When a company is struggling, directors often reach the same conclusion: the business could survive if the wage bill were smaller.
Then comes the next problem.
“We can’t afford the redundancies.”
That can leave directors feeling trapped. Keep all the employees and the company continues losing cash. Make redundancies and the company may not have enough money to meet redundancy pay, notice pay, accrued holiday and wages.
It needs dealing with carefully, but it doesn’t automatically mean the company must close.
Start with the business, not the redundancy bill
The first question is whether there is a viable business underneath the current cost base.
If reducing staff from, say, 25 people to 18 would return the company to sustainable profitability, that is very different from a company that will continue losing money even after substantial redundancies.
I want to see the numbers after the proposed restructuring.
What does turnover look like? What gross margin remains? What is the revised monthly wage bill? What cash is needed to get through the next 13 weeks?
There is little point borrowing £100,000 to fund redundancies if the company will still be insolvent three months later.
Work out the real employment cost
Don’t estimate the redundancy liability by looking only at statutory redundancy pay.
Depending on the circumstances, employees may also be owed wages, accrued holiday pay, notice pay, contractual redundancy entitlements, pension contributions, expenses or commission.
For redundancies on or after 6 April 2026, statutory redundancy pay is currently based on a maximum weekly pay of £751 and a maximum of 20 years’ service. The maximum statutory redundancy payment is therefore £22,530.
Build an employee-by-employee schedule before making decisions.
Consultation still matters when cash is short
Financial distress doesn’t switch employment law off.
Where 20 or more redundancies are proposed at one establishment within 90 days, collective consultation rules become particularly important. For 20 to 99 proposed redundancies, the minimum period before the first dismissal is normally 30 days. For 100 or more it is 45 days, and the Redundancy Payments Service must also be notified using form HR1.
Since 6 April 2026, the maximum protective award for failure to comply with collective consultation obligations has increased to 180 days’ pay.
So leaving employment issues until the company has virtually run out of cash can make a bad position considerably worse.
Can the company fund the restructuring?
Possibly.
The answer may be existing cash, shareholder funding, refinancing, collection of debtors, sale of surplus assets or support from a lender.
There is also a little-known possibility worth exploring. Where making statutory redundancy payments would itself make the business insolvent, the Redundancy Payments Service says it may be able to assist, although sums paid become a debt that the business must repay.
That isn’t a universal rescue mechanism, but it is something I would investigate where the underlying business is viable.
What if formal insolvency becomes necessary?
If the company enters a qualifying formal insolvency process and employees are made redundant, eligible employees can claim certain amounts through the statutory scheme.
These can include statutory redundancy pay, up to eight weeks of unpaid wages, up to six weeks of holiday pay and statutory notice pay, all subject to the applicable statutory limits and conditions. Where those claims rank in the insolvency is explained in my article Who Gets Paid First in an Insolvency?
That safety net is important, but directors shouldn’t plan a formal insolvency simply because the government will meet some employee claims.
First ask whether the business can genuinely be rescued.
Directors who are also employees
This is often misunderstood.
Being a director doesn’t automatically prevent somebody from claiming employee entitlements following formal insolvency. A director can also be an employee.
But employment status has to be established. Evidence may include the employment contract, payslips, P60s, bank payments, working hours, holiday arrangements, pension arrangements and how the individual actually worked within the business.
A director who has simply taken irregular drawings and dividends shouldn’t assume a redundancy claim will succeed.
Don’t wait until Friday’s payroll fails
Redundancies take planning.
If the cashflow shows that wages become impossible in six weeks, that is the time to address the problem.
Not in week six.
Early enough, we may be able to restructure the workforce, refinance the cost, negotiate with creditors and preserve the viable business. Leave it too late and the only realistic option may be closure. I explain how to judge that point in When Should Directors Stop Trading?
Takeaway checklist
- Is the underlying business viable after restructuring?
- How many roles genuinely need to disappear?
- What are the full employee liabilities, not just redundancy pay?
- Does collective consultation apply?
- Has HR1 notification been considered where required?
- Is there enough cash to trade through consultation and notice periods?
- Can shareholders, lenders, debtors or asset sales fund the restructuring?
- Could RPS financial assistance be relevant?
- What does the revised 13-week cashflow show?
- Are directors who expect employee claims genuinely employees?
- Have alternatives to redundancy been considered?
- Has insolvency and employment advice been taken before cash runs out?
Final thoughts…
A company that cannot afford redundancies isn’t necessarily beyond rescue.
But there is an uncomfortable reality here.
If the workforce is too large for the business the company now has, doing nothing is itself a decision… and usually an expensive one.
The earlier we identify the real cost of restructuring and compare it with the cost of continuing as we are, the more options we have.
Sometimes that leads to redundancies and a smaller viable company.
Sometimes it leads to a sale, refinance or formal restructuring.
And sometimes the numbers tell us that an orderly closure is the better answer.
The important thing is to find out while there is still enough cash to make a choice.
Meta description
What happens when a struggling company needs redundancies but cannot afford them? Paul Brindley explains funding, consultation, RPS claims and the rescue options directors should consider.
Hashtags
#CompanyInsolvency #Redundancy #BusinessRescue #Directors #Cashflow #Restructuring #InsolvencyAdvice