A recent case involving collapsed department store chain Allders has clarified the position as to where statutory redundancy pay (SRP) ranks in the pecking order of creditors when a company collapses. The Enterprise Act 2002 changed the respective rights of some creditors on an insolvency, which made it uncertain whether SRP was or was not an ‘administration expense’. Administration expenses are payable before the claims of creditors generally.

The point needed to be tested as the administrators wished to make a large number of Allders staff redundant and paying their SRP out of the available assets would have left little or nothing for the other creditors – including the administrators themselves.

The argument turned on the fact that insolvency law regards some, but not all, statutory redundancy payments as preferential creditors – the implication being that any other statutory redundancy payments due are not preferential and rank equally with the other unsecured creditors. The court decided that SRP is an unsecured creditor. In practice, the Government underwrites a shortfall if the available assets are insufficient to pay the SRP in full.

Had the decision gone the other way, it might well have produced a crisis in the insolvency profession, with administrators being unwilling to take on cases if the level of SRP liabilities meant that there were insufficient funds left to cover their charges.