More than 2000 jobs at risk as UK prison builder ISG collapses into administration

Administrator Ernest Young confirmed on Friday that one of the UK’s largest construction contractors, ISG, had collapsed into administration. EY said that most of the 2,400 people ISG employs across the UK would be made redundant with immediate effect and that only 200 employees would be retained to assist administrators.

In the light of ISG’s collapse, we take a look at what it means when a company enters into administration and the rights of employees when a company does so.

What does it mean when a Company enters into administration?

If a company has become insolvent, it may enter into administration. A company is said to be insolvent if (1) it is unable to pay its debts as they fall due, or (2) its liabilities are greater than its assets.

In an administration, an administrator is appointed to rescue the company or realise its assets. Although the Insolvency Act 1986, requires an administrator to explore whether they can preserve the insolvent company as “a going concern”, in most cases, administration will lead to the sale of a company’s assets to a third-party buyer.

What effect will a Company entering into administration have on its employment contracts?

In an administration, the administrator is appointed as agent of the company. The administrator’s appointment does not amount to a change of employer and accordingly, employment contracts will not automatically terminate on the appointment of an administrator. This is different to the position where a Company enters compulsory liquidation, the effect of which is to terminate all employee contracts with immediate effect from the date of the publication of the winding up order.

Employee Rights – Retention, Redundancy or Transfer?

Where a company enters into administration, it does not necessarily mean that all employees will be dismissed, either immediately or at all.  The rights of employees will largely depend on the plans for the administration.

Staff Retention 

Some staff (particularly those with hands on knowledge and or a deep understanding of the Company’s business) may be retained whilst the administrator makes a decision as to the Company’s future. 

Where staff are retained, even in the short term, their employment rights remain the same as before the administration. Although the company will remain the employer of the retained staff, they will inevitably report to the administrator in practice.

The administrator may ask employees to take a pay cut or a defer a portion of their pay to help the company survive.

Redundancy

It is common in an administration, for administrators to make redundancies.

On being made redundant, an employee may be eligible to receive statutory or contractual redundancy pay. Other payments which may be owed to employees may include holiday pay, statutory or contractual notice pay, pension contributions, family pay such as maternity pay and other amounts such as unpaid wages, commissions or bonuses.

Staff Transfer

Pursuant to the Transfer of Undertakings (Protection of Employment) Regulations 2006 (known colloquially as TUPE), if a business is sold as a going concern, an employee’s employment contract may transfer to the buyer. This can be a positive outcome for employees as their terms and conditions of employment will transfer automatically to the buyer and their continuity of service will be preserved.

Recovery of monies owing to employees

Where a Company is insolvent and does not have enough funds to pay employees the sums due to them, employees can make a claim to the UK’s National Insurance Fund (NIF).  The NIF provides some protection for employees by guaranteeing a basic minimum payment of specific debts owed to employees. 

Sums recoverable from the NIF include arrears of pay, statutory notice pay and holiday pay (all capped at a specified level), unpaid pension contributions and a statutory redundancy payment. 

Where an employee is eligible to receive a statutory payment such as statutory sick pay, maternity pay, paternity pay etc, liability for such payments will pass to HMRC which will continue to pay for them full term. Employees should speak with their employer/ the administrator if such payments are owed or contact HMRC directly.

What about other payments not covered by the NIF/HMRC?

Employees can still claim in an administration against their employer for any sums not recovered from the NIF/HMRC.

On being made redundant, employees will be placed into two core categories of creditor; ordinary creditor and preferential creditor, with different rights for both.

An employee will become an ‘ordinary creditor’ if they are made redundant within the first 14 days of administration. Any employees retained for longer than 14 days after the business enters administration will become a ‘preferential creditor’.

Ordinary creditors represent the lowest bracket of priority. This means that they will not see any money owed until every creditor above them has been paid.

Preferential creditors have far superior rights when it comes to repayments of monies owed. In particular, “Qualifying Liabilities” (which include wages, holiday pay, sick pay and pension contributions) will rank higher in the insolvency process. If once the administrator has left office, qualifying liabilities remain, they would be paid to employees in priority to the administrator’s fees.

Claims against the Employer

Where an employee is made redundant in an administration, they may have certain claims against their employer.  These may include a claim for unfair dismissal, a claim for a protective award (where the administrator proposes dismissing as redundant more than 20 or more employees at one establishment within a period of 90 days or less and did not “collectively consult” with them) or a claim where the administrator failed to observe its duty to inform or consult under TUPE. Such claims will need to be made against the Secretary of State for the Department of Business and Trade and the former employer.

Summary

The insolvency of an employer is likely to be a very worrying and stressful time for all affected employees. Where an employee’s contract is terminated as a result, there are steps which an employee can however take to ensure that they receive at least some of the monies owed to them. These include making a claim to the NIF for certain payments and/or HMRC.

How Pinney Talfourd can help

We have extensive experience in advising employees on their rights when a company becomes insolvent. We also regularly advise employees/organisations in all aspects of workforce reorganisations including redundancies, dismissals and settlements. For help and advice with a specific issue, please contact Charlotte Buck or Alex Pearce.