Last week, BBC News reported that a record number of businesses are experiencing financial distress and facing insolvency. For HR professionals, it is important to understand the employment implications. In this week’s blog we explore what happens to employees when a business is placed into administration, when it is sold out of administration, and when it enters liquidation.

Administration: a temporary measure

Administration is often the first step in an insolvency process, designed to protect a company from creditors while attempting to restructure or find a buyer. When a business is placed into administration, an administrator – usually an insolvency practitioner – takes control of the company’s operations. Their primary goal is to rescue the company as a ‘going concern’ or, if that’s not possible, to achieve the best return for creditors.

For employees, administration can create significant uncertainty. In the short term, administrators often continue to operate the business to maximise its value. This means employees typically remain in their roles. However, redundancies may be made if downsizing is necessary to stabilise the business.

HR professionals should prepare for potential workforce restructuring during administration. The fact that a business is in administration does not mean that any ‘short-cuts’ to legal processes are automatically available. If 20 or more redundancies are proposed at one establishment then collective consultation obligations will still apply. There is a narrow defence to any failure to collectively consult where ‘special circumstances’ exist. However, the fact that a business is insolvent and the commercial pressures that go with such a situation is unlikely, on its own, to be regarded as ‘special circumstances’. When deciding on the level of any award the tribunal will always take account of what has been done and this can be important in limiting liability. If time pressures do not allow for a full collective process to be followed, all efforts should be made to do whatever is able to be done in the timeframes allowed.

Sale out of administration

In some cases, administrators may sell the business, either partially or in full, to a new owner. This can have varied implications for employees, depending on the nature of the sale.

If the business is sold as a going concern, the Transfer of Undertakings (Protection of Employment) Regulations (TUPE) may apply. TUPE safeguards employees by transferring their contracts, including terms and conditions, to the new employer. Where a business is bought out of administration, there are certain changes to the usual position. Certain liabilities (or part thereof) will not transfer to the new employer: sums which an employee may be owed from their outgoing employer such as wages, and holiday pay up to 8 weeks’ pay (currently capped at £700 per week). These sums can generally be claimed by the employee direct from the Insolvency Service. If employees are owed in excess of the amount they are entitled to claim from the Insolvency Service, then these remaining liabilities will transfer to the purchaser.

Usually, TUPE does not permit changes to be made to the employment contracts of transferring employees if the reason for those changes is the transfer. However, where a business is in administration then changes to terms and conditions of employment are allowed provided that they are agreed by ‘appropriate representatives’ of the affected employees and have the aim of safeguarding the survival of the business.

The requirement to inform and consult with affected employees (or their appointed representatives as appropriate) about the sale still applies in full. As with collective consultation for any redundancies (see above), there is a defence if it can be shown that there were special circumstances making it not reasonably practicable. The defence is narrowly construed. An administration situation is not likely to be enough on its own to bring the defence into play. HR should try their utmost to do what they can in the limited time which is likely to be available to them.

Liquidation: the end of the road

Liquidation marks the closure of a business and the cessation of its operations. When a company goes into liquidation, all employees are automatically dismissed as the business ceases trading.

Employees become creditors in the liquidation process, entitled to claim for unpaid wages, holiday pay, redundancy pay, notice pay from the business. However, there is often insufficient liquidity for the business to repay these amounts. Employees are therefore also able to claim through the government’s Insolvency Service in the same way as when there is a sale out of administration. These payments are capped, and employees unfortunately may not recover the full value of what they are owed.

The administration and liquidation process is undoubtedly challenging for all employees, but particularly for HR professionals, who find themselves in the unenviable position of navigating and supporting the process, often while facing the uncertainty of their own employment.