High Court considers whether administrators of a company that has furloughed its employees, pending payments from the CJRS, can avoid ‘adoption’ of the employees’ contracts

Debenhams Retail Ltd, Re [2020] EWHC 921 (Ch)

In a new judgment, the High Court has considered whether the administrators of Debenhams Retail Ltd can avoid ‘adoption’ of the contracts of company employees (within the meaning of paragraph 99(5) of Schedule B1 to the Insolvency Act 1986) who have been furloughed pursuant to the company's participation in the Coronavirus Job Retention Scheme (CJRS).

In Debenhams Retail Ltd, Re [2020] EWHC 921 (Ch) (17 April 2020), the Administrators of Debenhams (the company) were appointed on 9 April 2020 and immediately sought an order from the High Court in relation to the contracts of the 13,000 or so employees who had already been ‘furloughed’, pursuant to the company's participation in the CJRS.

The terms of the Order that was sought included that the employees' contracts would not be ‘adopted’ by the Administrators (within the meaning of paragraph 99(5) of Schedule B1 to the 1986 Act) if the employees remained furloughed and the Administrators took no further action in relation to these employees except to pay to them amounts that were to be reimbursed to the company through its participation in the CJRS. The Administrators advised that, if the contracts were adopted, they may have no alternative but to dismiss the furloughed employees (who are not providing any services to the company, and cannot do so under the terms of the CJRS) if there is exposure to a super-priority liability for wages or salary over and above the amounts which will be reimbursed under the CJRS.

NB - similar, but not identical questions have arisen in the case of Carluccio's Limited, Re [2020] EWHC 886 (Ch) - in which Snowden J considered slightly different circumstances where the administrators sought assurances that they would not be criticised for deciding to furlough the company's employees if that resulted in the administrators also adopting their contracts.

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Mr Justice Trower does not make an order in the terms sought by the Administrators. However, he decides to issue Directions - that expose the Administrators to risks including liability for wages, or salary (estimated to be in excess of £3 million a month), over and above the amounts which will be reimbursed under the CJRS. The Directions provide that -

'... the Joint Administrators cause the Administrators be at liberty to act on the basis that they will be taken to have adopted 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 from the time of their appointment:

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

(2) the Administrators make an application in respect of such employee or employees under the CJRS.' (paragraph 8)

Setting out his reasons for the terms of the Directions, Mr Justice Trower firstly highlights the relevant law relating to the ‘adoption’ of contracts - paragraph 99 of Schedule B1 to the 1986 Act - that includes (under subparagraph 5) powers specifically designed to give administrators the ability and obligation to pay wages or salary to employees ahead of other creditors where the contracts have been 'adopted' following the period of 14 days after an administrator’s appointment.

In doing so, Mr Justice Trower rejects the submission of the Administrators - that it is not necessary to involve paragraph 99 in order to give the liability for employee wages 'super-priority' for payment ahead of other liabilities, because paragraph 66 of Schedule B1 provides for administrators to pay employees out of the usual ranking of priorities where it is necessary or appropriate to do so - agreeing with the approach adopted by Snowden J in Carluccio's that using paragraph 66 -

‘…is not the obvious place to start when considering how they should be discharged during the course of the administration. In any event, the fact that paragraph 66 is an available statutory source for the ability of administrators to make payments to employees if necessary was accepted by Snowden J in paragraphs 111 and 112 of his judgment.

But in any event, it seems to me that this submission misses the point. It is clear from paragraph 91 of his judgment that Snowden J considered that the contracts of employment would be adopted by the acts of participation and payment that constitute the Relevant Circumstances in the present case. This conclusion did not depend on the question of whether or not paragraph 66 of Schedule B1 might also be available as a source of the statutory ability to pay employees. It simply enabled him to say that, in the light of the adoption of the employment contracts of the Carluccio employees, paragraph 99 of Schedule B1 permitted and indeed required the administrators in that case to actually make the payments which participation in the CJRS required Carluccio to pay.’ (paragraphs 42 and 43)

Moving on to consider case law that considers what type of circumstances may lead to a contract of employment being adopted by an administrator (as the Act does not include provision for this) - in particular, the House of Lords judgment in Powdrill v Watson (Paramount Airways Limited) [1995] 2 AC 394 - Mr Justice Trower observes that -

‘It is clear from Lord Browne-Wilkinson's speech in Paramount that policy considerations are relevant to the true construction of the word "adopted" in paragraph 99 of Schedule B1, but I do not accept that the absence of services being provided under a contract of employment is, of itself, a good reason why those contracts should not be treated as being adopted in any particular case. Doubtless the continuing provision of services by an employee is a good litmus test in most cases in which the question arises, but that will not always be the case, more particularly where one of the reasons that the employees are being retained is because they "will have an important role in ensuring the viability of the future business and continued trading in the future”. (paragraph 59)

In addition, Mr Justice Trower holds that -

‘I do not consider that the mere fact that the CJRS is designed to try and prevent employee redundancy in the context of companies driven into financial distress by the COVID-19 pandemic, can of itself prevent the contracts of employment from being adopted if that is the consequence of established principles of construction of paragraph 99. Paramount makes plain that paragraph 99 must be construed if possible in a way which does not undermine the rescue culture, but that principle can only go so far where the design of the CJRS requires the administrators to act in a manner which cannot be regarded as anything other than adoption in accordance with established principles.’ (paragraph 61)

Furthermore, while Mr Justice Trower observes that election of the type described by Lord Browne-Wilkinson ("some conduct by the administrator … 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 …") is a slightly different formulation from the one adopted by Snowden J in paragraph 99 of Carluccio's, Mr Justice Trower finds that this difference does not lead to a different result -

‘In my judgment these acts of participation and payment are only consistent not just with the Administrators treating the contracts of employment as continuing but also with the company in administration having continuing liabilities under them, being separate liabilities that arise in the administration. If that were not to be the case the company in administration could not make the claim under the CJRS... the Administrators could not possibly procure the company to participate in the CJRS without procuring it to pay the equivalent amount to the employee. The obligation to do so arises under the continued contract of employment which the company in administration is required to honour as a condition of participation in the CJRS.

In my view it is plain that the company thereby comes under a separate liability incurred in the administration which flows from the continued existence of the contract. It arises in circumstances in which the Administrators elected to take steps which require them to treat the contract as continuing to give rise to liabilities to which the company is subject in its administration. The effect of this occurring is that those liabilities are then entitled to the super-priority for which paragraph 99 provides.’ (paragraphs 63 and 64)

Having determined that it is likely that participation in the CJRS, to enable payments to the company in respect of furloughed employees, would cause the Administrators to be held to have adopted the employees' contracts, Mr Justice Trower issues Directions to that effect, noting that they cannot operate as a complete defence to any subsequent challenge to the Administrators' actions. However, Mr Justice Trower highlights that, by carrying out their functions in accordance with his Directions, the Administrators will at least comply with paragraph 68(2) of Schedule B1, and have any protection that is possible under that provision.