Debenhams Retail Ltd, Re

Participation in the Coronavirus Job Retention Scheme and payment of furloughed employees may amount to adoption of their employment contracts by administrators. The relevant question is whether, after the statutory 14-day period, the administrators engage in conduct amounting to an election to treat the contracts as continuing to give rise to separate liabilities in the administration. Mere continuation of employment is insufficient, but conduct required to participate in the scheme and make the required wage payments may satisfy that test. The administrators’ subjective intention that liabilities should not have super-priority is immaterial. Policy considerations, including the rescue culture and the purpose of the scheme, inform construction but cannot displace established principles where the conduct is objectively inconsistent with non-adoption.

The joint administrators of Debenhams Retail Ltd, appointed on 9 April 2020, sought directions under paragraph 63 of Schedule B1 to the Insolvency Act 1986. Most of the Company’s employees had been furloughed under the Coronavirus Job Retention Scheme before the administration. The administrators proposed paying furloughed employees 80% of wages, subject to the scheme cap, and claiming reimbursement.

The administrators sought a declaration that the employment contracts would not be adopted in those circumstances. The application raised the interaction between the scheme, the statutory super-priority for liabilities under adopted employment contracts, and the principles stated in Powdrill v Watson (Paramount Airways Limited) and In Re Carluccio’s Limited.

1. Directions. The court declined to grant the declaration sought. It gave the administrators liberty to act on the basis that employment contracts would be treated as adopted where, after 14 days from appointment, they caused the Company to make payments under the contracts, including amounts reimbursed under the Coronavirus Job Retention Scheme, or made an application under the scheme.
2. Meaning of adoption. Following Powdrill v Watson (Paramount Airways Limited), adoption requires conduct by the administrator amounting to an election to treat the continuing employment contract as giving rise to a separate liability in the administration. Mere continuation of employment does not, by itself, establish adoption. The relevant conduct must occur after the statutory 14-day period.
3. Application to the scheme. Participation in the scheme and payment of the required sums to furloughed employees are positive acts which presuppose that the employment contracts continue. The scheme requires the employer to pay the employee the relevant grant amount and treats the payment as wages. The administrators could not participate without procuring those payments. Their conduct therefore constituted an election to treat the contracts as continuing to give rise to liabilities in the administration.
4. Policy and objective character. The absence of services during furlough did not prevent adoption. Employee retention could itself be an incident of achieving the purpose of administration. The rescue culture and the purpose of the scheme were relevant constructional considerations, but could not prevent adoption where the administrators’ acts were objectively inconsistent with non-adoption. Their subjective wish to avoid super-priority was immaterial.
5. Procedural qualification. Because the application was without adversarial argument, the directions were not binding and did not provide a complete defence to a later challenge. They afforded the protection contemplated by paragraph 68(2) of Schedule B1 to the Insolvency Act 1986.