It's important for HR directors to understand what happens when the administrator is called in, so they can fully participate in discussions with management and know how best to handle employees' concerns when insolvency occurs.
The main objective in any administration is the survival of the company. If this cannot be achieved the administrator will 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.
In some cases, a business might be lucky enough to secure investment from a 'wealthy do-gooder' (Peter Jones recently saved Jessops) who steps in to save the company from administration - and many people's jobs.
Sadly, many companies might be seen as too big a risk and will go through a process of liquidation that involves the collapse of the company. In certain circumstances the business will be sold and jobs saved. However, when the business has to be shut down, the assets are sold and the staff dismissed.
Insolvency is never good news for employees in a business. News of a business becoming insolvent will spread rapidly through a company and employees will naturally be concerned about their future.
But just what are the rights of the employees and what powers does the administrator have to compromise those rights?
Despite stories in the media to the contrary, Insolvency Practitioners are careful to ensure that an employees' rights and claims are protected. In recent years, this has been enforced by legislation and where it is appropriate or possible, administrators will aim to comply with the requirements before making redundancies.
During insolvency, HR staff will often be called upon to address the concerns of worried employees, typically these are:
Will I be made redundant and how does the administrator choose who stays and who goes?
There is always the possibility of redundancies following administration. In the case of redundancy, 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 etc. In these circumstances, redundancies can be made without notice or consultation (but only as a last resort).
However, employees will be able to claim for lack of consultation at an employment tribunal.
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 usually 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.
The business of my employer has been sold and we are to be re-employed by the buyer. What are my rights?
Employees in parts of the business that have been sold will be transferred under TUPE (Transfer of Undertakings) rules that protect employees' terms and conditions, although employees have the choice not to go across with the business.
Under TUPE, the buyer will assume full responsibility for all employees and all the obligations to them under 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 employee is deemed to have continuity of service from when they were first employed in the original business.
In summary, when a business goes insolvent, it is not always Armageddon. Employees' rights remain and are protected by law. HR Directors will need to be up to speed on these regulations as they work with business owners and the administrator to find the best solution for the future of the company and its employees.
John Alexander and John Dickinson are insolvency practitioners and partners with London accountancy firm, Carter Backer Winter
