Kerry Underwood

INSOLVENCY: FURLOUGHING IS AN ADOPTION OF EMPLOYMENT CONTRACTS SAYS COURT OF APPEAL

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Kerry Underwood offers consultancy services in relation to this and other matters and details are here.

In

Debenhams Retail Ltd, Re [2020] EWCA Civ 600

the Court of Appeal upheld the decision of the High Court – reported in my blog

FURLOUGHING, INSOLVENCY AND ADOPTION OF EMPLOYMENT CONTRACTS

that the furloughing of employees under the government’s Job Retention Scheme in relation to coronavirus amounts to an adoption of contracts of those employees.

The significance of an employment contract being adopted in an administration is that it gives employees what is known as “super-priority” in that salaries, sick pay and holiday pay for the period from adoption until termination of the employment or, if earlier, the end of the administration, are payable as expenses of the administration ahead of not only pre-administration unsecured liabilities, but also ahead of many of the costs and expenses of the administration itself.

Hence the term “super-priority”.

The judgment examines in detail the current Job Retention Scheme.

The judgment also contains a helpful and detailed analysis of the general law in relation to the adoption of employment contracts by Administrators.

“30. The effect of the relevant provisions of paragraph 99 was helpfully summarised by Mr Smith as involving the following points:

(1) A liability arising under a contract of employment which is adopted by an administrator is charged on and payable out of the property of which the administrator has custody or control immediately before the cessation of his appointment (paragraph 99(3)).

(2) The liability ranks ahead of the administrator’s remuneration and expenses and any amounts secured by a floating charge, which themselves rank ahead of ordinary unsecured liabilities, and is therefore commonly described as enjoying “super-priority” (paragraph 99(4)).

(3) The liability is restricted to “wages or salary” and excludes any liability which arises by reference to anything which is done, or which occurs, before the adoption of the contract (paragraph 99(5)). Wages or salary includes holiday pay and sick pay (paragraph 99(6)), but has been held not to include redundancy payments and payments for unfair dismissal (Re Allders Department Stores Ltd [2005] EWHC 172 (Ch)[2005] ICR 867[2006] 2 BCLC 1) or protective awards or payments in lieu of notice (Re Huddersfield Fine Worsteds Ltd [2005] EWCA Civ 1072[2005] 4 All ER 886).

(4) The administrator is given an initial 14-day period following appointment to decide on the action, if any, to be taken. Any action taken within that period does not amount or contribute to the adoption of a contract (paragraph 99(5)(a)).”

For the facts of the case please see my previous blog

FURLOUGHING, INSOLVENCY AND ADOPTION OF EMPLOYMENT CONTRACTS.

The court rejected the submission that in reality the Administrators were not adopting the contracts as the government was making all of the payments and thus there was no financial impact on the administration estate and consequently the Administrators did not need to make any election to treat the liabilities as having super-priority.

Debenhams argued that this was consistent with the object of an administration.

The Court of Appeal held that the Job Retention Scheme required employees to continue to be employed; indeed that was the whole point of the scheme and therefore to be furloughed employees had to remain in employment and therefore the act of furloughing by the Administrators amounted to adoption of those employment contracts.

No specific evidence of adoption was needed; it is a matter of law and the Court of Appeal had this to say at Paragraph 54 of its judgment:

“54. We agree with the way in which Laddie J summarised the effect of Paramount on the meaning of adoption in Re Antal International Ltd [2003] EWHC 1339 (Ch), [2003] 2 BCLC 406 at [7]:

“What Lord Browne-Wilkinson was pointing out was that it was important to find some conduct on behalf of the administrator or receiver which could be treated as an election or could be regarded as him exercising a choice as to whether or not the contracts of employment were to be adopted.”

And again at [12] where he said:

“It is necessary to look at the facts and to decide whether there has been some conduct by the administrator or receiver which can legitimately be treated as an election to continue the contract of employment.”

 

Adoption of Employment Contracts in the Present Case

The Court of Appeal recognised the fact that furloughed employees are not carrying out any work for the company, and indeed are not permitted to do so under the Job Retention Scheme. While regarding that as a significant factor, and one that distinguishes the current case from the facts of previous decisions, the Court of Appeal did not consider that it was sufficient to justify a finding that the contracts had not been adopted.

The Court of Appeal did say that “there may be good reasons of policy for excluding action restricted to implementation of the Scheme from the scope of “adoption” under paragraph 99 [that is paragraph 99 of Schedule B1 to the Insolvency Act 1986], but such exclusion cannot be accommodated under the law as it stands.”

On the day that the reasons were published the Administrators announced that they would be permanently closing five further stores, with 1,000 jobs at risk at a result.

Written by kerryunderwood

May 7, 2020 at 12:15 pm

Posted in Uncategorized

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