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Human resource
management in administration concerns human resource management as
it applies specifically to the field of public administration. It is
considered to be an in-house structure that insures unbiased treatment, ethical
standards, and promotes a value-based system. Administration is the most common
insolvency procedure and is designed to promote company re-organisation and/or
efficient asset realisation whilst creditors are kept at bay under the
protection of what is called a “statutory moratorium”.
An Administrator is
appointed to promote (if possible) the rescue of the company as a going
concern. Because the administrator is an agent of the company, his or her
appointment does not amount to a change of employer, so employment contracts do
not automatically terminate on the appointment.
Generally speaking,
if an employee carries on working for a business that an administrator is able
to sell, and that employee decides to stay on, TUPE regulations protect the
employee’s contract of employment. The new owner will usually take over the
obligation to pay what is owed to that employee. Under TUPE regulations,
existing terms of employment contracts transfer automatically to the new
employer after 14 days. If the new employer refuses to meet the terms of an
employee’s contract of employment, then that may amount to breach of contract.
If an employee is
made redundant by the administrator, he or she can claim unpaid wages from him
or her. However, there is no guarantee that the full amount your staff are owed
will be paid, as this depends on whether or not enough funds are raised from
the sale of the company and/or its assets. Some debts (known as “preferential
debt”) must be paid out before other debts.
Administrators have
been busy on the UK high street since the beginning of the year. HMV and
Blockbuster were the first to call in administrators and this week fashion
retailer Republic is reportedly close, putting around 1,000 jobs at risk.
Sadly, the news that a high street retail business is going
into administration has become a regular press feature in the current
contracted market. So just what does "administration" mean and what
are the implications of this process for employers?
What does administration mean for business?
Despite public perception, when a company goes into
administration this does not always mean "game over" for that
company. When companies are in financial trouble administrators are appointed
to take control of the company with the primary objective of saving the
business, which will often entail internal restructuring and job losses. If
saving the business is not possible, the administrators strive to achieve a
better result for the company's creditors than if the company were wound up
without first going through administration. This will inevitably involve sales
of the company's assets (and perhaps eventual liquidation).
What role do employers play?
For employers, the primary concern in administration will be
to maintain employee relations and work with the administrators to manage job
losses. However, once administrators are appointed, employers hand over control
of the company to them. It is clear that, from a Human Resources/Employee
Relations perspective, there are likely to be conflicting interests between the
administrators and the employer throughout the process.
Employers are not authorised to make decisions about the
future of the company once it is in administration and are instead obliged to
cooperate fully with administrators to sympathetically implement any changes
that must be made.
Option 1: Save the company as a going concern
Administrators act as an agent for the company, so their
appointment will not terminate the employment of the business's workforce. Staff
will usually receive their salary as usual, but it will be important to manage
employee morale once administration is announced. Ensuring that staff
is well informed and their expectations are managed is key to minimising the
risk of employees taking to social media sites to voice their discontent.
Where an administrator proposes to make 20 or more employees
redundant within a 90-day period, employers and administrators will need to
work together to ensure that the company's collective consultation obligations
are met. The fact that the business is in administration will not be sufficient
for the company to rely on the "special circumstances" defence for
any failure to comply with its collective consultation obligations. Therefore,
poor management of staff during an administration process can result in
liability for a "protective award" in the employment tribunal of up
to 90 days' pay per employee.
Option 2: Sale of the business' assets
Where a company is in administration, the administrators may
sell company assets to repay creditors, which may trigger the Transfer of
Undertakings (Protection of Employment) Regulations 2006 (TUPE). TUPE contains
certain concessions where the transfer is insolvent in the hope that it will
encourage the rescue of more businesses. For example, employees of a business
in administration can expect to transfer to a purchaser but, contrary to the
ordinary rules, it is potentially easier for an administrator or a transferee
to vary transferring employees' terms and conditions of employment.
Regardless of which route administrators adopt, the process
will be unsettling for the workforce. HMV bosses were recently left red-faced
when employees took control of the HMV Twitter page, posting tweets about the
"mass execution of loyal employees" to reasonable number of
followers, with #HMV X-Factor Firing trending as a result. This serves as a
powerful reminder to employers that an inclusive process will benefit not only
the staff affected but also protect the value in the company's brand.
Companies that went into administration from the year 2007-2013;
Q - What is insolvency?
A - Insolvency arises when individuals or businesses have
insufficient assets to cover their debts, or are unable to pay their debts when
they are supposed to.
Q - What procedures are open to an insolvent company?
A - These fall into six main categories. The first
four provide the potential for the rescue of the company or its business, while
the last two do not:
- Administration
- Company voluntary arrangements
- Scheme of arrangement
- Administrative receivership's
- Compulsory liquidations
- Creditors’ voluntary liquidations
Q - What is administration?
A - Administration is one of a number of formal
English insolvency procedures.
There are three entry routes into administration in
England:
- By an order of the court;
- Appointment by a qualifying floating charge holder; and
- Appointment by the company or its directors.
Administration stops any legal action or process
against a company from proceeding, unless the Administrators or the English
Court give permission. This means that creditors can’t take legal action
against a company in administration to recover outstanding amounts.
Q - What is the purpose of the administration?
A - An Administrator must perform his functions with
the objective of -
- Rescuing the company as a going concern, or failing that;
- Achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up (liquidated) (without first being in administration), or failing that;
- Realising property in order to make a distribution to one or more secured or preferential creditors.
The Administrator must perform these functions in the
interest of the company’s creditors as a whole.
Q - What will happen next?
A - The Administrators will initially review the
company’s position and collect information about the company. The
Administrators will assess whether there is there is the support (the
employees, the suppliers, the customers and a fund if required) to continue
to trade the business.
The Administrators will take over the day to day
control and management of the company.
Q - I am owed money, what notification will I receive?
A - The Administrators will write to all known
creditors of the company (as recorded by the company) as soon as is reasonably
practical to inform them formally of the appointment.
The Administrators will send a report to all known
creditors with 8 weeks of appointment. This report is known as the
Administrators’ proposals and will outline steps taken by the Administrators to
date and the strategy going forwards.
The Administrators are also required to provide a
written update on the administration to all known creditors every 6
months. This report will be sent within one month of every 6 month
anniversary or earlier if an Administrator vacates office or an extension to
the administration is granted.
Q - What is a pre-pack?
A - A pre-pack is a shortened form of the phrase
“pre-packaged administration”. A pre-pack is a deal to sell the assets of
a failed company, which is agreed prior to the insolvency, and is then usually
completed almost immediately after the appointment of the Administrators.
It can be the best way of preserving value for the business,
creditors and shareholders. If a business enters administration it may
result in disruption, uncertainty and a real certainty that the business would
cease to operate, meaning losses to all stakeholders.
A pre-pack transaction can mean a smooth transition with
enhanced realisations for creditors and the preservation of value for goodwill
and the brands of the business.
If a pre-pack is applicable in an administration where you
are a creditor, you will be sent information on why the pre-pack was used when
you are notified of the appointment.
Q - I am an employee, how does the administration affect
me?
A - Employees will be addressed at a local level and all
employees will be contacted in writing in due course. If you are an
employee and have a query, please contact your local Human Capital
representative at the company in the first instance.
Customers
Q - What happens if I owe the company money?
A - Your debt will still be due and, if you pay by cheque,
please forward payment in the usual way. If you pay by telegraphic
transfer, or some other direct payment method, the Administrators will set up
new bank accounts for the company and will contact you in relation to the new
bank details as soon as they are available.
Q - Will the company still supply me post administration?
A - All customers with ongoing or outstanding purchase
orders or supply contracts will be contacted individually by a representative
of the Administrators.
Q - What happens if the company owes me money?
A - On the date of the administration, all amounts that the
company owes are frozen. The company’s assets will be realised and the
proceeds, after the costs of the administration, will be allocated to the
creditors depending on what type of creditor they are.
Q - How do I know what kind of creditor I am?
A - There are four main types of creditor:
- Secured (split into security via fixed and floating charges);
- Preferential;
- Unsecured; and
- Shareholders / members
Secured creditors have security registered at
Companies House. When they have a fixed charge over an asset, the secured
creditor will be paid out of the realisations from those specific assets, after
the costs of realisation have been deducted. When they have a floating charge
over an asset, the secured creditor will be paid out of the realisations from
those assets, after the costs of realisation, the preferential creditors have
been paid in full and the prescribed part (see below) has been set aside.
Preferential creditors primarily consist of
employees for arrears of wages, accrued holiday pay, unpaid contributions to
occupational pension schemes and state scheme premiums, all within certain
limits. Preferential creditors rank ahead of all other creditors when
realisations are achieved from assets where there is no fixed charge
registered.
Unsecured creditors are all other non-secured
and non-preferential creditors. These are usually the normal “trade” creditors.
They rank below Preferential and Secured creditors, with the exception of when
the prescribed part is applicable (see below).
Shareholders / members will be the last class of
creditor to receive a distribution and they will only receive a distribution
after everyone else has been paid in full.
Q - What is the prescribed part?
A - When a secured creditor has a floating charge registered
after 15 September 2003, a proportion of the funds available to them is set
aside for distribution to unsecured creditors. This is the prescribed
part. (Please note there are some Administrations where there are pre 15
September 2003 floating changes and consequently NO prescribed part.)
Insolvency legislation sets out how the prescribed part is
calculated and if it is applicable further details will be provided in the
Administrators’ proposals and reports.
Q - Will there be a meeting of creditors?
A - If a meeting of creditors is called, details will be
sent in the Administrators’ proposals. The purpose of the meeting is to
allow the creditors to consider and vote on the Administrators’
proposals. The meeting can also elect a committee of between 3 and 5
creditors’ representatives to assist and oversee the Administrators.
If a meeting is not called, the reason will be given in the
Administrators’ proposals and details will be provided at this point in
relation to what a creditor needs to do if they wish to call a meeting.
Q -Can you provide me with an estimate of the time-frame
for reviewing my claim and paying a dividend?
A - The administration process is complex and it takes time
to assess the company’s position and provide an estimate of the quantum or
timing for reviewing claims and making a distribution. The Administrators
will include an update of dividend prospects and, if possible, a time-frame in
their proposals and reports.
Q - Will you refund the costs incurred in preparing a
claim?
A - We are unable to refund the costs in preparing a claim.
Consequently, we cannot refund any expenses incurred in obtaining information
necessary to make a claim.
Q - Will I get paid for services or goods I have provided
before the date of the administration?
A - You will rank as an unsecured creditor (see above).
Q - Should I continue providing services or supplies
after the date of the administration and how do I know I will be paid?
A - The company will pay for goods and services rendered to
the business after the date of our appointment as Administrators against an
appropriately authorised purchase order or letter of undertaking.
Q - I have goods on site for which I have not been
paid. I am coming to take them away as I retain title to all goods
provided until I am paid.
A - You are not entitled to take away these goods until the
Administrators have determined retention of title issues. This involves a
process of identifying the stock and reviewing the supply terms. Please contact
a representative of the Administrators detailed on the webpage for the company
of whom you are a creditor.
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