Weekly dilemma: Administration

This week's dilemma concerns what happens to a company's employees after it has gone into administration.

My business is losing money hand over fist, and will shortly go into administration. What does this mean, and what will happen to my staff? Will they get their final-salary payments?

Administration is the most common insolvency procedure and is designed to promote company reorganisation 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.

The first £800 of remuneration owed to employees for the four months immediately before the date your company became insolvent will qualify as a preferential debt. "Remuneration" here includes wages, contributions to an occupational pension scheme, holiday pay and sick pay, among other things. Amounts over £800, or which relate to periods longer than the four months before the insolvency date, will constitute ordinary debt.

If any sums owed to employees cannot be satisfied by the administrator as either preferential or ordinary debt, the employees can apply for certain payments from the National Insurance Fund. The administrator should tell the employees how to the employees can do this. The National Insurance Fund can make payments including:

• wages (up to a maximum of £400 a week for eight weeks);
• holiday pay (up to a maximum of £400 a week for six weeks);
• statutory notice pay (up to maximum of £400 a week);
• statutory redundancy pay (subject to qualifications);
• any basic award for compensation for unfair dismissal;
• any protective award ordered by an employment tribunal; and
• any statutory payments in respect of time off work or suspension on medical or maternity grounds.

To be eligible for statutory redundancy pay an employee must have been continuously employed by your company for at least two years and has to have made a written application to the company, or applied to an employment tribunal for an award, within six months of the redundancy.