Can't Afford To Make Redundancies - Worried Directors Guide

I need to make some employees redundant but I can't afford to pay redundancies or wages because of cash flow problems. What can I do?

Well there are 2 types of actions that you can take.

You could enter into an insolvency procedure such as administration or a company voluntary arrangement that will allow the company to make redundancies at no cost because the government will pay the redundancy payments from the national insurance fund. This is handled by the redundancy payments office (RPO). To see how it works in practice see our page on redundancy and CVA. The same will apply in administration as well.

But what if you really do not want to go into any sort of formal insolvency ie there are no real debts? However, you are very sure that this is just a temporary problem but you still need to make redundancies for the good of the company as a whole and save the remaining jobs? This situation may arise where a bank overdraft has been withdrawn or a contract is taking longer to get started.

Well, you may be surprised to hear that the Redundancy Payments Office can make a "loan" to the company to pay these liabilities. How it works in practice is that the redundancy will be actually paid to the employee and the company will need to pay back the payment on a timescale to be agreed. This can be from 1 to 3 years.

So what is the catch? The redundancy payments will be the statutory amounts up to the maximum of £425 per week- which is the salary used to make the calculation. To see the actual chart of what can be paid look at this graph. This will mean that if your employee is 43, has worked for 6 years, they will be entitled to 7 x £525 which is £3675. Also the amounts are paid direct to the employees although that isn't really a catch at all.

So how do I go about making a claim?

You need to convince the RPO that;

1. You do not have the funds or other resources to make the payment.
2. By receiving the assistance it will save a significant number of jobs.
3. The assistance will secure the solvency of the company for the foreseeable future; and
4. You will be able to repay the loan within an agreed period.

In order to do this you will need to submit management accounts and demonstrate why you have not been able to come up with the funds. You will also need to provide forecasts for the business. If you need help with this or want to know more please call us on 08009700539 or email help@ksagroup.co.uk

How long does it take?

Payments take 6-8 weeks so you need to make an application in plenty of time.

Can't afford to pay the staff wages?

If this is the case then the company is obviously insolvent and you need to act quickly. It may well be that you have just done a cash flow forecast and you are looking at a few months in advance. Even so, as a director, you have a duty to act and should take advice. Remember that a CVA or any other type of insolvency event allows the company to make redundancies at no cost and also any unpaid pay can be claimed by the employee.

It may well be that a liquidation or administration is the only option here.

Categories: Turnaround, What is a CVA or Company voluntary arrangement?