Re Debenhams Retail Ltd (in administration) Rowley and another (as joint administrators of Debenhams Retail Ltd)  EWCA Civ 600
On 6 May 2020 the Court of Appeal upheld the recent High Court decision refusing to grant a declaration to the joint administrators of Debenhams that they would not have adopted the contracts of furloughed employees if the only active steps they had taken in relation to these employees were to pay over the sums reimbursed by the Government under the Coronavirus Job Retention Scheme.
By the time the joint administrators of Debenhams Retail Limited had been appointed, many of the employees had been placed on furlough under the job retention scheme. The administrators were acting with the objective of rescuing the company as a going concern. They were concerned that if they were deemed to have adopted the furloughed employees, the various “wages or salary” sums set out in paragraph 99(6) of Schedule B1 to the Insolvency Act 1986 would rank as administration expenses subject to the statutory charge under paragraph 99(5) and undermine the proposed rescue. They applied to Court for a direction under para 63 of Schedule B1 that they would not be deemed to have adopted the furloughed employees’ contracts if they took no further action other than paying across monies received from the Government under the job retention scheme.
As is well known, the Para 99 priority only applies to employment contracts adopted by the administrators. Action taken within 14 days after the administrators’ appointment does not amount or contribute to adoption of the employment contract (Para 99(5)(a)).
The High Court (Mr. Justice Trower) refused to grant the direction sought. He agreed with the decision in Re Carluccios and ruled that the administrators had adopted the employment contracts of all employees who had consented to be furloughed. The administrators appealed on the grounds that words or conduct had to be shown that they had elected to adopt the employment contracts such that the stipulated wages/salary sums would rank with priority.
Court of Appeal
The Court of Appeal upheld the High Court decision and dismissed the appeal; the administrators had adopted the furloughed employees’ contracts. In brief, the reasons were that they would continue paying the wages or salaries of the furloughed employees up to the limits set by the job retention scheme. These payments were remuneration under the existing employment contracts, subject to the scheme limits. The employees had consented to being furloughed and thus to remain bound by their employment contracts save for the obligation to be available to work during the furlough period. And the administrators had kept these employees in the job retention scheme and had not terminated their employment. The Company remains liable for the remaining salary in excess of the retention scheme limit unless the employees have agreed to waive the difference.
The recent Coronavirus legislation’s relationship with more established insolvency legislation is not necessarily straightforward, but this issue is important as the amounts at stake for employee intensive companies are considerable. Administrators who are concerned about adopting employment contracts after the 14 day grace period should seek advice before they risk incurring significant administration expenses.
The Coronavirus era has attracted quite some discussion about “light touch administrations,” but whilst this ruling does not make the administrators’ task any easier, we believe there is merit in using administration as a temporary measure to aid the return to solvency and control of the directors. We may soon have a moratorium and restructuring plan to assist. There will be more tricky issues to be resolved by the Courts, but with that we hope this will provide more creative options for business rescue.