Court of Appeal guidance on adoption of employment contracts by administrators

Re Debenhams Retail Limited [2020] EWCA Civ 600

As is now well known, the government’s Coronavirus Job Retention Scheme enables employers to lay off (“furlough”) their employees and apply for a grant to cover 80% of an employee’s salary, up to a maximum of £2,500.  The purpose of the scheme is to protect jobs on a temporary basis by avoiding redundancies.

The scheme is expressly available to companies which are in administration.   But how is it to interact with the detailed provisions of the insolvency legislation?

This question was immediately pressing to the administrators of two well known companies, Carluccio’s and Debenham’s who needed to make urgent decisions about the companies’ employees following appointment.

Company administrators have a 14 day window following appointment in which to decide whether to “adopt” employment contracts.  The decision to do so can be significant to the success of the administration.  Employees whose contracts have been adopted enjoy a “super priority” meaning that their wages are payable as expenses of the administration ahead of other unsecured liabilities and, indeed other expenses of the administration.   Employees whose contracts are not adopted become unsecured creditors of the company.  This is the effect of Paragraph 99 of Schedule B1 of the Insolvency Act 1986

In Re Carluccio’s Limited [2020] EWHC 886 (Ch) and Re Debenhams Retail Limited [2020] EWHC 921 (Ch) the administrators sought guidance from court about the operation of the scheme in the context of the insolvency legislation. They wanted to know whether (in the specific circumstances of each company) by paying sums to the company’s employees pursuant to the scheme they would be taken to have “adopted” the employees’ contracts.

In each case the judges (Snowden J and Trower J) gave declarations that payments to furloughed employees would mean that their contracts had been adopted for the purposes of the IA.

Although the administrators in Carluccio’s made submissions that the adoption provisions in paragraph 99 did not apply (because the employees were not providing any services at all) in general their position was essentially neutral.  The administrators in re Debenhams however had a specific concern about the treatment of sick and holiday pay.  Although these payments count as wages (and so are subject to the super priority) there is no clarity as to how they are treated under the scheme.  Accordingly the administrators could find that meeting holiday and sick pay over the period of the furlough have to be met on a super priority basis without reimbursement from the government.

The Debenhams administrators appealed to the Court of Appeal which handed down a written judgment on 6 May 2020.  It gave detailed to consideration (as did both first instance decisions) to the meaning of “adopt” applying  the House of Lords decision in Powdrill v Watson, Re Paramount Airways Ltd [1995] 2 AC 394 (Paramount).

The Debenham’s administrators argued (relying on passages from Paramount) that adoption requires words or conduct which objectively evidence an election  by the administrator to treat the employment liabilities as enjoying a super-priority.  In other words, the court is to look at the intentions of administrator, albeit objectively.

The court of appeal rejected that argument, putting the test in simple terms.  It is a wholly objective question focussed on the conduct of the administrator.  “If the officeholder has continued their employment, in other words has taken active steps to continue their employment, that necessarily results in super-priority for the relevant liabilities under the contracts of employment”.

It was an interesting feature of both cases that the court was prepared to give guidance in circumstances where neither the affected employees nor the government was represented.  The declarations are not, therefore, binding on the employees but indicate to the administrators how they can act.

While the specific circumstances are (we must hope) unlikely to be repeated, the guidance on the meaning of adoption is likely to be durable.




7th May 2020