formal insolvency procedure such as Administration, Company Voluntary Arrangement and even Liquidation may be necessary. 

Risk Of Staff Walkout

Plainly, if the wages of the staff of a company are not paid, then they may no longer wish to stay with the company and support it through a troubled patch of company cash flow problems. The company may not be able to survive if employees walk out, as it may struggle to serve its customers.

Action To Take When Unable To Pay Wages Of Staff

Recognition OF Employee Rights

Employees have a legal right to be paid, and delays in the payment of wages mean a director who buries their head in the sand risks not only the collapse of the company but also potential personal liability from wrongful trading.

Assess The Financial Situation

It is necessary to carefully consider the company’s finances and prepare a cash flow forecast. 

In addition, are wages the only issue, or are there wider cash flow problems? Are there debts mounting with HMRC, suppliers, or lenders?

Consider Short-Term Financing Options

If the company has a profitable core business but is simply experiencing temporary cash flow difficulties, you may be able to raise emergency funds. Consider: invoice financing, overdrafts or short-term loans, directors’ loans. 

Using personal funds to cover payroll, though this carries risks for a director and whatever option you consider, think carefully before taking on further debt, which may make cash flow problems worse, so document your reasons for the actions taken.

Transparent Communication With Employees Over Their Wages

If you know wages will be paid late, let your staff know as early as possible. Be honest about the reasons and what steps are being taken to resolve the issue. Most employees will appreciate this and may be more patient if they are kept fully informed.

Failure to pay wages without explanation can result in resignations, employment tribunal claims, and even whistleblowing to HMRC or the Insolvency Service.

Take Advice From An Insolvency Practitioner

If the situation is deteriorating or you already know the company is insolvent (i.e., it cannot pay its debts as they fall due), you should seek immediate advice from a licensed Insolvency Practitioner (IP). An IP can review your options, which might include:

• Company Voluntary Arrangement (“CVA”) – A formal agreement with creditors to repay debt typically over a period of time.
• Time to Pay arrangement with HMRC – If tax arrears are part of the problem.
• Administration – If the business has value but needs protection from creditors while it restructures and is placed into a position where its survival could be possible as a going concern.
• Creditors Voluntary Liquidation (“CVL”) – If the business cannot continue trading and an orderly winding up is required.

Get Help And Speak To Us

Importantly, speaking to a licensed Insolvency Practitioner early can protect you as a director from accusations of wrongful trading or misconduct. If the situation is that you cannot afford to pay employees the national minimum wage, there may be other consequences to consider, so reach out to us for assistance as soon as possible.