Re Debenhams Retail Ltd (in administration) [2020] EWCA Civ 600

By Keisha Green

First instance

This case is regarding an application for directions filed by the administrators of Debenhams Retail Ltd (the Company). It was initially heard in the Chancery Division by Trower J in April 2020. Directions were sought in connection with whether the contracts of furloughed employees participating in the Corona Job Retention Scheme (the Scheme) had been adopted and, as a result, gave rise to super-priority.

The majority of the Company’s 15,000 employees were furloughed, of which many employees consented and participated in the Scheme. The Scheme allowed for employees to be paid 80% of their wages. Directions were requested in connection with the 20% shortfall in employee wages, which amounted to roughly £3 million a month. If it was held that the contracts were adopted, this would result in the wages enjoying super-priority status in the administration.

Despite the employees being unrepresented, directions were given on the understanding that guidance was needed in these difficult times brought about by Covid-19, although the directions as to the law were not binding. Upon considering the position, and having regard for the recent decision in Carluccio’s regarding participation in the Scheme, Trower J held that the administrators could act on the basis that the contracts had been adopted, where the administrators had caused the Company to pay its employees via the Scheme, more than 14 days after the appointment of the administrators.

Appeal

The administrators appealed the decision on the grounds that the test established in Paramount was misapplied by Snowden J in Carluccio’s and that the administrators were, in participating in the Scheme, merely continuing the employment of employees and were exercising the duties of an administrator in doing so. Consequently, they submitted that there was no evidence, either by word or conduct, that the administrators had elected to treat the liabilities of the employees’ contracts as having super-priority. The appeal was dismissed, affirming the judgment of Trower J and expanding upon their submissions.

First, it is relevant to note that the terms which the majority of employees agreed to prevented wages greater than the sum payable under the Scheme from enjoying super-priority status. However, it could be the case that, despite these terms, holiday pay would still enjoy super-priority, amounting to £1.28 million over a three-month period.

The Court considered that the administrator’s contention that Snowden J had misapplied the test in Paramount was to misunderstand the approach initially taken. The essence of the test was whether the administrator (or officeholder) had taken active steps to continue employment, rather than that there was evidence of the election by the administrators, as was submitted. Snowden J’s application of the test in Carluccio’s led to the conclusion that an administrator making an application under the Scheme or making payments to employees who consented to be furloughed would give rise to liabilities qualifying for super-priority.

Where employment is continued by the Company, it does not necessarily follow that the contract will be adopted by the administrator. However, by participating in the Scheme the administrators had taken active steps to cause the Company to continue employment, more than 14 days after their appointment. As such, it was held that the contracts as a whole were adopted. Whereas not partaking in the Scheme, i.e. doing nothing, does not involve continuation of the employment by the administrators.

The administrators also submitted that finding that the contracts had been adopted would hinder the efforts of the administration and could potentially lead to the dismissal of employees. But, not only is the dismissal of employees against the purpose of the Scheme, to aid in job retention, but participants were expected to engage in the Scheme in good faith on the intention of retaining/rehiring employees. Furthermore, in reiterating Lord Browne-Wilkinson in Paramount, the Court recounted that it is not for the administrator to limit the extent of adoption in the pursuit of successful administration.

Implications

Whilst it is true that the extent of adoption should not be limited by administrators, it is possible that, as a consequence of trying to prevent employee contracts from obtaining super-priority, there is an increase in the number of employees dismissed during the administration process. The outbreak of Covid-19, and the resulting economic shutdown, has caused some businesses, which may have been struggling financially before the outbreak, to enter administration. For instance, Victoria’s Secret, Monsoon and Antler, are amongst the latest retailers in the clothing and fashion industry to enter administration since May 2020. With the lockdown restrictions easing, and the use of the Scheme eventually set to come to an end, we shall have to wait and see to what extent the Scheme has achieved its aim, and if it has affected the pursuit of successful.