What happens when the administrator is called?

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Recent high-profile examples of companies going into administration such as Woolworths and Phones 4u has brought the process into the public consciousness. It causes distress to the workforce, and this impact is a major consideration for the company when considering administration options.

It’s important that HR directors understand what happens when the administrator is called in, so that they can fully participate in discussions with management and know how to handle employees’ concerns.

There are three key administration objectives, set out in The Insolvency Act 1986:

1. Rescuing the company as a going concern or;

2. Achieving a better result for the company's creditors as a whole than would be likely if the company were wound up or;

3. Realising property value by distributing it to creditors. 

The administrator of a company acts in the interests of the company's creditors. He or she may seek to sell off part or all of the business to new investors always with the overall aim of keeping the business trading and employees in their jobs. 

Insolvency is never good news for employees. Knowledge of a business becoming insolvent spreads rapidly through a company and staff will be concerned about their future. Administrators understand the distressing impact of administration on both employees and employers and are willing to work closely with businesses to minimise the impacts.

The Department for Business, Innovation & Skills, through the Redundancy Payments Office (RPO) provides guidance on redundancy for employers and employees on its website and in the booklet called Redundancy & Insolvency: A guide for Employees.

However, the RPO is responsible only for statutory redundancy payment and other statutory guaranteed debts payable from the National Insurance Fund when an employer becomes insolvent.  

It is important for HR managers to familiarise themselves with this information so that they are able to advise employees accordingly. During the administration process, HR staff will often be requested to address workers' concerns. These are the most frequently asked questions:

1. What are my rights when the business of our employer has been transferred under administration to a new entity or purchased by an existing business?

When such a transfer takes place the rights of employees and employers are governed by TUPE regulations.

Broadly speaking, the effect of the regulations is to preserve the continuity of employment and terms and conditions of those employees who are transferred to a new employer.

Under TUPE, the buyer will assume full responsibility for all employees and all the obligations of their current contracts. The buyer may choose to re-negotiate terms of employment but can only do so in the normal way with full consultation.

If the buyer chooses to make anyone redundant after the sale of the business goes through, then the employees in question are deemed to have continuity of service from when they were first employed in the original business.

2. How does the administrator choose who stays and who goes?

There is always the possibility of redundancies following administration. The administrator will seek to follow the rules on consultation and should liaise with union representatives, management and senior staff before making a final decision.

However, it is not always possible to follow the consultation process fully where certain branches are being closed down, or the administrator has been appointed at very short notice with no funding for wages, and so on. In these circumstances, redundancies can be made without notice or consultation as a last resort, but employees will be able to claim for lack of consultation at a tribunal.

3. My employer is insolvent and I have been made redundant. I am owed wages and holiday pay. How do I get my money?

An employee can usually claim 'Redundancy and Payment in Lieu of Notice'. In some cases, the government will pay the claim on behalf of the company, taking this from the company settlements at a later date.

Certain statutory limits will apply to employees’ claims, currently capped at £450 per week. Employees who are contractually paid more than this have a claim filed against the company, which is dealt with in the course of the administration or subsequent liquidation.

Remember, when a business goes into administration it does not always mean that employees will lose their jobs, even if there is a sale of the company. HR directors should familiarise themselves with regulations so that they can work with business owners and the administrator to find the best result for employees.

Melissa Jackson is director of the corporate recovery and insolvency department at CBW accountants. 

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