Right now it seems like not a week goes by without another household name going into Administration.  Over the last few months, we have seen Comet, Jessops, HMV and, most recently, Republic, all suffer this fate.  But what is ‘Administration’ and what does it mean for a company’s employees?  Perhaps unsurprisingly, the legal issues can be very complicated, explains James Willis. What is Administration? Administration is a form of insolvency proceedings.  It involves the appointment of a licensed insolvency practitioner to act as the ‘Administrator’ of the ailing company.  The Administrator has responsibility for the management of the affairs, business and property of the company, with the principle objective of trying to rescue the business as a going concern. What about the employees? When a company enters Administration, the Administrator has a period of 14 days in which to decide whether he/she wishes to ‘adopt’ the employment contracts of the company’s staff.  If the Administrator does not wish to adopt the employment contracts, he/she can dismiss the staff concerned.  If, however, the staff are not dismissed, then after 14 days the employment contracts are likely to be deemed to be ‘adopted’.  Once adopted, the employees enjoy 'super priority' status in relation to their on-going wages, such that these will be paid in priority to almost all other liabilities of the company. Of course, the situation is not so positive for those employees whose employment contracts are not adopted.  

We have all heard reports of Administrators swiftly wielding the axe and making large numbers of employees redundant almost immediately following their appointment.  If this happens, then the dismissed employees may have claims against the company for, amongst other things, wrongful and unfair dismissal.  But the problem is that employees are normally prevented from pursuing such claims because of an enforced moratorium on all legal proceedings against companies in Administration.  Furthermore, even if the employee could pursue claims against the insolvent company, there may simply be no assets from which to obtain compensation anyway.

 In such circumstances, employees may be entitled to receive limited compensation from the Government, through the National Insurance Fund.  However, this may not cover all the financial losses that the employee suffers. The ‘white knight’? Of course what we all hope for is for a ‘white knight’ to come along, rescue the ailing company and take on its entire staff.  If such a ‘white knight’ buys a business out of Administration, it will typically ‘inherit’ all its employees.  But the legal issues in such situations can still be quite complicated.  The buyer (for understandable reasons) will be reluctant to inherit too many unforeseen liabilities.  

The company in Administration, meanwhile, may be unwilling or unable to pay all sums due to its staff in order to keep such liabilities to a minimum.  Where employees find themselves caught in the middle, again, some compensation may be recoverable from the state.  But employees can still find themselves out of pocket. 

What about the future? These are very difficult situations, for any number of reasons.  Whilst protection of various sorts is built into the laws relating to employment and insolvency, there is still the potential for considerable financial hardship for individual employees.  The unfortunate reality is that whilst the threat of a triple-dip recession continues to loom large and economic growth remains stagnant, the prospect of further high-profile administrations is quite high. Want to know more? The Employment and Recovering & Insolvency teams here at stevensdrake recently worked together to present an in-house training session on employment law and administration to a national firm of insolvency practitioners. 

This article is provided for general information only. Please do not make any decision on the basis of this article alone without taking specific advice from us. stevensdrake will only be responsible for the advice we give which is specific to you.