The British economy may be displaying showing signs of growth but there are still plenty of companies feeling the pinch in the post-recession UK. According to research from Deloitte, 1,833 businesses went into administration last year.
If an employer has a series of debts that it can’t pay it has four choices: liquidation, receivership, a CVA/IVA or go into administration. Today, we’re going to look at how staff are affected in the event of administration.
What happens in administration
When a company chooses administration, it effectively asks an independent adjudicator, known as an Insolvency Practitioner, to take charge of the company.
The Insolvency Practitioner will restructure the company in an effort to prevent it from being liquidated and has the power to make anyone at the company redundant.
Redundancy pay during administration
Employees receive different employment rights when they’re being made redundant from an administration, depending on when they were made redundant:
• During the first two weeks of administration – employees are classed as ‘ordinary creditors’. This means that, while they are entitled to redundancy pay and any lost salary payments, they enjoy the same rights as the company’s other debtors and may never receive the money.
• After the first two weeks of administration – employees become a ‘preferential creditor’. This means they get paid in full before ordinary creditors.
That means that, if you survive for two weeks when your company is in administration, you’ll be entitled to everything set out in legislation and in your contract.
Pay cuts during administration
An Insolvency Practitioner may be able to limit job cuts at a struggling company by reducing the pay of staff – so you might be asked if you want to take a permanent pay cut.
However, some administrators offer employees the option of deferred pay. This is a temporary measure that ensures any pay that’s cut from your wage is listed as debt to you as a preferential creditor.
Life after administration
Administration is never an everlasting process and once the Insolvency Practitioner has finished their work it will aim to sell the company to another business. In this instance, any outstanding money will be paid by the buying company, in line with the Transfer of Undertakings (Protection of Employment) Regulations (TUPE).
There are also two other ways for a company to come out of administration:
• Agreeing a CVA – a Company Voluntary Agreement sees a company transfer all its undertakings and staff to a new company. This method means that all remaining staff are completely protected under TUPE but any debtors will only receive part of what’s owed to them because the company will only repay a portion of its total debt. Any unpaid money can be claimed from the National Insurance Fund.
• Entering liquidation – here a company will cease to exist and you will make your redundancy claim through the Insolvency Practitioner that’s appointed. Again, only a portion of your debt will likely be paid upon entering liquidation, so you’d have to claim the remaining money from the National Insurance fund.
Insolvency
If the company does become insolvent, you can claim a number of payments through the National Insurance Fund. You can claim for the following:
• Redundancy (Have you got questions about redundancy? Read Howells' essential guide to redundancy)
• Unpaid wages of up to a maximum of 8 weeks
• Holiday entitlement of up to 6 weeks
• Statutory notice pay
• Unpaid pension contributions
If you’re facing redundancy or job uncertainty because your company is entering administration, talk to the expert team at Howells today. Our employment solicitors will help you through the process and ensure your voice is heard – call 0808 178 2773.
