Carluccio’s/Debenhams Revisited

Re Debenhams Retail Limited (In Administration) [2020] EWCA Civ. 600

Following the recent High Court decisions dealing with the relationship between the Government’s Coronavirus Job Retention Scheme (“the Scheme”) and paragraph 99 of Schedule B1 to the Insolvency Act 1986 (“Schedule B1”), namely that of Snowden J in Re Carluccio’s Ltd [2020] EWHC 886 (Ch) and that of Trower J in Re Debenhams Retail Ltd [2020] EWHC 921 (Ch) [for commentary see here], the Joint Administrators of Debenhams Retail Ltd (“Debenhams”) appealed the latter to the Court of Appeal.  At the end of a remote hearing on 24 April 2020, the Court of Appeal (The Chancellor and Bean and David Richards LJJ) dismissed the appeal and reserved judgment, which was handed down on 6 May 2020.

It was argued on behalf of the Joint Administrators that the Judge below and Snowden J in Carluccio’s had been wrong to conclude that the act of paying the furloughed staff under the Government’s Coronavirus Job Retention Scheme (“the Scheme”) would amount in itself to an act evidencing an election on the part of the Administrators resulting in the adoption of those contracts of employment under paragraph 99 of Schedule B1.  They further argued that the Administrators could make the payments pursuant to paragraph 66 of Schedule B1, without reference to paragraph 99, so that the Judge below (and Snowden J) had been wrong to hold that super-priority under the provisions of paragraph 99 would apply to the relevant liabilities to those employees.

David Richards LJ, giving the Judgment of the Court, first set out the factual background, the elements of the Scheme (as they were at the date of the Appeal hearing and in rather more depth than in either of the High Court judgments) and the provisions of paragraph 99 of Schedule B1.  The Judge then reviewed the meaning of adoption, within the context of what is now paragraph 99 of Schedule B1, based on the dicta of Lord Browne-Wilkinson from Powdrill v Watson & Anor (Paramount Airways Ltd) [1995] 2 AC 394.  It had been submitted on behalf of the Administrators that, although Snowden J in Carluccio’s had correctly identified the test, he had applied it incorrectly to the circumstances created by the Scheme, and that Trower J in the instant case had applied the wrong test, so that both had arrived at the wrong decision.

The Court rejected the idea that the two judges at first instance had differed in their approach and came to the conclusion that Counsel for the Administrators had misunderstood the approach taken by Lord Browne-Wilkinson in Paramount.  This was that it was a question of whether, on an objective view, the officeholders had continued the employment of the relevant employees (a view supported by dicta of Laddie J in Re Antal International Ltd [2003] 2 BCLC 406).  David Richards LJ then set out a number of factors that led the Court to the conclusion that, by facilitating the payments under the Scheme, the Administrators in this case had indeed continued the employment of the furloughed employees.

• The payments that the Administrators would continue to pay the furloughed employees were (by definition) payments of remuneration made pursuant to and exclusively derived from the employees’ contracts of employment (as reflected in the treatment of such payment for tax purposes);
• The furloughed employees remain bound by the terms of their contracts of employment and accept the continuation of that employment (other than the obligation to be available for work) subject to the variations agreed;
• In continuing to pay the furloughed employees the Administrators were acting within the objective of rescuing Debenhams as a going concern;
• Although the fact that the furloughed employees were precluded under the terms of the Scheme from providing services to the company for the duration of the furloughing was a relevant factor, it was not decisive and was outweighed by the fact that in all other respects both sides were bound by the continued performance of the contracts of employment;
• Even though the remuneration that the employees had agreed to receive during the furloughing was limited to the amounts payable under the Scheme, so that the payments to them was “neutral” to the administration, this did not mean that the contracts had not been adopted by the Administrators: the Government could have chosen to implement the Scheme in such a way as to have it operate entirely outside the contracts of employment, but it had chosen not to;
• The significant point was that the Administrators had taken steps to ensure that the contracts of employment remained in place: the fact that any decision as to the ultimate long-term fate of the furloughed employees would necessarily be postponed to a later date in circumstances that were virtually impossible to predict at this stage did not detract from that central point.

The Court therefore concluded that the Administrators would necessarily be taken to have adopted the contracts of employment of the furloughed employees, with all the consequences for super-priority this entailed under paragraph 99 of Schedule B1.  The fact that his conclusion might prove counterproductive in many administrations (though apparently not as much in the case of Debenhams as the Administrators had feared at the date of the hearing at first instance before Trower J) was an unfortunate consequence of the law as it currently stands.  In a somewhat Pyrrhic victory, the Court did however agree with the submission that the more appropriate mechanism for making the payments to the furloughed employees under the Scheme was paragraph 66, and not (as Trower J and more expressly Snowden J had found) paragraph 99 of Schedule B1, but that conclusion did nothing to undermine the correctness of the decisions below regarding adoption under paragraph 99.

In practice, therefore, this decision reaffirms the decisions on adoption reached in Carluccio’s and at first instance in the present case, albeit that it concedes the point argued by the Administrators both below and in the Court of Appeal that the authority for the Administrators to be making the payments under the Scheme is actually paragraph 66 and not paragraph 99 of Schedule B1.  As the decision makes clear, the potentially unfortunate consequences of this result for the rescue culture generally and for the intended purpose of the Scheme is something for Parliament to sort out.