Company: Administration order

The judge had been correct to determine that, by paying only the amounts which might be claimed under the Coronavirus Job Retention Scheme (JRS) to employees of Debenhams Retail Ltd (the company) while they had been furloughed, the appellant joint administrators had adopted the contracts of those employees with the effect that those employees had, potentially, enjoyed super-priority in the administration. The Court of Appeal, Civil Division, dismissing the administrators’ appeal, held that the question was whether the conduct of the administrators had been such that they had to be taken to have accepted that the relevant amounts falling due under the employment contracts had enjoyed super-priority. In the present case, because of the nature of the JRS, the administrators had continued the employment of the furloughed employees.

The applicants were the joint administrators of Debenhams Retail Ltd (the company). At the time of the administrators’ appointment, the vast majority of the company’s employees had been placed on furlough pursuant to the company’s participation in the Coronavirus Job Retention Scheme (JRS). The administrators sought directions, pursuant to para 63 of Sch B1 to the Insolvency Act 1986 (IA 1986), that none of the contracts of the company’s employees which had been furloughed had been adopted by the administrators within the meaning of IA 1986 para 99(5) of Sch B1, and thereby enjoyed super-priority, if the employees had remained furloughed and the administrators had taken no further action in relation to those employees except to pay them the amounts that were reimbursed to the company through its participation in the JRS.

The judge held that the administrators had so adopted those contracts. The administrators appealed. They submitted that, before it could be concluded that contracts of employment had been adopted, it had to be shown that there had been words or conduct on the part of the administrators which had evidenced an election by them to treat the liabilities arising under the contracts of employment as enjoying super-priority and that, for the purposes of IA 1986 para 99(5) of Sch B1, what had been needed was conduct on the part of the administrators which could be said to have been an election to treat the contracts as continuing.

Whether the judge had erred in deciding that the contracts of employment of the furloughed employees had been adopted by the administrators.

The conduct by an administrator or receiver which amounted to an election to treat the continued contract of employment as giving rise to super-priority did not involve an element of the intentions of the administrator. Evidence of an election by the administrator had not been required. The question had been whether the conduct of the administrator had been such that he had to be taken to have accepted that the relevant amounts falling due under the employment contract had enjoyed super-priority, which had been an wholly objective question, focussed entirely on the conduct of the administrator. The issue was whether the officeholder had continued the employment of the relevant employees (see [53] of the judgment).

In the present case, the administrators had continued the employment of the furloughed employees. First, the administrators would continue to pay the wages or salaries of the furloughed employees up to the limits provided by the JRS. Those would be payments of remuneration pursuant to their contracts of employment, subject only to the limits. The employees’ entitlement to those payments was derived exclusively from their contracts. Second, all the furloughed employees who had accepted the continuation of their employment on those terms had remained bound by their contracts of employment, save only as regards the obligation to be available for work during the furloughed period. Third, in continuing to pay the furloughed employees, the administrators had been acting with the objective of rescuing the company as a going concern (see [56]-[59], [65], [70] of the judgment).

Accordingly, the judge had been correct to find that, for the purposes of IA 1986 para 99(5) of Sch B1, the administrators had adopted the contracts of those employees who had consented to be furloughed. Therefore, the appeal was dismissed (see [70] of the judgment).

Powdrill v Watson; Talbot v Cadge; Talbot v Grundy [1995] 2 AC 394 applied; Antal International Ltd, Re [2003] EWHC 1339 (Ch) applied.

Decision of Trower J  [2020] All ER (D) 111 (Apr) affirmed.

Tom Smith QC and Richard Fisher QC (instructed by Freshfields Bruckhaus Deringer LLP) for the administrators.

Peter Fuller Barrister.