A familiar and deeply uncomfortable position

For many directors, few situations feel as paralysing as realising your business can no longer comfortably meet its payroll, while at the same time knowing that redundancy costs are simply unaffordable. It is a position we see regularly at Parker Walsh, particularly in smaller owner-managed companies where staff are loyal, long-serving and integral to the business. The emotional weight of the decision-making is often as heavy as the financial pressure.

Cash flow distress rarely arrives overnight. More often, it creeps in through rising costs, delayed customer payments, reduced demand or the loss of a key contract. By the time wages are being questioned, the company is usually already under significant strain.

Understanding your legal duties as a director

When a company becomes insolvent or is approaching insolvency, the focus of a director’s duties shifts. Instead of acting primarily in the interests of shareholders, directors must consider the interests of creditors as a whole. Continuing to trade while knowing staff cannot be paid in full, or favouring some creditors over others, can expose directors to personal risk.

This does not mean that every company facing payroll difficulties must immediately cease trading. It does mean that decisions need to be taken carefully, documented properly and based on sound professional advice.

Why redundancy is not always the immediate answer

Redundancy can appear to be a clean solution, but in reality it often creates an additional cash crisis. Statutory redundancy pay, notice pay and accrued holiday entitlements can quickly add up, particularly where employees have long service. For a company already struggling to pay wages, finding these funds can feel impossible.

In some cases, directors delay action out of fear, continuing to trade in the hope that things will improve. Unfortunately, this can deepen losses and increase the eventual cost to creditors, including employees.

Exploring realistic alternatives

There are circumstances where short-term measures can provide breathing space. Informal discussions with staff about reduced hours, temporary lay-offs or deferred pay can be appropriate, provided they are handled transparently and lawfully. Open communication is critical, and any changes must comply with employment law and contractual obligations.

More fundamentally, directors need to assess whether the business is viable in the medium term. If there is a realistic prospect of recovery, formal restructuring options may be available that protect jobs while addressing creditor pressure.

The role of formal insolvency solutions

Formal insolvency procedures are often misunderstood as business failure. In reality, they can be a mechanism for dealing with unaffordable liabilities in an orderly and lawful way. In certain insolvency processes, employee claims such as redundancy and notice pay may be met by the Redundancy Payments Service, rather than the company itself. This can remove the immediate financial burden from the business and the director personally.

Molly Monks F.I.P.A of Parker Walsh, a licensed Insolvency Practitioner, regularly advises directors in exactly this position. Her focus is on providing clear, practical guidance that balances legal obligations with commercial reality. Early advice can often mean the difference between an orderly solution and a disorderly collapse.

Acting early protects everyone

The most damaging decisions are usually those made too late. Ignoring the problem, missing payroll, or making promises to staff that cannot be kept can quickly erode trust and worsen the outcome for all involved.

Seeking professional advice at the first sign of difficulty does not mean you have failed. It means you are taking your responsibilities seriously and giving the business, and your employees, the best possible chance of a fair outcome.

A difficult position, but not one you have to face alone

Being unable to afford staff wages while also being unable to fund redundancies is one of the hardest positions a director can face. It is complex, stressful and emotionally draining. However, there are options, and there is support available.

With timely advice from an experienced licensed Insolvency Practitioner, directors can make informed decisions, protect themselves legally and ensure employees are treated as fairly as possible under very challenging circumstances.