What happens when a company goes into administration?

When a company goes into administration an appointed administrator takes control with the primary goal of utilising assets to pay creditors as quickly as possible. One of the main advantages to the administration process is the protection from payment demands and time allowed to devise a plan.

Eight-week breathing space

So what happens when a company goes into administration? During the time the company is in administration, there is an eight-week period that protects the company against any creditors taking legal action. This gives the company, and insolvency practitioner, time to address the situation and come up with a plan that is then proposed to the stakeholders invested in the business.

What happens company goes into administration

Compulsory or voluntary administration

Company Administration can be entered by way of court order, voluntarily by company directors or on the application of a qualifying floating charge holder, this is where an administrator can be appointed without the need for a court order.

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The administration process

When a company goes into administration, the administrator will aim to rescue the company in order to get the best possible result for the creditors. They may also realise any assets or company property which will be used to pay secured and prioritised creditors.

The administrator has 8 weeks to manage the process and send out a proposal to the creditors on the plan of action to pay back debts and manage the administration. This will outline how they will try to get the best outcome for creditors.

The administration process can go on for up to a year, depending on the nature of the situation. When considering payments to creditors there is a general order of priority during the administration process.

  1. Secured creditors
  2. Preferential creditors
  3. Unsecured creditors
  4. Shareholders

The administration process normally ends automatically after the 1-year period is up. During this time, the company may have been rescued, in which case it can be passed back to the directors. If the administration was unsuccessful then the company may go into liquidation or have been dissolved if secured and/or preferential creditors have been paid, but none of the other creditors.

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How does it affect the company’s employees?

When your employer goes into administration, it can be worrying for the employees of a business. Your employee rights will depend on your employment status and how the insolvency practitioner has planned the process. However, company administration does not automatically mean that the company goes out of business and, therefore, you’re out of a job.

In some cases, the business can be turned around by selling company assets or by restructuring the company. In which case, your job may be safe.

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When the administration takes over

When an administrator takes control, they may adopt your employment rights from your original employer. If you are kept beyond two weeks, then you become a ‘preferential creditor’ which may help you later on, if they do decide to close down the business.

You would be entitled to claim your outstanding salary and commission, accrued holiday pay up to 6 weeks and occupational pension payments owed from four months before the company went into administration.

On the other hand, if you are made redundant during the first 2 weeks of company administration, you become an ‘ordinary creditor’. Although you would still receive any outstanding wages and redundancy payment, there is little chance you would receive much else if you are still owed money.

Making a claim

If you haven’t received all of what you are owed and want to make a claim, you need to do so via the insolvency practitioner. You need to be aware of how much you are owed and contact the Redundancy Payments Service. This claim is then made from the National Insurance Fund (NIF) and you can claim for your last 2 months wages and holiday pay (up to 6 weeks).

It’s important to be aware that this process can be a little complex and take time to come through. You may also need to write to your ex-employer for the payment and provide evidence to your insolvency practitioner of the amount you are owed.

Unfortunately, the money from the NIF will be capped so it’s best to be aware of the amounts you will receive. It’s always best to check the UK government website for the latest limits and what you are entitled to.

When the business closes down

If the administrator adopts your employment rights during the administration period, they may also ask that you take a pay cut or defer some of your pay. If you choose to do this and the business closes down, the money lost will be included in the money owed to you.

When the business closes down, your employment rights may be transferred, which is called a transfer of an undertaking (TUPE). In this instance, your rights are protected, and you are regarded as an asset of the business. The company taking over will then be responsible for paying you any money owed.

However, there may be insufficient funds so you may still only receive a proportion of your debt. In this instance, it may be worth making a further claim via the insolvency practitioner with the National Insurance Fund to make sure you are protected for longer.

The content of this article was correct at time of publication.

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