Debenhams Retail Ltd, Re

The Court of Appeal dismissed the administrators' appeal and held that administrators who continue to pay furloughed employees under the Government’s Coronavirus Job Retention Scheme (CJRS) have, for the purposes of paragraph 99 of schedule B1 to the Insolvency Act 1986, adopted those employees' contracts of employment. The court applied the test in Powdrill v Watson (Re Paramount Airways Ltd): adoption depends on objective conduct by the officeholder amounting to a continuation of the employment after the 14-day safe harbour. The administrators' participation in the Scheme, continuation of contractual obligations (other than the requirement to attend for work) and payments of wages up to the Scheme limits were held to constitute continuation and therefore adoption. The consequence is that wages and certain related sums arising after adoption rank as expenses of the administration with super-priority under paragraph 99(4) and (5).

Background and parties: Debenhams Retail Limited, with some 15,550 employees, placed approximately 13,000 employees on furlough under the Government's Coronavirus Job Retention Scheme following the March 2020 lockdown. Administrators were appointed on 9 April 2020. The joint administrators (appellants) adopted a strategy of keeping employees on furlough, paying salaries up to the amounts reimbursable under the Scheme and seeking the employees' consent to reduced pay where necessary.

Nature of the application and procedural posture: By application under paragraph 63 of schedule B1 to the Insolvency Act 1986, the administrators sought a declaratory direction that participating in the CJRS and paying amounts reimbursable under the Scheme would not amount to adoption of the employees' contracts of employment. Trower J at first instance declined to make the declaration and directed that administrators could act on the basis that such conduct would amount to adoption. The administrators appealed to the Court of Appeal. The court heard submissions and considered the first-instance decision and a closely related High Court decision in Re Carluccio's Limited [2020] EWHC 886 (Ch).

Issues framed:

• Whether, for the purposes of paragraph 99 of schedule B1, administrators adopting the CJRS payments and keeping employees on furlough amounts to adoption of contracts of employment;
• What conduct constitutes adoption, and whether payments pursuant to the Scheme—being reimbursed by Government—can be treated as not amounting to adoption;
• Which statutory provisions (paragraph 99 and/or paragraph 66 of schedule B1) provide authority for the administrators to make payments to furloughed employees.

Reasoning and conclusions: The court reviewed the statutory framework, the CJRS direction and guidance and the authorities, notably Powdrill v Watson (Re Paramount Airways Ltd). The leading principle from Paramount is that adoption depends on objective conduct by the officeholder that continues the employment beyond the 14-day period; mere inaction does not constitute adoption. The court rejected the administrators' submission that participation in the Scheme could be understood objectively as not involving any election to treat liabilities as having super-priority because the payments were economically neutral (being reimbursed by Government). The court held that the furloughed employees remained employed, remained bound by most contractual obligations, and that payments of wages, even if limited by the Scheme, are payments under the contracts. Those factors, taken with the administrators' purpose of rescuing the company and reasonable expectation that employees could resume work, demonstrated continuation of employment and therefore adoption under paragraph 99. The court noted paragraph 66 as an appropriate source of authority for making payments but confirmed that paragraph 99 governs the consequences of adoption on ranking of liabilities. The appeal was dismissed.

Appeal dismissed. The Court of Appeal held that, applying the test in Powdrill v Watson (Re Paramount Airways Ltd), administrators who cause the company to continue employment and pay furloughed employees (even up to amounts reimbursable under the CJRS) have objectively continued those employments and thus adopted the contracts for the purposes of paragraph 99 of schedule B1. As a result, wages and certain related sums after adoption enjoy super-priority in the administration.

Appeal to the Court of Appeal from the High Court of Justice, Business and Property Courts (Trower J, CR-2020-002113). The first-instance decision declined the administrators' declaratory relief and allowed them to act on the basis that participating in the CJRS would amount to adoption; the Court of Appeal dismissed the appeal. The judgment refers to and considers Snowden J’s judgment in Re Carluccio’s Limited [2020] EWHC 886 (Ch).