Newsflash : Court of Appeal Decision in re Debenhams Retail Ltd (in Administration)

On 6^th May the Court of Appeal (Bean and Richards LJJ) in re Debenhams Retail Ltd (in Administration)[1] handed down what appears to be the first appeal on the Coronavirus Job Retention Scheme (‘CJRS’) dismissing the Administrators’ appeal, holding that if they paid sums received under CJRS to furloughed employees they will be taken to have ‘adopted’ their contracts for the purposes of Insolvency law.

Like the matter of re Carluccio’s[2], the case concerned the interplay of CJRS and "adoption" of employment contracts by administrators.

The issues to be determined was whether –

1. by paying only amounts received under CJRS to staff while they are "furloughed" and not permitted to work for the furloughing Company, the administrators of that company had ‘adopted’ their employment contracts; and
2. whether by ‘adopting’ them, payment of salary and other amounts including sick and holiday pay were ‘expenses of the administration’ receiving ‘super-priority’.

The Facts

Debenhams Retail Limited (‘DRL’), part of a well-known retail business, which employed 15,550 staff, found itself forced to close its stores on 25 March 2020 following the Government’s imposition of  lockdown measures to combat the spread of the Covid-19 infection. DRL gave written notice to around 13,000 employees, informing that they were being placed on furlough under CJRS with the first few days.

Administrators were subsequently appointed who consented to management continuing operations so as to ensure trading resumed once lockdown ended. As such the sought to maintain staff furlough status.

The administrators wrote to furloughed staff on 10^th April seeking express consent. The vast majority replied with around four expressly rejecting proposals and ten failing to reply.

Simultaneously they applied for directions from the High Court, seeking declaration that none of the furloughed contacts would be ‘adopted’ by the administrators.

The effect of their contracts being adopted would mean after 14 days from appointment –

• liability is charged on and out of the property the administrators had custody & control over immediately before the cessation of their employment;
• the liability would rank ahead of administrators’ remuneration/expenses, any amounts secured by flouting charge as well as unsecured creditors as such ‘super-priority’; and

• liability is restricted to ‘wages or salary’ which includes holiday and sick pay.[3]

In relation to excess holiday pay alone[4] this was said to generate a liability of £1.28 million.

The difficulty for the Court was both that ‘adoption’ is not defined in the 1986 Act and the Powdrill case (that provides authority as to definition)[5] concerned three companies whose relevant employees had all performed services for each employer after the relevant 14 day period, something which could not be said for the furloughed employees of DRL.

Briefly, Powdrill provided for adoption if –

• words or conduct on the part of the administrator;
• objectively constructed evidenced election on their part;
• construed election to treat liabilities arising under the employment contract as enjoying ‘super-priority

On 15^th April the case came before Trowner J. Following re Carluccio’s, he refused the declaration sought, finding furloughed staff contracts were most probably adopted (but not declaring this as he had not heard from the employees). The administrators appealed.

The administrators alleged whilst payment of wages normally led to inference of election to treat contracts as having super-priority, re Carluccio’s was wrongly decided in that it did not take account of source of the payment as being from HMRC not the employer.

The Decision

The Court, dismissing the appeal, held adoption was not concerned with accepting but continuing employment and that whether there was an election to continue was an objective question of fact in each case (the administrator’s actual intent was not expressed as a factor).

The Court held the administrators of DRL on payment of wages under the furlough scheme he is ‘continuing’ the employment contract –

1. The payments would be made under terms of their contracts (albeit amended by the terms of CJRS), reflected in the tax position of both the employees and DRL;
2. The employees consenting to the furlough arrangements were agreeing to be bound by their employment contracts (including duties of loyalty) save only as to actual work;

• The purpose of the administrators’ actions were to rescuing DRL for the benefit of the creditors and the purposes of the administration;

1. While the requirement not to provide work was a relevant factor it was not decisive was balanced against the continued performance of the employment contract by both sides

[1] [2020] EWCA Civ 600 https://www.bailii.org/ew/cases/EWCA/Civ/2020/600.html

[2]  re Carluccio’s Ltd [2020] EWHC 886 (Ch) https://www.bailii.org/ew/cases/EWHC/Ch/2020/886.html

[3] Sch.B1 Para. 99(3), (4), (5)(a) & (6) Insolvency Act 1986

[4] HMRC’s updated Employer Guidance had by this time clarified that holiday pay is payable in full even when
   taken during furlough, so an employer would be liable for the balance above the 80% paid by the Government.

[5] see Powdrill v Watson [1994] ICR 395 (concerning ‘Paramount Airways Ltd’, ‘Leyland DAF Ltd’ & ‘Ferranti
   International Plc’)