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Insolvency: Administration and its impact on employees

Fraser Vandal discusses the impact of Administration on Employment contracts, redundancies and considerations if the business was to be purchased.

Insolvency: Administration and its impact on employees

Published: 09 February 2024
Time to read: 6 mins

The news that Stewart Milne Group (SMG) entered Administration in early January came as a surprise to many people.  The business was listed for sale for some time, however SMG’s bankers considered that there were no viable offers for it.  The impact of SMG’s administration will be significant for employees – both of SMG and other businesses in the sector.  Unlike other sectors, the Construction sector frequently operates through engagement of individual unincorporated sub-contractors.  There may be uncertainty around whether these individuals are self-employed or have the status of “worker” in relation to employment rights, which creates an additional layer of complexity.

Fraser Vandal, employment law specialist at Gillespie Macandrew, discusses the impact of Administration on Employment contracts, redundancies and considerations if the business was to be purchased.

What is the purpose of administration?

An administrator may be appointed if (i) it is apparent that a business is unable to pay its debts, or (ii) a business is solvent, but is likely to become unable to pay its debts in future.  The purpose is to rescue the business from pending insolvency and to put its creditors in a better position than if the business were simply would up.  Administration often leads to sale of the business’ assets, followed by a winding up.  Sometimes it saves the business, which recovers out of Administration.

What is the impact on employment contracts?

Employment contracts do not terminate automatically when an administrator is appointed.  It has been widely reported that over 200 employees of SMG lost their jobs, whilst around 50 were retained.  Decisions regarding the dismissal of staff are for the administrator to make, taking several factors into account.

Retained staff will assist the Administration process, providing detailed hands-on knowledge and understanding of the business.  SMG remains the employer of the retained staff and employment does not transfer to the administrator, although retained staff will inevitably report to the administrator in practice.

Collective redundancies

Where an administrator “proposes to dismiss as redundant 20 or more employees at one establishment within a period of 90 days or less”, collective redundancy consultation duties would apply.  In practice, this means consulting with employee representatives for either 30 or 45 days before dismissals take place; but the commercial reality of Administration means that the requisite consultation often simply does not happen.  Failure to comply with these duties creates the risk of “protective award” claims for 90 days’ gross pay per employee (although the moratorium on legal proceedings that applies during Administration would need to be lifted for such claims to be made).

An administrator must also notify the Secretary of State of proposed collective redundancies within a specified time limit, failing which the administrator may be personally liable for a criminal offence.

Adoption of employment contracts

No act or omission by an administrator in the first 14 days post-appointment will cause contracts of employment to be “adopted”, therefore allowing an administrator the opportunity to identify their priorities.  However, if staff continue to be employed after the first 14 days and are paid in accordance with their existing employment contracts, then the administrator will likely have adopted the employment contracts.

The main benefit of contract adoption for retained employees is that any “qualifying liabilities” incurred after adoption will rank higher in an insolvency process.  If qualifying liabilities remain unpaid when an administrator leaves office, then they would be paid to employees in priority to the administrator’s fees and expenses.  Qualifying liabilities are, however, limited – including wages/salary, holiday pay, sick pay and pension contributions; but excluding statutory redundancy pay, payments in lieu of notice, protective awards and damages.

National Insurance Fund

In most administrations, employees will be owed sums on termination.  Whilst employees can rank in insolvency, the order of priority generally means that they are unlikely to recover significant sums.  Instead, it is more common for employees to seek payment of certain debts from the National Insurance Fund (NIF).  Sums recoverable from the NIF include arrears of pay (capped to a specified level), statutory notice pay, unpaid pension contributions and a statutory redundancy payment.  Employees can still claim in an insolvency for any sums not recovered from the NIF.

Transfer of Undertakings

If the administrator were to find a buyer for SMG’s business and assets, the Transfer of Undertakings (Protection of Employment) Regulations (TUPE) could potentially apply – transferring the employment of some or all retained employees to the purchaser.  Dismissed employees may also assert that they should transfer and attempt to raise Tribunal claims against the purchaser on this basis.  Within this process, debts payable from the NIF would not transfer to a purchaser; whilst there would be greater than normal scope for the purchaser to vary employment terms.  The usual TUPE rules on information and consultation would still apply – with similar penalties for non-compliance as those for collective redundancies noted above.

In practice, administrators give minimal warranties and indemnities on insolvent sales with the TUPE risk being borne by the purchaser.

What about sub-contractors?

Administration of SMG will not have a direct impact on the employees of corporate sub-contractors that it engaged with, but there could be indirect consequences.  Contracts for construction operations have statutory protection in relation to payment.  Those protections may place sub-contractors in a better position than other trade creditors.

Sub-contractors may continue to be engaged on a project until completion – either by the administrator or by another business which steps into the insolvent business’s shoes.   However, some sub-contractors may still end up out of pocket and without the contracted work – with potential knock-on effects for their employees.  The terms of the subcontract will be key and advice should be sought early.

It is possible that individual unincorporated sub-contractors may attempt to assert employment rights as part of the Administration and seek to claim employment debts either from the NIF or the insolvent estate.  Whether or not individuals could successfully assert employment rights will depend on a number of factors and each case will turn on its own circumstances.

If you have any questions regarding the topics raised above, please get in touch with Fraser or a member of our Employment law team to discuss further.

 

*This article originally featured in Project Scotland on 7 February 2024.

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