I Can't Afford to Pay My Staff - What Can I Do?
For every business owner, being unable to pay staff borders on the unthinkable. Our employees are the foundation of our business and trust us to repay their diligent hard work and commitment – but sometimes, that just isn’t possible.
In difficult situations like this, directors need to assess the company’s situation and make a plan of action that protects the financial welfare of their staff. Directors must also protect themselves by bearing their legal responsibilities in mind.
In this guide, we’ll cover what options are available to you and when they’re appropriate. We’ll also be taking a look at the potential legal implications.
Contents
Telling Your Staff
It’s crucial that you tell your staff there’s a chance they may not be paid as soon as possible.
Informing your staff is a scary prospect, but letting them know allows them time to come to alternative arrangements; it also helps to reduce any damage to employer-employee trust. Keeping staff on side will help to minimise further operational problems in this challenging time.
Giving your staff a nasty surprise on payday will not end well. They’re liable to quit, publicise their poor treatment on social media, or even pursue you for damages in an employment tribunal.
The Legal Implications
Your company is technically insolvent when you cannot pay your debts – such as wages – as they fall due. This is an important distinction as it fundamentally changes your duties as a director. When insolvent, directors must protect the position of company creditors instead of promoting the business’s success.
Unpaid employees will become creditors of the business as it owes them money; asking them to continue working unpaid will build up the business’s overall debt and worsen the position of all company creditors.
If the company then enters into insolvent liquidation, the decision to continue trading can result in accusations of misfeasance and wrongful trading. These charges carry a range of potential penalties:
- Disqualification from future directorship (from between 2-15 years)
- Court fines
- Personal liability for company debts
You can protect yourself from these charges by assessing your situation with an insolvency practitioner.
Review Your Situation
Understanding the root cause of your business’s cash flow problems will allow you to make the right decision going forward.
It may be that your business is struggling thanks to a temporary cash-flow issue; perhaps a debtor to the company has not repaid an invoice on time, leaving you in the lurch.
Alternatively, the problem may be more deep-rooted. Maybe the company doesn’t generate enough turnover to sustain itself, or you can’t keep up with your competitors.
There are various solutions, some better suited to short-term issues and others to long-term.
Solutions for Short-Term Issues
If your business is undergoing a temporary blip in its balance sheet, a short-term solution is your best bet. These solutions aren’t quite as drastic as formal insolvency procedures, but there are still some considerations to bear in mind.
It’s important to remember that these solutions are only intended for short-term issues. If your business is facing long-term problems, short-term fixes can make your situation worse, potentially causing further legal and financial fallout down the line.
If you’re struggling with unaffordable debt, speak to a professional before making any decisions. Many directors unwittingly commit misfeasance or wrongful trading offences while trying to save their company.
Call in Your Debts
This should be your first port of call. If you’re struggling to pay your debts, call in any money that’s owed to you.
Unpaid invoices from customers can be a real lifeline. Get in touch and explain that you’re in need of repayment; if they insist on more time or refuse, you can offer an early payment discount to encourage them to repay. Make sure that you only offer a reasonable discount.
Liquidate Surplus Assets
Another step to consider is liquidating any of your business’s surplus assets. While you may be in this situation because of a lack of sales, this option is not limited to your company’s stock. You can also sell nonessential property or equipment to make ends meet.
Pay Staff Wages Yourself
If you’re confident this is only a temporary problem, you can consider paying staff wages out of your own pocket.
Doing so will count as credit in your director’s loan account. This can be especially handy if you currently owe money to the company – reducing your debt will lessen your personal liability if it goes through insolvent liquidation later on.
Remember that this is only advisable if you think the company stands a good chance of getting back on its feet. You probably won’t be able to get your money back if you pay staff and the company then enters into liquidation, as you’ll be a low-priority creditor.
If the company is beyond saving, you should allow it to undergo liquidation so that staff can collect redundancy packages from the government.
Renegotiate Payment Terms
Contact your creditors – such as your suppliers – and explain your situation.
Tell them that your company has hit a financial speed bump, making it challenging to keep up with your payments, but that you’ll be back on your feet soon. Creditors will need to be assured that giving you more time to pay will give them a better chance of getting paid in full.
They may factor in additional interest charges on the debt as part of this renegotiation, so make sure you don’t make any unreasonable agreements. Doing so will just create bigger problems later on.
Time to Pay (TTP) Arrangement
If you have outstanding debts with HMRC, a Time to Pay arrangement could be the answer.
TTP arrangements, naturally, give you more time to pay. They generally establish a 3-6 month repayment plan, but can be longer. You can also amend the arrangements if you think you’ll need more time than initially agreed upon. According to HMRC, over 90% of these arrangements are carried out successfully.
You’ll need to convince HMRC that your company is actually viable and will be able to keep up with the arrangement. If the company suffers from deeper, long-term issues, it’s doubtful they’ll agree to a TTP arrangement.
Refinance
Business loans are a solid option for those struggling with temporary cash flow problems. You can use the loan to bridge the gap between now and your next big order, etc.
You can also take out loans to pay off old loans with unfavourable terms (such as high instalments or interest rates) and replace them with new, more favourable ones. This makes it easier to pay your staff by reducing your monthly overheads.
You need to be very careful when considering refinancing options. Lenders may require you to sign personal guarantees to secure the loan, leaving you personally liable for the debt if the business fails. This could result in you having to declare bankruptcy if you can’t pay it off.
Always seek advice before pursuing any kind of loan.
Solutions for Long-Term Issues
When a business is suffering from deep-rooted, long-term issues that go beyond a few unexpected bills and unpaid invoices, it’s time to think about formal insolvency procedures.
These options may appear daunting to business owners, but they offer legal and financial protection for company directors and, in some cases, the opportunity for a successful business recovery.
It’s best to act early to minimise any potential fallout. Early action also bolsters your chances to return to profitability.
Creditors’ Voluntary Liquidation (CVL)
As the most common form of liquidation in the UK, a CVL offers a range of benefits:
- Safeguards directors from creditor legal action
- Writes off company debts
- Prevents creditors from contacting you
- Cost of procedure is usually covered by proceeds of the liquidation
Control of the company will be handed over to a liquidator, who then sells the company’s assets to help repay creditors. Any remaining debts are written off.
Company Voluntary Arrangement (CVA)
If your business is struggling to keep up with its overheads – but you don’t want to see it go into liquidation – you should consider a Company Voluntary Arrangement.
A CVA acts as a repayment plan, allowing you to make one monthly contribution that is divided up between your creditors:
- Stretches out repayments over a course of 5-6 years
- Freezes interest on debts
- Safeguards you from creditor legal action
- Protects company from closure
So long as you keep up with your monthly instalments, your business will be able to operate as normal. These instalments will be worked out with your insolvency practitioner, tailored so that they are affordable for your company and reasonable for your creditors. At the end of the arrangement, any remaining debts are liable to be written off.
Keep in mind that you’ll need the backing of 75% of your creditors (by value) in order to enter into a CVA.
Administration
Although it is an expensive solution, administration can be a good choice for those who wish to keep their business open but have been unable to gain the backing needed for a CVA.
The process must seek to achieve one of the following outcomes:
- Rescue the company as a going concern
- Achieve a better result for creditors than a liquidation
- Realise assets to make a return to secured or preferential creditors
The administrator will seek to save the business – where possible – before defaulting to one of the other options. The process gives the business some breathing space, freezing interest and protecting it from legal action while the administrator returns it to profitability.
Typically, the process is used to get the business to a state where it can get the backing required for a CVA.
Speak to an Expert Today
If you’re unable to pay your staff, it’s vital that you get in touch with an insolvency practitioner right away. Inaction or uninformed decisions can result in civil or even criminal charges.
Our team will help assess your situation, letting you know the best course of action for you. You may just need a short-term fix, or you may need to pursue a more formal option such as a CVL or a CVA. Either way, we can help to ensure you’re upholding your statutory duties, keeping you out of hot water.
Get in touch today to book a free consultation.
