High street chain Poundworld recently called in administrators. This follows on from the collapse of Toys ‘R’ Us and Maplin earlier in the year. As the retail sector continues to struggle it is likely that others will befall the same fate but, what exactly is administration and, what does it mean for employees of the affected company?

What is administration?

Administration is a legal process whereby an insolvency practitioner takes over the running of an insolvent company with a view to rescuing the business, or, if this can’t be achieved, realising its assets and paying creditors (those owed debts).

If the insolvency practitioner continues to trade the business then administration can provide a breathing space with creditors prevented from enforcing their claims and employees continuing to be employed.

The ultimate result of an administration may be the sale of the business as a going concern, the sale of part of the business or the closure of the business and sale of the assets (as happened in the case of Woolworths).

Is my employment contract still valid?

An administrator acts as the agent of the company once appointed so your employment contract with your employer does not automatically terminate and remains in full force and effect, unless and until any variations are agreed with the administrator.

Will I be made redundant?

It is likely to depend on the cash flow situation in each case. Administrators, once appointed may need to make quick costs savings measures, for example by reducing the wage bill. However, some or all of the employees will need to be retained to keep the business running while a buyer is sought. For example, the administrators of Poundworld, Deloitte have said they have no plans to make redundancies immediately.

What if the company stops paying me?

If you carry on working but do not receive your pay then you will have a debt against an insolvent company. Generally this means that you will have an unsecured debt and be well down the pecking order when it comes to priority on the realisation of assets (perhaps securing a few pence in the pound of what you are owed). However, certain limited employment debts are classed as preferential debts and should be paid in full after expenses and secured creditors have been paid. This includes remuneration for work done in the four months before the insolvency date, up to a maximum of £800.

Will I be entitled to a redundancy payment if I am made redundant by the administrator?

Yes, if you would otherwise have been eligible – so you will need to have been employed for two years or more. The government (through the National Insurance Fund) guarantees certain minimum payments to employees (but not other types of workers) of insolvent companies, including a statutory redundancy or equivalent payment.

Will I be entitled to any other payments if my employment is terminated by the administrator ?

As well as statutory redundancy payments, the National Insurance Fund will cover the following employment debts due on termination:

• up to eight weeks arrears of pay
• up to six weeks holiday pay
• statutory notice pay (if you have a more generous contractual entitlement this is not covered)
• unpaid employer pension contribution (in certain circumstances)

How do I claim?

There is an online form to complete to claim a payment from the National Insurance Fund. However, claims involving insolvent companies can be complex and we would always recommend you take advice in order to ensure you are able to claim your full entitlement. So, talk to our employment law specialists today and we’ll help you figure out the best way forward.