High levels of inflation are causing many problems for business owners. Statistics from the Insolvency Service show insolvencies hit 1,827 in July, 67% higher than in 2021. A growing number of directors seemingly believe current economic conditions make survival impossible.
These are very worrying times for business owners, particularly where they feel a great responsibility to their workforce and the disastrous effect on staff livelihoods if their company goes into liquidation.
A failure to pay wages is generally the result of a cash flow shortage. Is this shortage short term or are there bigger underlying problems suggesting that your business model is not sustainable? The main point here is to seek advice early in order to have as many options as possible to resolve viability problems. If this scenario resonates with you, seeking advice early from an experienced Insolvency Practitioner will help you work through your company’s problem areas. A problem shared really often is, a problem halved.
It may be that your business has a future but has short-term cash flow troubles. It is vital to address the problem early. It may be that additional working capital is required in the interim. It is advisable to be honest with staff, explain the situation and explain what solution you have arrived at to solve the problem. Hopefully, staff will respond positively to your proactive approach and support the business.
There are insolvency processes that effectively draw a line in the sand. The business may be able to continue to trade and pay its current liabilities. Additional amounts can be put aside to pay “old” creditors an amount in the pound in full and final settlement of these liabilities. This can be done via a Company Voluntary Arrangement (CVA).
In these circumstances, a company Administration may be the solution. All or part of the business can be sold, providing funds to pay creditors and saving your employees’ jobs moving forward. This formal insolvency process, overseen by a Licensed Insolvency Practitioner (“IP”), is often used to facilitate a rescue of some or all of the business. It also gives the business time to maximise asset realisations.
It is important to get the best advice in these circumstances. For example, if a company is allowed to continue to trade and, as a result, the value of outstanding wages and creditors increases, then legal action can be taken against the directors and they can potentially be made personally liable for the losses incurred.
If a company cannot cover its payroll costs then this may just be the tip of the iceberg and a Creditors Voluntary Liquidation (CVL) may be the best solution. Here the company ceases to trade, its assets are realised and, if possible, a distribution made to creditors. Unfortunately, employees will lose their jobs but are legally able to claim holiday pay, redundancy pay, any unpaid wages and payment in lieu of notice period (limits apply) from the Government.