New High Court ruling regarding Debenhams furloughed employees

Share:
News Banner

by Paul Wilson, Barrister

There has been a further ruling from the High Court on the CJRS and its interrelationship with insolvency law principles underpinning the adoption of contracts of employment by administrators In the Matter of Debenhams Retail Limited (In Administration) [2020] EWHC 921 (Ch).

It comes just 4 days after the judgment in In the Matter of Carluccios Ltd [2020] EWHC 886 (Ch) which was the first published judgment to consider the implications of the CJRS in this field.

Debenhams have over 15,500 employees. The company wrote to approximately 13,000 store-based employees on 25th March informing them that because of the Coronavirus crisis that it was closing all of its stores to trading and that they were being furloughed until further notice with effect from the following day.  The Administrators were appointed on 9th April.  Before they were appointed a further 867 employees were furloughed.  They sought directions on the question of whether the contracts of employees who had been furloughed under the CJRS will be adopted by the Administrators (within the meaning of paragraph 99(5) of Schedule B1 of the Insolvency Act 1986) if they remain furloughed and the Administrators take no further action in relation to those employees other than to pay them the amounts that are to be reimbursed to the company through its participation in the CJRS.

The relevance is that if they are adopted then the furloughed employees will enjoy “super-priority” status in the administration with respect to payments of wages post adoption pursuant to paragraphs 99(5) and (6) of Schedule B1 of the Act and they will rank ahead of both the provable claims of other creditors and of other expenses of the administration.  If so, this is likely to have a significant effect on the future conduct of the administration.

On 15th April Mr Justice Trower gave directions that the Administrators were at liberty to act on the basis that they will be taken to have adopted any contract of employment between the company and its employees in circumstances where, in respect of any particular employee or employees, at any time after 14 days from the date of their appointment:

  • they cause the company to make payments to such employees under and in accordance with their employment contracts including in respect of amounts which may be reimbursed to the Company by the grant under the CJRS; or if
  • they make an application in respect of such employees under the CJRS.

In doing so Mr Justice Trower rejected the Administrators’ argument that Snowden J in Carluccio was wrong in concluding in similar circumstances that the contracts of the employees in that case would be adopted when the Administrators in that case made an application under the CJRS in respect of consenting employees or made any payment to employees under their varied contracts.

The Administrators’ concern arose not out of any desire not to retain employees and to secure payment of their wages under the CJRS, but out of the uncertainty as to the real extent of the super-priority liabilities which may continue to subsist if the contracts are adopted – for example in relation to sick pay and holiday pay.   Obviously the outcome is consistent with Carluccio – and therefore, as matters stand, if administrators of a company make an application under the CJRS and or make payment to furloughed employees of the capped 80% of their contractual entitlement to wages, then those contracts will have been adopted for the purposes of paragraph 99(5) of Schedule B1 of the Act.

It remains to be seen whether uncertainties around the operation of the CJRS will have any significant effect further on down the line.  For the time being, it clearly assists administrators who want to “mothball” a business or part of a business and to seek a sale whilst retaining employees on the books under the CJRS – when the retention of those employees is likely to significantly affect whether the business will continue to be viable if a purchaser is found.

It must be noted that in both cases the outcome will amount to persuasive guidance (and not binding in law) since it had not been possible for any representative employees or other interested parties to be joined to the applications in either case.