A director of a company entering into administration will be faced with a number of serious issues that will need resolving in the weeks and months to come. Dealing with the contracts of employees, and calculating redundancy when a company goes into administration is likely to be one of the most sensitive, and one of the most complicated. 

The business world has seen near-unprecedented financial hits in recent years as a result of the COVID-19 pandemic, and the recent end of the furlough scheme ensures that the financial hits continue to come. 

It is more important now than ever that you know what rights your employees have; that you understand how much it is expected of the company to pay them in the event of redundancy, and how you go about making such a calculation. 

For more information on how to assist your business’ finances in the wake of the furlough scheme, check out our eBook.

What Does it Mean When a Company is in Administration?

When a company is in administration it means that it has a serious financial issue. This step may have been taken to stave off the threat of insolvency while regaining control over a difficult financial situation. Once a company has been placed into administration it has effectively been placed under the management of the administrator. 

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Control of the company is ceded by directors to the administrator, who takes stock of the entire operation to assess the financial situation. They will devise a strategy to turn the firm around and repay all creditors. 

When placed into administration, a company is afforded some time to begin the process of coming up with a plan going forward. This is because all legal proceedings the company is faced with are put on hold as an official moratorium is placed on the business.

Employee Rights When a Company Goes into Administration

A company in administration must make several key decisions. Not least of these decisions revolve around the employees’ futures. Workers’ rights will  depend entirely on their status within the firm, the importance of their role, and when they were let go (if applicable). The timeframe of redundancy will decide which type of creditor they go on to become. 

wooden pieces to signify employees of a business

An employee that is subjected to redundancy when a company goes into administration is likely to be placed into two core categories of creditor; ordinary creditor, and preferential creditor, with different rights for both. It is also important that you understand the rights of your employees in the event of the sale of your business as a going concern. 

Ordinary Creditors 

An employee will become an ‘ordinary creditor’ if they are made redundant within the first 14 days of administration. Ordinary creditors represent the lowest bracket of priority. This means that they will not see any money owed until every creditor above them has been paid. However, an employee under this bracket does retain the same entitlement to redundancy payments/outstanding wages.

Preferential Creditors 

Any employees retained for longer than two-weeks after the business enters administration will become a ‘preferential creditor’. This type of creditor has far superior rights when it comes to repayments should they find themselves made redundant at a later stage of the administration process.

In the event of redundancy, an employee kept on as a preferential creditor will receive any money owed during the four months preceding the insolvency on a preferential basis. Anything owed more than four months before insolvency will be handed out on an ordinary creditor basis.

 A preferential creditor is able to claim: 

  • Any outstanding salary/commission (up to £800)
  • Outstanding holiday pay up to six weeks
  • Occupational pension payments (where applicable)

For more information on what a preferential creditor can claim, and for any guidance, contact us today.

Staff Transfer in the Event of Insolvency/Sale 

If the business is set to be sold as a going concern, any employment contracts can be transferred to the new buyer. All employee rights are protected under the rules of the Transfer of Undertaking (Protection of Employment) legislation — known as TUPE for short.

This means that should your company be sold while in administration, new owners are required to transfer existing employee contracts across. All terms and conditions are also expected to be left unaltered, carried over, and fulfilled. These can include: 

  • Wages 
  • Holiday entitlement 
  • Hours expected to work 
  • Outstanding payments 

Calculating Redundancy Payments When a Company Goes into Administration 

A member of staff that has been employed for two continuous years prior to administration/liquidation is eligible for statutory redundancy pay. This payment is tax-free up to £30,000. The amount of the payment is calculated depending on age and length of contract. These calculations only consider the last 20 years of employment.

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Redundancy payments are calculated as follows:

  • Aged 18-21 – Employees in this band are entitled to half a week’s pay for every year they have been under the company’s employment. 
  • Aged 22-40 – This band allows for one week’s worth of wage for every year. 
  • Aged 41-65 – These employees are eligible for one and a half weeks wage for each year of employment.

Payment is capped to £544 a week — any employees earning amounts higher than this will all receive this flat fee as standard. 

If employee pay differs week to week then the amount owed is calculated by getting an average amount using the last 12 working weeks prior to redundancy. 

Any calculation of redundancy payment should be shared with employees and should include any overtime/bonuses/commissions stated in their contracts.

To be eligible for redundancy when a company goes into administration , employees must apply within six months of being let go. They must also succeed in a tribunal with the National Insurance Fund before funds can be made available. 

Not everybody applies for redundancy payments. Those not applicable include the following: 

  • Employees who reject an offer to continue/an offer of alternative work 
  • Any employees dismissed for misconduct 
  • Crown servants, members of the armed forces, and employees of the Police 
  • Apprentices 

Employee redundancy payments must be paid no later than their final payday unless an agreement has been reached in writing for an extension. Any failure to pay not agreed by both parties could lead to an employment tribunal and more serious sanctions.

How Inquesta Helps with the Company Administration Procedure

Going into administration has a reputation as a bad thing for a business and its employees. The reality is that it represents an opportunity for the company to secure its long-term future, with the hope that all employees can be retained in the process. 

However, redundancies may be inevitable if the financial difficulties are severe enough. As a result, it is important that you understand exactly how to calculate redundancy when your company goes into administration so you can do the right thing by your employees; as well as safeguard your business against any further sanctions due to poor redundancy practice. 

Inquesta’s team of insolvency practitioners have decades of experience supporting businesses through the administration process, and even acting as administrators on their behalf. 

Get in touch with one of our expert insolvency practitioners today for assistance with redundancy payments, as well as guidance with various aspects of corporate recovery and insolvency; from liquidation to business recovery and more. For more information book a free consultation or contact our team.