Krasner v McMath

Under paragraph 99 of Schedule B1 to the Insolvency Act 1986, an employment liability has super-priority only if it both arises under an adopted contract of employment and is wages or salary within the statutory extension. A protective award is a statutory liability, not a liability arising under the contract, and it is not brought within the extended meaning of wages or salary.

Payments in lieu of notice require classification. A payment made after proper notice, while the employee remains entitled to wages for the notice period, has super-priority. Contractual, agreed, or wrongful summary-dismissal payments in lieu do not. The construction is reinforced by the statutory administration regime's objective of preserving viable businesses.

These urgent, conjoined appeals concerned companies in administration and the status of employee claims after administrators had adopted contracts of employment. Peter Smith J had held that protective awards and payments in lieu of notice were payable ahead of administration expenses in Re Huddersfield Fine Worsteds Ltd, [2005] EWCA Civ 1682 (Ch). Etherton J reached the opposite conclusion in the Ferrotech and Granville administrations.

The administrators of Huddersfield Fine Worsteds Ltd and Globe Worsted Company appealed. Employee representatives appealed the Ferrotech and Granville decisions. The central issue was whether protective awards under section 189 of the Trade Union and Labour Relations (Consolidation) Act 1992, and the several forms of payments in lieu of notice, obtained super-priority under paragraph 99 of Schedule B1 to the Insolvency Act 1986.

1. Disposition. The court allowed the administrators' appeal from Peter Smith J and dismissed the employees' appeals from Etherton J, subject to the limited exception for first-category payments in lieu of notice. Protective awards and most payments in lieu did not have super-priority.
2. Protective awards. Paragraph 99(5) imposes two separate requirements. The liability must arise under an adopted contract of employment, and it must be wages or salary within paragraph 99(5)(c) and (6). A protective award under section 189 of the Trade Union and Labour Relations (Consolidation) Act 1992 arises because of employment, but it does not arise under the contract of employment.
3. Paragraph 99(6)(d) of Schedule B1 was construed as referring back to the periods of holiday or absence described in paragraph 99(6)(a) and (b). It did not make a protective award wages or salary. The contrary readings either deprived the references to a period of effect, rendered the other listed categories redundant, or produced anomalous results. The court would not insert omitted words merely because the drafting was unsatisfactory.
4. Payments in lieu. Applying the four categories identified in Delaney v Staples, [1992] 1 AC 687, a first-category payment is ordinary wages: the employer has given proper notice, released the employee from work, and paid the wages attributable to the notice period in a lump sum. It both arises under the contract and is wages, so may obtain super-priority. Third- and fourth-category payments are neither wages nor liabilities arising under the contract. A second-category contractual payment arises under the contract but is a one-off payment not referable to a period, and therefore falls outside paragraph 99(5).
5. The construction was also consistent with the administration regime's rescue culture. Extending super-priority to protective awards and the disputed notice payments would make adoption of employment contracts significantly more hazardous and could frustrate going-concern rescues.

• Court of Appeal (Civil Division): In this judgment, [2005] EWCA Civ 1072, the court allowed the administrators' appeal and dismissed the employees' appeals subject to the first-category notice-payment exception.
• High Court (Chancery Division), Peter Smith J: In Re Huddersfield Fine Worsteds Ltd, [2005] EWCA Civ 1682 (Ch), held that protective awards and payments in lieu of notice had super-priority.
• High Court (Chancery Division), Etherton J: In the Ferrotech and Granville administrations, held that protective awards and payments in lieu of notice did not have super-priority. This conclusion was upheld, subject to the first-category notice-payment exception.