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Does an Administrator ‘adopt’ a Contract of Employment if they Furlough Staff?

IN THE MATTER OF DEBENHAMS RETAIL LIMITED (IN ADMINISTRATION
IN THE MATTER OF THE INSOLVENCY ACT 1986 [2020] EWCA Civ 600

 

Yesterday, the Court of Appeal handed down Judgment in a case where the Administrators of Debenhams sought clarification of their position in relation to furloughed employees.

Facts

Debenhams closed its doors on 25th March 2020 as a result of the lockdown. It furloughed nearly 14,000 employees under the Government’s Coronavirus Job Retention Scheme (the Scheme).

On 9th April 2020 administrators were appointed (Schedule B1 of 1986 Act).

The purpose of the administration is to keep the company in a state where it can be rescued as a going concern. That was best suited by furloughing the majority of staff, keeping the management in place and to pay/ apply for the maximum allowed wages from the Scheme.

The Administrators sought a declaration as to whether, by participating in the Scheme, they were adopting the contracts of the furloughed employees for the purposes of Paragraph 99 of Schedule B1 of the 1986 Act.

This declaration is important, because the effect of the adoption of a contract of employment is that the wages (from adoption until termination of the employment) are payable as expenses of the administration ahead of:

  • Pre-administration unsecured liabilities; and
  • Many of the costs and expenses of the administration.

In short, the answer is Yes, they do adopt the contracts.

The Administrators argued that they had not adopted employment contracts

Three reasons:

  • Furloughed employees are not carrying out any work for the company. Indeed, not permitted to do so under the terms of the scheme. The effect of payment was neutral on the administration.
  • Whilst furloughed, the remuneration is limited to the amounts payable under the scheme. The company is therefore the conduit by which the money gets from the government to the employee.
  • Any decision to terminate the contract of employment is postponed until after the scheme has ended.

The Court Found…

that by paying the employees only the furloughed payments under the scheme the administrators had adopted the contracts.

They did so for these reasons:

  • Administrators will continue to pay the wages of the furloughed employees up to the limits provided by the scheme. The employees’ entitlements to those payments is derived exclusively from their contracts. The payments are taxable and are an expense of the company; and the payment to the company under the scheme will be income of the company for the purposes of corporation tax;
  • All furloughed employees who have accepted the continuation of their employment on the terms of the scheme will remain bound by their contacts of employment.
  • In continuing to pay the furloughed employees, the administrators are acting with the objective of rescuing the company. The administrators rely paragraph 66 of Sched B1 to continue to pay the furloughed employees, but to rely on that paragraph, they must necessarily, as it says in the act, think it likely to assist achievement of the purpose of administration.

James discusses this case in his latest YouTube video which can be found here.

For other updates on all areas of civil law, then follow James on his YouTube, Instagram channels or his Twitter account @barristercivil.

James Wilson

7th May 2020