Debenhams Retail Ltd, Re

An administrator adopts a contract of employment by taking active steps, after the statutory 14-day period, to continue the employment. The inquiry is wholly objective. It turns on the administrator’s conduct, rather than on an actual or inferred intention to confer super-priority on liabilities under the contract.

Paying furloughed employees contractual remuneration through the Coronavirus Job Retention Scheme, while retaining them under their contracts for the prospective rescue of the business, amounts to continuing their employment. The employees’ temporary prohibition on working, the Government’s reimbursement of remuneration, and uncertainty about later termination do not prevent adoption under paragraph 99 of Schedule B1 to the Insolvency Act 1986.

The joint administrators of Debenhams Retail Ltd sought directions on whether they would adopt furloughed employees’ contracts if they paid remuneration limited to sums available under the Coronavirus Job Retention Scheme. Most employees had agreed to furlough and reduced pay. The administrators wished to preserve the workforce while seeking to rescue the company as a going concern.

Trower J declined the requested declaration and directed that the administrators could act on the basis that making the payments, or applying under the Scheme, would amount to adoption after 14 days. The administrators appealed. The central issue was whether participation in the Scheme, despite the employees being unable to work, involved continuing their employment for paragraph 99 purposes.

1. Appeal dismissed. The administrators had adopted the contracts of employees who consented to furlough. Their payments of contractual remuneration under the Coronavirus Job Retention Scheme, made after the 14-day period, were active steps to continue the employment.

2. Powdrill v Watson, Re Paramount Airways Ltd established that adoption requires conduct by the office-holder in continuing employment. It does not arise merely because the company allows employment to continue. The Court held that this is a wholly objective legal inquiry. It does not ask whether the administrator actually intended, or can objectively be taken to have intended, to elect that liabilities should enjoy super-priority.

3. The employees remained employed and bound by their contracts except for their obligation to work during furlough. Their right to remuneration derived from those contracts. The payments were expenses of the company and Government grants were its income. The Scheme’s reimbursement mechanism therefore did not make the company a legally irrelevant conduit.

4. The absence of services was significant, but not decisive. The administrators retained the workforce to support a potential rescue and resumption of trading. Their postponement of any termination decision likewise showed that they had taken steps to keep the contracts in being. Those factors outweighed the temporary non-provision of work and the cap on remuneration.

5. Paragraph 66 of Schedule B1 to the Insolvency Act 1986 was an appropriate, and perhaps the most obvious, authority for making the payments because the administrators considered them likely to assist the administration’s purpose. Paragraph 99 determined the consequences of adoption; it was not the necessary source of the payment power. The Court therefore affirmed Trower J’s practical direction.

• Court of Appeal (Civil Division): dismissed the administrators’ appeal in [2020] EWCA Civ 600.
• High Court (Business and Property Courts): Trower J, on 15 April 2020, declined the declaration sought and directed that the administrators could act on the basis that payment under the Scheme, or an application under it, would adopt the relevant contracts after 14 days.