Court of Appeal rules that Debenhams’ administrators ‘adopted’ the employment contracts of employees furloughed under the Coronavirus Job Retention Scheme

Debenhams Retail Ltd, Re [2020] EWCA Civ 600

In a new judgment, the Court of Appeal has considered the issue of whether, by paying only the amounts which may be claimed under the Coronavirus Job Retention Scheme (the Scheme) to employees of an insolvent company while they are ‘furloughed’ under the Scheme, the administrators have ‘adopted’ the contracts of those employees.

In Debenhams Retail Ltd, Re [2020] EWCA Civ 600, the administrators of Debenhams (the Company), appointed with the intention of rescuing the Company as a going concern, considered that the purpose of the administration would be best furthered if the employees remained on furlough under the Scheme (and therefore received reduced salary payments equal to what could be claimed under the Scheme). They would continue to pay salaries up to the limits reimbursed or funded under the Scheme, but they would not make any further payments to top up salaries. They wrote on 10 April 2020 to all or most of the furloughed employees seeking their express consent to being furloughed and to the consequent reduction in pay.

On the same day, the administrators also sought directions from the High Court, as to whether, by participating in the Scheme, they would be 'adopting' the contracts of the furloughed employees pursuant to paragraph 99 of Schedule B1 the Insolvency Act 1986.

NB - in the Court of Appeal's judgment, Lord Justice Richards summarises the effect of adoption of a contract of employment as being to make wages or salaries, and other amounts such as sick pay and holiday pay, payable as expenses of the administration that have a higher priority for payment than pre-administration unsecured liabilities and many of the other costs and expenses of the administration.

In the High Court, Judge Mr Justice Trower (in Debenhams Retail Ltd, Re [2020] EWHC 921 (Ch)) ruled that it was likely that participation in the Scheme, to enable payments to the company in respect of furloughed employees, would cause the administrators to be held to have adopted the employees' contracts, making an order in the following terms -

'The Joint Administrators be at liberty to act on the basis that they will be taken to have adopted (for the purpose of and within the meaning of paragraph 99(5) of schedule B1 to the Act), any contract of employment between the Company and its employees in circumstances where, in respect of any particular employee or employees, at any time after 14 days after the time of their appointment:

(1) the Joint Administrators cause the Company to make payments to such employee or employees under and in accordance with their employment contracts including in respect of amounts which may reimbursed to the Company by a grant under the Scheme; or

(2) the Joint Administrators make an application in respect of such employee or employees under the Scheme.'

The administrators appealed to the Court of Appeal.

* * * * *

Giving the judgment of the Court, Lord Justice David Richards firstly reviews the nature of the Scheme - its statutory basis under the Direction given by HM Treasury to the Commissioners for HM Revenue and Customs and guidance on eligibility conditions - and the effect of ‘adoption’ of a contract of employment under paragraph 99 of Schedule B1 to the 1986 Act. Noting that ‘adoption’ is not defined under the Act, Lord Justice Richards considers its meaning as discussed in Lord Browne-Wilkinson’s speech in the House of Lords judgment in Powdrill v Watson, Re Paramount Airways Ltd [1995] 2 AC 394 (Paramount). In particular, Lord Justice Richards sets out how a passage at p.449A-B forms the cornerstone of the administrators' submissions, where Lord Browne-Wilkinson said -

'In my judgment as Mr Sumption QC [for the appellant administrators and receivers] submitted adoption in sections 19 and 44 [provisions replaced by section 99 of the 1986 Act] can only connote some conduct by the administrator or receiver which amounts to an election to treat the continued contract of employment with the company as giving rise to a separate liability in the administration or receivership.'

Going on to examine the meaning of this and other parts of Lord Browne-Wilkinson’s speech, Lord Justice Richards says -

'By ‘a separate liability in the administration’, Lord Browne-Wilkinson was referring to those liabilities under a contract of employment that enjoyed super-priority. All liabilities arising under an employment contract would be liabilities of the company but only some of them would be separate liabilities in the administration, enjoying super-priority, and only then if the administrator had adopted the contract.

Lord Browne-Wilkinson then considered whether it was open to the officeholder to limit, as the administrators and receivers had sought to do in their letters to the employees, the extent to which they adopted the contracts, concluding that they could not do so. The acceptance of Mr Sumption's submission excluded the words, vital to the appellants' case, that adoption ‘signifies some words or conduct’. If the officeholders' conduct constituted adoption, there was nothing they could unilaterally say to qualify or exclude adoption. (That is not to say that if officeholders informed employees that their contracts were being adopted, they would not be bound by that.)' (paragraphs 41 to 41)

Having then considered Lord Browne-Wilkinson’s reasons for reaching his conclusion, Lord Justice Richards considers its application to the present case, noting that each case must be decided by reference to the particular evidence before the court. Consequently, Lord Justice Richards sets out three factors in the present case that support the conclusion that Debenhams’ administrators have continued the employment of the furloughed employees -

'First, the administrators will continue to pay the wages or salaries of the furloughed employees up to the limits provided by the Scheme…

Second, all the furloughed employees who have accepted the continuation of their employment on these terms (and those other employees who do not treat their contracts as terminated by reason of the Company's failure to pay their full contractual remuneration) will remain bound by their contracts of employment, save only as regards the obligation to be available for work during the furlough period ...

Third, in continuing to pay the furloughed employees, the administrators are acting with the objective of rescuing the Company as a going concern, that being the purpose of the administration, and in the interests of the Company's creditors as a whole: see paragraph 3(1) and (2) of schedule B1 …' (paragraphs 57 to 59)

Going on to reject the principal points raised by the administrators as competing factors that support the opposite conclusion on adoption, Lord Justice Richards, with whom The Chancellor of the High Court and Lord Justice Bean agree, rules that -

'Overall, for the reasons we have given, which do not essentially differ from those given by Trower J at [51]-[65], we conclude that the administrators have, for the purposes of paragraph 99, adopted the contracts of those employees who have consented to be furloughed. For these reasons, we dismissed the appeal.' (paragraph 70)