COVID-19: Debenhams’ administrators took on contracts of furloughed employees

England and Wales High Court
England and Wales High Court

The joint administrators of the department store Debenhams have been held by the High Court of England and Wales to have adopted the employment contracts of personnel who had been furloughed due to the company’s participation in the Coronavirus Job Retention Scheme (JRS).

The administrators sought an order declaring that none of the contracts of furloughed employees would be adopted by them if they remained furloughed, and that they would take no further action in relation to those employees except to confirm the terms of their ongoing engagement and to pay them the amounts reimbursed to the company through the JRS.

The application was heard by Justice Trower.

Urgent application

Debenhams Retail Ltd appointed administrators for the company on 9 April 2020, following a period of trading difficulties. Prior to the appointment of administrators they confirmed their intention to participate in the UK government’s Job Retention Scheme for employees affected by the COVID-19 pandemic.

Due to the required closure of their stores, the majority of the company’s employees, numbering over 15,000 in total, had already been furloughed. The company sent letters to furloughed employees stating that they would be paid 80 per cent of their usual monthly wages up to £2,500 a month, but would not receive any further payment. They were not asked to consent to the arrangement at that time, but this was later sought by the administrators.

The administrators made an urgent application seeking direction from the court per Schedule B1 of the Insolvency Act 1986, as they would have to make a decision in the next few days about whether or not to dismiss a significant number of the company’s employees. They argued that if the contracts were to be adopted by the administrators, the 20 per cent shortfall in wages not covered by the JRS would constitute exposure to a super-priority liability, ranking the payment of wages ahead of the provable claims of other creditors and expenses incurred by the administrators. This was said to amount to around £3 million a month. Thus, the status of the employees’ contracts would have a significant impact on the future conduct of the administration.

The official guidance from the government regarding the JRS is that the administrators of a company are able to access the scheme. The expectation is that they would likely only use it where there was a reasonable chance of rehiring the workers, for example following the sale of the business. In support of the application, one of the administrators described their strategy as “a ‘light touch’ administration which would protect and retain value in the business, reduce new money funding requirements and maximise options for exiting the administration as a going concern”.

Positive conduct

Following oral arguments on 15 April 2020, Trower J declined to make the declaration sought by the administrators and directed them that they were to act at liberty on the basis that they were to be taken to have adopted any contract of employment between the company and its employees where, at any time after 14 days from the time of their appointment:

“(1) the Joint Administrators cause the Company to make payments to such employee or employees under and in accordance with their employment contracts including in respect of amounts which may be reimbursed to the Company by a grant under the JRS; or (2) the Administrators make an application in respect of such employee or employees under the JRS”.

Trower J, in his opinion, noted the lack of other parties present in the application, but stated: “[I]n the present circumstances I think that it is appropriate for the court to do all that it can to assist the Administrators by addressing any areas of uncertainty, recognising all the while that the most it can do is give the Administrators liberty to act in a particular way without prejudice to the ability of an interested party to argue subsequently that its views were wrong.”

He also quoted with approval Snowden J’s judgment in the similar Carluccio case decided a few days beforehand, who said: “The COVID-19 pandemic is a critical situation which carries serious risks to the economy and jobs in addition to the obvious dangers to health. I think that it is right that, wherever possible, the courts should work constructively together with the insolvency profession to implement the Government’s unprecedented response to the crisis in a similarly innovative manner.”

Addressing the present case, he said: “It seems to me to be clear […] that by causing the Company to make an application under the JRS and in making payment to the furloughed employees of a capped 80 per cent of their contractual entitlements, the Administrators will be engaging in positive conduct which presupposes that the contracts of the furloughed employees continue to exist and treats that as being the case. The reason for this is that the terms of the JRS itself enable the employer to obtain reimbursement for a proportion of what are characterised as the wages which it pays the employee and requires a sum representing the full amount of the grant to be paid to them as wages. The whole purpose of the JRS is to enable employers to retain their employees and, while they are retained under the JRS, the amounts they are paid by the employer continue to be treated as wages from the perspective of both employer and employee.”

He continued: “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.”

Addressing the status of the liability under the JRS, he said: “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.”

He concluded: “I should add that it cannot matter that the Administrators may not want the Company to incur liabilities which qualify for super-priority. To that extent there is an objective element to what is meant by the administrators electing to treat the contracts in a particular manner. What matters is whether there is a separate liability arising in the administration which has arisen out of elective conduct by the Administrators, not whether they subjectively want that liability to have a particular ranking. The ranking flows from the election to do something after the expiry of the 14-day period which gives rise to a separate liability arising under the contract of employment, not the other way around.”

In his disposition, Trower J outlined the future position of the administrators thusly: “In light of the considerations that I have described earlier in this judgment, and the considerable uncertainty arising out of the Covid-19 pandemic and the operation of the JRS, I also concluded that it was appropriate for the court to give the Administrators the directions that I have indicated. They cannot operate as a complete defence to any subsequent challenge, but by carrying out their functions in accordance with those directions the Administrators will at least have the protection contemplated by paragraph 68(2) of Schedule B1.”

© Scottish Legal News Ltd 2021

Tags: coronavirus

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