Sign of the times: Debenhams Retail Ltd (in administration): Administrators and furlough arrangements

April 22, 2020

By Lisa Linklater and Harriet Hartshorn

Trower J gives urgently sought directions to the administrators of Debenhams in respect of furlough arrangements and considers the decision of Snowden J in Re Carluccio’s

Introduction

It is a sign of the times that there have been two urgent applications to the High Court of Justice for directions by administrators in respect of furlough arrangements in the course of one week. Each application has concerned high profile companies employing vast numbers of people.  The financial implications of the issues before the court in each case are significant for both employees and administrators.

In the most recent of those applications, in In the matter of Debenhams Retail Ltd (in administration) [2020] EWHC 921 (Ch), Trower J has considered and applied the decision of Snowden J in Re Carluccio’s Limited (in administration) [2020] EWHC 886 (Ch) and determined issues that did not arise on the facts of Re Carluccio’s.  While Trower J cautioned that the directions would not be binding because no representative employees had been joined into the application, the decision provides further clarity and guidance for employees, administrators and their advisors on the complex legal issues arising in respect of employees, furlough arrangements and administration.

The urgency of the application flowed from the fact that the Administrators needed to make a decision as to whether or not to retain a significant number of the company’s employees. As Trower J noted at paragraph 3 of his judgment, that decision was to be informed in part by the answer to the question raised by the application before the court.

Issues

The key issue which arose in Re Debenhams was whether the contract of employees who have been ‘furloughed’ pursuant to the Coronavirus Job Retention Scheme, (‘the Scheme’) will be adopted by the Administrators, within the meaning of paragraph 99(5) of Schedule B1, if the employees remain furloughed and the Administrators take no further action in relation to those employees except to pay to them amounts that are to be reimbursed through the company’s participation in the Scheme.

Background

Debenhams is of course a well-known group which operates 147 department stores in the UK. Even before the current global health emergency, the group was experiencing significant trading difficulties.  The COVID-19 pandemic has proven to be an acute challenge. The entire estate of Debenham’s stores have been closed since the Government imposed restrictions on the opening of non-essential businesses.

On 25 March 2020, the company wrote to some 13,000 store-based employees and informed them that they were being furloughed until further notice. As such, unlike in Re Carluccio’s, by the time of the Administrators’ appointment by the company’s directors on 9 April 2020, the vast majority of the company’s employees had already been placed on furlough.

On 10 April 2020, the Administrators wrote to some 13,070 employees, seeking express consent to the furloughing arrangements. The overwhelming majority of employees consented to the arrangements. The Administrators’ intention was to pay each furloughed employee 80% of their salary up to £2,500 per month from the Company’s available cash reserves. The Administrators would then seek reimbursement of those amounts from the Scheme.

Analysis

The Administrators sought to challenge the correctness of Snowden J’s conclusion in Re Carluccio’s as to how the principles of adopting contracts of employment should be applied when an administrator makes payments to furloughed employees and applications in respect of those payments under the Scheme [34].

At [38], Trower J distinguished Re Carluccio’s from Re Debenhams. In Re Carluccio’s, the employees had not yet been placed on furlough and the administrators were concerned to ensure that the monies which would be received under the Scheme could be applied in the payment of wages. As such, the questions which arose in Re Carluccio’s were not limited to whether the administrators were to be regarded as having adopted the contracts of employment. Rather, they ‘extended to the statutory source of the administrators’ ability to pay the employees ahead of the company’s other creditors’.

It was advanced by the Administrators in Re Debenhams that payments to employees can be justified under paragraph 66 of Schedule B1 and as such it is not necessary to invoke paragraph 99, thereby avoiding the super-priority afforded by paragraph 99 [39]. Trower J considered it appropriate to identify paragraph 99 as the source of the obligation to pay wages as a super-priority administration expense and as the statutory basis for the Administrators’ ability to do so. As such: ‘Explicit reliance on paragraph 66 of Schedule B1 is therefore not needed for that purpose, because the ability to pay flows inexorably from the combination of (a) the adoption of the contract which is part of the conduct by the administrator of his functions and (b) the fact that paragraphs 99(4) and 99(5) then provide for the liability to be payable out of the assets’.

Trower J further stated that: ‘It is clear from paragraph 91 of his judgment that Snowden J considered that the contracts of employment would be adopted by the acts of participation and payment that constitute the Relevant Circumstances in the present case. This conclusion did not depend on the question of whether or not paragraph 66 of Schedule B1 might also be available as a source of the statutory ability to pay employees’ [43].

Trower J went on to consider the definition of the word ‘adopted’ as analysed in the leading House of Lords case of Powdrill v Watson (Paramount Airways Limited) [1995] 2 AC 394 and in the case of Re Antal International Ltd [2003] 2 BCLC 406 in which Laddie J considered the need for relevant conduct by an administrator in order for there to be an election to treat the contracts of employment as continuing. Trower J held:

1. ‘The question asked by Laddie J was whether the conduct in issue could legitimately be treated as an election to continue the contract of employment. As I understand the structure of the JRS and the steps which must be taken to claim under it, it would not be possible for the Administrators to participate without electing to treat the relevant contracts of employment as continuing. It would also be contrary to the purpose of the JRS, which is designed to facilitate employee retention and requires the relevant employees to continue as such’ (At [55]).
2. ‘Reverting to Paramount those established principles of construction require the court to consider whether the acts of participation in the JRS and payment to the furloughed employees (the Relevant Circumstances I identified at the beginning of this judgment) constitute an election of the type described by Lord Browne-Wilkinson (at p.449B) i.e. “some conduct by the administrator … which amounts to an election to treat the continued contract of employment with the company as giving rise to a separate liability in the administration …” This is a slightly different formulation from the one adopted by Snowden J in paragraph 99 of Carluccio, but not in my view a difference which leads to a different result’ (At [62]).
3. ‘In my judgment these acts of participation and payment are only consistent not just with the Administrators treating the contracts of employment as continuing but also with the Company in administration having continuing liabilities under them, being separate liabilities that arise in the administration. If that were not to be the case the Company in administration could not make the claim under the JRS. As Mr Smith QC accepted in argument, the Administrators could not possibly procure the Company to participate in the JRS without procuring it to pay the equivalent amount to the employee. The obligation to do so arises under the continued contract of employment which the Company in administration is required to honour as a condition of participation in the JRS’ (At [63]).
4. ‘In my view it is plain that the Company thereby comes under a separate liability incurred in the administration which flows from the continued existence of the contract. It arises in circumstances in which the Administrators elected to take steps which require them to treat the contract as continuing to give rise to liabilities to which the Company is subject in its administration. The effect of this occurring is that those liabilities are then entitled to the super-priority for which paragraph 99 provides’ (At [64]).

Trower J therefore concluded that it was likely that the acts of participation in the Scheme and payment to the furloughed employees, would result in the Administrators being held to have adopted the contract of employment. It was also emphasised that ‘it cannot matter that the Administrators may not want the Company to incur liabilities which qualify for super-priority’ [65].

Commentary

The consistency of approach in Re Carluccio’s and Re Debenhams and detailed judgments in each case provide welcome clarity on the complex legal issues arising in this new and important area regarding employees in administration.  However, in these extraordinary times, administrators, employees and their advisors will need to be alert to further novel and complex legal issues, for instance when the legislation in respect of the Scheme is enacted.

A full copy of the judgment can be found here.

A copy of the writers’ article on Re Carluccio’s can be found here.

The Court of Appeal has heard and dismissed an appeal from this judgment, a copy of the Court of Appeal’s judgment dated 6 May 2020 is here.

Lisa Linklater is a barrister specialist in all aspects of contentious and non-contentious insolvency, company law and commercial litigation. She is recommended in both Legal 500 UK Bar Guide 2020 (commercial, banking, insolvency and Chancery law) and Chambers UK Bar Guide 2020 (Chancery and insolvency).

Harriet Hartshorn is a versatile junior who has developed a strong commercial and insolvency practice encompassing a range of personal and corporate insolvency matters.