Company Administration – how am I affected?
Given the current economic climate, it is unfortunately to be expected that an ever greater number of companies are going into administration. I have spoken to more and more people recently who are employed by businesses where administration is happening or imminent. These people are understandably worried and want to understand what administration is and what it might mean for their personal situation.
In the current climate it can be expected that larger numbers of companies are going into administration. I have spoken to a number of people recently who are employed by businesses where administration is happening or imminent. These people are quite concerned and want to understand what administration is and what it might mean for their personal situation.
If a company is considering Administration, it means that the business is facing significant problems which are threatening its ability to survive. Usually the business will be in a position where it is struggling to pay the people it owes money (its creditors) and there is a risk that they may try to force the company to be closed. In this situation, significant changes will normally be required for the company to survive.
It is normally the directors or shareholders who apply for Administration. However, the process could also be started by sympathetic creditors who want to see the business work so they have the best possible chance of being paid and many be trading with the business into the future.
The Administration process gives a struggling company a legal protection or breathing space from its creditors for a period of time. This could be for up to a year or longer in certain cases. During this time any legal action currently being taken against the business by its creditors is suspended, for example any winding up petitions are cancelled. In addition, creditors cannot start any new actions against the business. The time given to the company while it is in administration is used to try and rescue the business by implementing changes which will make it viable again.
The Administration process must be agreed by the court. If the court agrees that the administration should take place an Insolvency Practitioner is appointed to manage the business. This person is called the administrator. The first job of the administrator is to analyse the business and determine what the options are. The changes that the administrator will suggest may be potentially significant and radical. For example, these might include significant cost savings involving employee redundancy and or the sale of some or all of the business. If the administrator believes that the business is not viable, they may recommend that it is closed in its entirety.
Once the company enters Administration, the administrator has a maximum of 8 weeks to review the company’s affairs and produce a report stating what is going to be done to rescue the business or if it is deemed that a rescue is just not possible, why this is.
The effect on the company’s employees on entering into administration will really depend on the decisions made by the administrator. During the administration process, wages (i.e. PAYE and NI payments) must still be made by the company. If a decision is made that part of the business can be saved but some of the employees are no longer required, then they will be made redundant and will be paid redundancy according to the contractual obligations of the company.
Under European TUPE (Transfer of Undertakings and Permanent Employment) law, if any part of the company is sold, then any employees within this part of the business must be transferred to the new owner under the same contractual terms as they had with the old business. This does not mean that the new owner has to continue to employ these people. It can make them redundant if they are deemed unnecessary for the new business. However, the redundancies must be carried out in accordance with the contractual obligations of the old company. Most importantly the time that employees worked for the old business before they were transferred to the new one must be taken into account.
Where the administrator decides that the business cannot be saved, then they will initiate the process of closing the company. This will generally be done by the process of Creditors Voluntary Liquidation. In this situation, only if the business can afford it, will employees be paid any monies owed. If not, employees will have to have to make a claim for a statutory redundancy payment from the government National Insurance Fund (NIF). Unfortunately these payments are very limited. Employees, who are owed more than they are able to claim from NIF, will rank as preferential creditors, which means that once the company is closed and any assets liquidated, they will be paid after payment of the insolvency’s expenses but subject to a maximum of 800 pounds. Any balance owed will be treated as unsecured debt in the same way as the company’s trade creditors, and it is unlikely that employees will recover more than a small proportion of what they are owed.
Overall, the outcome of a company administration can be that all or part of the business is saved and the employee’s jobs are preserved. However, more often than not, radical change will be required and unfortunately this will lead to employee redundancies. Given this situation, if you believe the business you work for is considering administration or has entered into it, it is important to hope for the best but also prepare for the worst and review your options for employment elsewhere if only for peace of mind.
Resources:
Derek Cooper is Managing Director of Cooper Matthews Limited http://coopermatthews.com and a member of the Turnaround Management Association UK.
With significant experience in working with small to medium sized businesses, Cooper Matthews specialise in providing straight forward insolvency advice for businesses with financial problems.
Free expert advice on Company Administration visit http://coopermatthews.com/administration-order.html
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