It has been suggested that the Company might appoint an administrator, with a view to selling the business. How will this affect our employees?


Patricia Rooney writes:


When appointed, an administrator acts as agent for the Company and for the benefit of all creditors. The administrator’s primary objective is to allow the Company to continue as a going concern.

As the administrator is the agent of the Company, employment contracts automatically continue. Once the administrator is appointed, he has 14 days in which to adopt contracts of employment. This means that if a contract is adopted by the administrator and continued beyond that 14 day period, the employees’ salary, together with contributions towards their occupational pension scheme, are payable out of the Company’s assets. These payments are made in priority to a floating charge or the administrator’s own costs and expenses. This will therefore allow the employees some protection knowing that their wages should be guaranteed after this 14 day period.

If the administrator elects not to continue with employment contracts, he can terminate those contracts, perhaps on the grounds of redundancy. If however, the administrator can rescue the business as a going concern and offer the business for sale, TUPE provisions will normally apply. In such circumstances, the administrator may rely on an economic, technical or organisational reason (ETO) for the termination of such contracts of employment.

In such a scenario, if the employment contract is terminated, the employees may recover payments from a government scheme (National Insurance Fund/Redundancy Payments Branch). Such payments are subject to a statutory maximum, namely the recovery of statutory redundancy pay, up to 8 weeks arrears of pay and up to 6 weeks holiday pay. Such payments are calculated up to the current maximum statutory weekly pay being £450. Employees dismissed for an ETO reason by the administrator are taken to be fairly dismissed on the grounds of redundancy and therefore could claim statutory redundancy pay and statutory notice pay.

If however the administrator dismisses employees unfairly because of the proposed sale/transfer, or a reason connected with it, under the TUPE Regulations such termination of employment is automatically unfair. Then the employees are not treated as dismissed on the grounds of redundancy and are therefore not entitled to pay in lieu of notice or statutory redundancy payments from the government scheme. They will be entitled to arrears of pay, and holiday pay, up to the date of administration, subject to the limits above.

The employees’ remedy in such circumstances is to issue proceedings against the Company and NewCo in the Tribunal alleging unfair dismissal due to the operation of TUPE Regulations. It is worthwhile remembering however that it is not possible to issue proceedings against the Company in administration, either without the leave of the administrator or of the High Court. Further, the fact that the Company is in administration suggests that it may have limited funds to discharge any Tribunal award.

If the administrator is able to rescue the Company as a going concern and sell the business, either as a pre-packed sale, or otherwise to NewCo, the employees should transfer to the new company. As there is no termination of employment, they will not be entitled to any redundancy pay or notice pay and the employees would normally transfer under their existing terms and conditions of employment. They may however be entitled to recover from the National Insurance Fund up to 8 weeks' arrears of pay and up to 6 weeks' holiday pay for the period of employment before the administration.

The Courts have held that an administration is relevant insolvency proceedings for the purposes of the TUPE Regulations. Consequently, in the event that the administrator is able to rescue the business and sell it as a going concern, following the transfer the parties can agree to variations to the contract of employment. Such changes to terms and conditions must be agreed between the employees’ representative (or a Trade Union if one is recognised) and the administrator or NewCo.

In the case of non-Trade Union representatives, any variation must be signed by the employee representatives. It should be noted however that under the TUPE Regulations there is no requirement that an individual employee must sign, or agree to, variations to their contract of employment.

For variations to be permitted under TUPE, the main reason for the changes to the terms and conditions of employment must be the transfer, or a reason connected with it, and that they are designed to secure the survival of the on-going business.

Whilst this provision of the TUPE Regulations relaxes the impact of TUPE in an administration, there is not a similar reduction in the obligation to inform and consult with the employees affected by the proposed sale. Employees should therefore expect that the administrator will inform and consult with their representatives in accordance with Regulation 13 of TUPE. Whilst there is a statutory defence that it was not reasonably practicable to consult, the Courts have demonstrated that they are reluctant to allow such a statutory defence simply because a Company is in administration. The absence of any consultation process would allow the employees to issue proceedings in the Tribunal where the Tribunal can assess joint and several liability on the Company and NewCo and may award up to 13 weeks’ pay to each employee.

It is not to be expected that any administration process will be announced in time for the employees to seek prior advice. The employees’ rights however, should be protected in part by the operation of TUPE Regulations, and their ability to lodge claims for statutory payments via the government scheme.

Note from Legal-Island: TUPE is just one of the topics under discussion at 'Commercial Law for Employers' on 11th June. See below for details.