Sharon McDougall: What does company administration mean for employees?
Sharon McDougall, a DAS-approved money adviser at Scotland Debt Solutions, part of Begbies Traynor Group, outlines the implications of company administration for employees.
Company administration is a statutory process that provides respite from creditor pressure for companies in financial distress. Creditors owed an undisputed debt of more than £750 can petition through the courts to have a company wound up, but entering administration immediately ceases any such legal actions.
A company in administration will be insolvent but, crucially, still viable and potentially capable of being restructured or sold in the professional view of a licensed insolvency practitioner.
The appointed administrator may be able to restructure the company by formally renegotiating its debts, for example, or it might be sold as a going concern. Whatever the outcome, administration affects company employees and the first 14 days after entering the process are crucial.
How are company employees affected by administration?
Members of staff who remain employed during the first 14 days of company administration become preferential creditors and may recover outstanding wages or other payroll-related payments more quickly than those who lose their jobs during this period.
Employees who are made redundant in the initial 14 days become unsecured creditors and, unfortunately, fall lower down the statutory hierarchy for repayment. This means they may not receive the payments and redundancy monies as quickly as employees who are kept on, although their right to claim remains. Where a company cannot afford to make redundancy payments, staff who are eligible can claim this and some other statutory entitlements from the National Insurance Fund (NIF).
Why might employees be made redundant in administration?
The administrator’s goal is to rescue or restructure the company so that financial stability improves and it can carry on trading with less financial and creditor pressure than it was experiencing previously.
One of the ways a company can be restructured is by cancelling onerous contracts to lower its outgoings. An administrator may also reduce the company’s payroll obligations by making jobs redundant and streamlining operations.
When a business transfers to a new owner, legislation is in place to protect employment contracts and preserve an employee’s rights. The Transfer of Undertakings (Protection of Employment) regulations, also known as TUPE, maintain an employee’s existing hours of work, rates of pay, and other terms.
What happens to staff who are retained by the administrator?
The administrator may have plans to sell the business using pre-pack administration. This means that elements of the business can be purchased by a third party, and employee contracts are protected by law.
It may even be possible for the administrator to keep the company trading during the period of administration, which would preserve jobs. This helps to present the business as a going concern if a sale is deemed to be the best outcome of administration.
After 14 days, responsibility for employee rights is adopted by the administrator. Although employees’ legal rights are not altered by this, the administrator could ask members of staff to accept a pay cut or to defer some of their wages to provide the company with a better chance of long-term survival.
What does administration mean for a business and its employees?
Administration does not mean that a company is going out of business. Although liquidation is a possibility, the company will have entered administration because there is still potential for a positive outcome.
Although worrying for employees, administration does offer the ‘breathing space’ that the company needs to ‘regroup’ and potentially survive. The extreme creditor pressure that companies typically experience is relieved immediately by going into administration, and this can prevent the enforced liquidation that would mean company closure and the loss of all jobs.