Updated: 8th November 2020
As a director or employee of a company that is entering administration you may be afraid that your job position is not secure. An administrator’s primary legal obligation is to act in the best interest of the creditors, and in some cases this may mean liquidating the company and selling its assets to recoup as much money as possible; in other instances this could involve ownership of the company transferring if it is sold on. As an employee you will be understandably concerned about how such an outcome may affect the status of your employment. Here is what you need to know.
Once a company enters administration it is common for it to continue trading while a way forward is navigated. Control of running the business will automatically shift from the current owners to the appointed administrator. If the administrator (which must be a licensed insolvency practitioner) manages the business for more than 14 days without dismissing you, they must ‘adopt’ any existing employee contracts. This means that any unpaid wages or untaken holiday entitlement from this point onwards would be seen as ‘preferential creditors’ and must be paid through the proceeds of the company’s assets ahead of a number of other creditors.
However, while the company remains in administration you are still at risk of redundancy as there is the possibility that the business might not make it through administration as a trading entity. Sooner or later the company will have to exit administration one way or another.
While saving the business and continuing to trade is always preferable, if the outcome of the procedure is total liquidation then obviously there would be no company left to employ you and your employment will be terminated. In such an event you may be able to obtain compensation in the form of employee redundancy depending on your age and length of service at the time you are made redundant.
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The Transfer of Undertakings (Protection of Employment) Regulations 2006, more commonly known as TUPE, is a powerful ruling which aims to protect employee rights when the company they work for is sold or ownership otherwise changes. This may occur for a number of reasons and can affect employees of both successful as well as struggling companies. TUPE most frequently applies following the merger or acquisition of a business by a larger company, when a business’s service provision changes, or when a company is sold out of administration either to a connected or unconnected third party.
In line with TUPE regulations, in the event of a company being sold out of administration the new owners are required to transfer the contracts of all existing staff over to the new business, and they also become responsible for any outstanding payments owed to employees.
Crucially under TUPE regulations, the new owners cannot pick and choose the employees they want to transfer over; instead they are acquiring the entire workforce along with the other assets of the business. Existing terms and conditions of employee contracts cannot be changed and crucially, as an employee, your start date remains the same as it was before the company was sold. This continuation of service is extremely important should you ever face redundancy in the future.
Remember that when it comes to insolvency proceedings, TUPE only applies if the company you work for is sold out of administration; if the company ceases trading and enters liquidation then TUPE regulations are not activated.
In a pre-pack administration the sale of the assets of the insolvent company is arranged before an administrator is formally appointed. This sale could be to one or more of its existing directors, or to an unconnected third party. Since employees are considered a class of company assets their salaries and contracts are included in the pre-pack sale. As a sale has already been agreed, pre-pack administration often offers much more job security for any employee involved as their contracts will be transferred upon the sale completing.
As TUPE employment rights and regulations apply to the newly formed company it is unlawful for the new company to terminate the old company’s employees. This presents a significant challenge for some businesses that are trying to execute a successful pre-pack sale, as the new company may not be able to afford the payroll of the old company. Luckily, TUPE is not optional and adopting the contracts of existing employees is a matter which must be adhered to in all instances. The UK has employee rights that allow you to file claims against insolvent companies that do not fulfil their employer obligations.
If your employer has entered a formal insolvency procedure and owes you money, or you believe has violated your employee rights, you can file a claim against them with the Department for Business, Energy and Industrial Strategy (BEIS). This organisation would then act on your behalf in lodging the claim against the insolvent company. Unfortunately, many times employees are not paid out of insolvency proceedings due to insufficient funds.
However, when it comes to redundancy pay, should the company not be in a position to pay staff what they are entitled to, monies will instead be taken from the National Insurance Fund to meet this shortfall. If redundancy pay is being funded in this way then employees will only be able to claim at statutory redundancy levels rather than for any enhanced redundancy entitlements they may have otherwise been entitled to as per their employment contract.
Claims for arrears of pay are capped at the statutory limit of £525 per week which includes wages, sales commissions, and salaries. Notice pay will also be capped at this level.
If you are a company director who is considering administration, call us on 0800 644 6080 for expert help and advice. We will be able to talk you through the pros and cons of company administration, as well as explaining the alternative options which may be available to you through a free consultation. We can also explain how your employees may be impacted by any decision you make from here onwards.
With 101 offices stretching from Inverness down to Exeter, Real Business Rescue can offer unparalleled director advice across the UK.