Carluccio’s Revisited: Debenhams Enters the Minefield

Re Debenhams Retail Limited [2020] EWHC 921 (Ch)

On 15 April 2020, two days after Snowden J handed down his judgment in Re Carluccio’s Ltd [2020] EWHC 886 (Ch), Trower J heard a very similar urgent application from the Joint Administrators of Debenhams Retail Ltd (“Debenhams”), seeking directions in the context of the Government’s Coronavirus Job Retention Scheme (“JRS”).  Having given directions the Judge reserved judgment, which was handed down on Friday 17 April 2020.  Although the two cases have much in common (including that Geoff Rowley of FRP Advisory was one of the Joint Administrators for each company), there were some crucial factual differences.  The most significant of these was that, by the date the Joint Administrators were appointed in Debenhams on 9 April 2020, the vast majority of the company’s more than 15,500 employees had already been furloughed pursuant to the JRS.

As was the case in Carluccio’s, the urgency of the matter meant that there had been no opportunity for any other interested party to be formally represented, which caused the Judge some concern as to whether it was appropriate to give any directions, but in the end the exceptional circumstances justified the Court’s intervention.  In his judgment the Judge referred to the lack of legislation or regulations on the precise workings of the JRS and indicated that the only details were those published in the Government’s Scheme Guidance, first published on 26 March 2020 and updated at intervals thereafter.  The Judge was aware that this Guidance had been updated just after the conclusion of the hearing in Debenhams (and indeed it was updated again on 17 April 2020), but he does not appear to have noted that on 15 April 2020 the Chancellor of the Exchequer had issued a Treasury Direction, pursuant to ss. 71 and 76 of the Coronavirus Act 2020 (“the Treasury Direction”).  However, nothing in the Treasury direction or the Schedule to it takes the matter any further as far as the issues with which the Court was grappling in this case are concerned.  It therefore remains the case that, although the JRS expressly applies to companies in administration, the Government has so far not provided any guidance as to how it is supposed to mesh with the provisions of insolvency legislation and in particular to para 99 of Schedule B1 to the Insolvency Act 1986 (“Schedule B1” and “the Act”, respectively).

Debenhams and the group of companies to which it belonged had, in common with much of the retail sector, been in considerable financial difficulties even prior to the onset of Coronavirus: in April 2019 its holding company had gone into administration; thereafter Debenhams had entered into a CVA pursuant to Part 1 of the Act; the terms of the CVA were challenged by the landlords, which challenge had (with one exception) been dismissed by Norris J in September 2019 (Discovery (Northampton) Ltd v Debenhams Retail Ltd [2020] BCC 9).

The issue before the Court was whether the Administrators would be taken to have adopted the contracts of employment of the furloughed employees in circumstances where the Administrators did nothing in relation to those employees but issue such communications as might be necessary to confirm the terms of the employees’ continuing engagement, seek any consents in relation to those terms and pay the employees their entitlement under the JRS.  The viability of the Administrators’ plans to rescue Debenhams hung on the outcome, since the furloughed employees were an integral part of the rescue plan but, if their contracts were adopted so that the relevant liabilities attracted the super-priority under para 99 of Schedule B1, that plan would not be economically viable: the Administrators estimated that, if the liabilities under the contracts of employment in question attracted super-priority, this could result in an additional burden of over £3 million a month.  They therefore sought a direction whereby they could implement the JRS without formally adopting the employees’ contracts of employment.  Although the Administrators accepted the reasoning of Snowden J’s analysis in Carluccio’s they argued that the Judge in that case had reached the wrong conclusion; in particular they argued that it was antithetical to the purposes both of the JRS itself and of the rescue culture to conclude (as Snowden J had in para [91] of his judgment in Carluccio’s) that in taking steps in relation to particular employees pursuant to the JRS, the Administrators would necessarily being electing to adopt the employees contracts of employment for the purposes of para 99 of Schedule B1.  They sought to persuade Trower J that they could circumvent these issues by relying on para 66 instead of para 99 (a solution that Snowden J had not agreed with).

Trower J did not consider it necessary to consider whether para 66 of Schedule B1 was applicable and he rejected the Administrators’ arguments on para [91] of the judgment in Carluccio’s and the applicability of para 99: in doing so he accepted in full both the reasoning and the conclusions reached by the Court in Carluccio’s.  The fact that (unlike the position in Carluccio’s) the employees had already been placed on furlough made no material difference to the application of the principles.  The Judge reconsidered the key passages in Powdrill v Watson & Anor (Paramount Airways Ltd) [1995] 2 AC 394 and Re Antal International Ltd [2003] BCLC 406 and reached the same conclusions as had Snowden J.  Although the Judge was sympathetic to the concerns of the Administrators, he refused to make the direction they sought and instead was only willing to direct (at para [8]) that the Administrators were at liberty to act on the basis that they would be taken to have adopted the contracts of employment between Debenhams and its employees where at any time after 14 days from their appointment they caused Debenhams to make payments to employees under and in accordance with their contracts of employment, including in respect of amounts that may be reimbursed to Debenhams under the JRS, or made an application in respect of any such employee under the JRS.

The result in Carluccio’s was a result that the administrators of that company could live with because they had been able to vary the contracts of the overwhelming majority of the workforce in such a way as neutralise the most drastic effects of para 99 of Schedule B1 prior to having to implement any part of the JRS.  By contrast that had not been possible here, where the Administrators had inherited a largely furloughed workforce, with the result that there was a real risk that para 99 could impose unacceptable levels of super-prioritised liabilities.  This judgment therefore underlines even more starkly than that in Carluccio’s the tensions inherent in the collision of the underlying policies behind the JRS and the rescue culture, albeit that both are essentially aimed at the same ends.  It is probable that, if the Government wishes to avoid the worst implications of these tensions, it (or Parliament) will need to make specific provisions in the measures that formally govern the JRS to exempt the scheme from the full force of para 99 of Schedule B1 beyond what is required to enable administrators to implement the JRS itself.  This could be done, for example, by specifying that any actions taken by administrators in pursuit of or in connection with implementing the JRS, even if taken after the 14-day period, would not (by themselves) amount to “adoption” within the meaning of para 99(5) of Schedule B1.  This would provide the result that the Administrators of Debenhams sought without doing violence to the legal understanding of the term “adoption” in this context (as identified in Paramount and refined in Carluccio’s and Debenhams) and without requiring any amendments to the Act itself.