When a company enters financial distress, administration creates uncertainty for staff. This formal insolvency process places the company under the direct control of a licensed insolvency practitioner, known as the Administrator. The primary purpose of this intervention is to attempt a rescue of the business or to achieve a better outcome for its creditors than would be possible through immediate liquidation. Employees must understand the immediate changes to their employment status and their rights concerning pay and job security during this period.
Defining Company Administration and the Administrator’s Role
Administration is a legal mechanism, governed by the Insolvency Act, that temporarily shields an insolvent company from its creditors. Upon appointment, the Administrator immediately assumes operational control, and the powers of the company’s directors are suspended. The Administrator’s function is centered on achieving a set of statutory objectives, which dictates all subsequent decisions, including those affecting the workforce.
The Administrator must pursue a strict hierarchy of goals, starting with the highest priority: rescuing the company as a going concern. If that is not reasonably achievable, the next objective is to realize company property to achieve a better result for the creditors than a liquidation would provide. Finally, if neither of the first two is possible, the goal becomes realizing property to make a distribution to the secured creditors. Employee retention is only justified if it directly serves one of these financial objectives.
The Immediate Status of Employment Contracts
The appointment of an Administrator does not automatically terminate employment contracts, but it does trigger a 14-day assessment period. During this time, the Administrator must decide whether to formally “adopt” the existing contracts of employment. This decision is one of the most significant legal consequences for staff who are kept working.
If the Administrator elects to keep an employee working beyond the initial 14-day window, the contract is automatically deemed adopted. Adoption elevates the legal standing of the employee’s wages and liabilities. Wages and other liabilities that accrue after adoption become an expense of the administration, granting them a “super-priority” status. This means post-adoption pay must be settled promptly and takes priority over the claims of most other creditors. If a contract is not adopted, it signals the Administrator’s intention to terminate employment quickly, leading to redundancy and an employee claim against the insolvent estate.
Continuing Work and Getting Paid During Administration
For employees whose contracts are adopted, work duties continue, with the Administrator effectively acting as the employer. Because post-adoption wages are a super-priority expense, they are paid on time and in full as a cost necessary to keep the business operational. This high-priority status applies to all wages accrued after the 14-day adoption period.
The situation is different for any outstanding wages or debts owed from the period before the Administrator was appointed. These pre-administration arrears, which include unpaid wages, commissions, or expenses from prior months, are treated as unsecured debts. Employees must claim these debts through the government’s insolvency scheme, as the company in administration is generally unable to pay them directly. The Administrator retains the right to terminate any adopted contract at any point if the company’s financial situation demands a reduction in personnel for the purposes of streamlining the business for sale or rescue.
Staff Rights When the Business is Sold
If the Administrator sells the company or its operations as a “going concern,” the rights of retained employees are protected by law. The Transfer of Undertakings (Protection of Employment) Regulations (TUPE) govern this transfer. TUPE ensures that employees automatically transfer to the new owner with their existing terms and conditions of employment intact.
The employees’ continuous service record is also preserved under TUPE, which is important for calculating future entitlements like statutory redundancy pay. A new owner may wish to make changes to the transferring employees’ contracts or make redundancies, but they are limited in their ability to do so. Dismissals primarily due to the transfer itself are automatically unfair, though the new employer may still implement redundancies for “economic, technical, or organizational” (ETO) reasons that require changes in the workforce.
Understanding Redundancy and Employee Claims
Redundancy is a common outcome in administration, whether declared by the Administrator seeking to cut costs or by a new owner after a TUPE transfer. When an employee is made redundant due to the company’s insolvency, they must apply to the government’s Redundancy Payments Service, which is part of the Insolvency Service, for their statutory entitlements. This process ensures employees receive certain payments even if the company has no funds remaining.
To begin the process, the Administrator provides the employee with a case reference number (CN number), which is required to submit an online claim. The government scheme covers several specific payments, subject to statutory caps on the weekly pay used for calculation.
The scheme covers the following entitlements:
- Statutory redundancy pay, calculated based on the employee’s age and length of continuous service.
- Arrears of pay, covering up to eight weeks of unpaid wages.
- Accrued but untaken holiday pay, typically limited to six weeks.
- Statutory minimum notice pay if the employer did not provide the required notice period.
Any amount owed above the statutory payment caps, or for claims not covered by the scheme, must be registered as an unsecured debt in the administration.
Essential Resources and Next Steps
Employees facing administration should immediately focus on gathering and organizing documentation related to their employment and the insolvency process. This includes all pay slips, the original contract of employment, and every piece of written communication received from the Administrator. Accurate records are necessary for a successful claim through the Insolvency Service.
Once made redundant, employees should contact official employment advisory services or a trade union for guidance on the claims procedure. Employees should also apply for employment-related state benefits, such as Universal Credit or New Style Jobseeker’s Allowance, to maintain an income stream while awaiting payments. Updating a curriculum vitae and registering with local employment agencies can help manage the career transition.