Debenhams Retail Ltd ((in Administration))

JurisdictionEngland & Wales
CourtChancery Division
JudgeMr Justice Trower
Judgment Date17 Apr 2020
Neutral Citation[2020] EWHC 921 (Ch)
Docket NumberCase No: CR-2020-002113

[2020] EWHC 921 (Ch)

IN THE HIGH COURT OF JUSTICE

BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES

INSOLVENCY AND COMPANIES LIST

CHANCERY DIVISION

Royal Courts of Justice, Rolls Building

Fetter Lane, London, EC4A 1NL

Before:

Mr Justice Trower

Case No: CR-2020-002113

In the Matter of Debenhams Retail Limited (In Administration)
And in the Mattter of the Insolvency Act 1986

Tom Smith QC AND Richard Fisher QC (instructed by Freshfields Bruckhaus Deringer LLP) for the Joint Administrators

Hearing date: 15 th April 2020

Approved Judgment

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.

Mr Justice Trower Mr Justice Trower

Introduction

1

This is an application by the joint administrators (the “Administrators”) of Debenhams Retail Limited (“the Company”) for directions pursuant to paragraph 63 of Schedule B1 (“Schedule B1”) to the Insolvency Act 1986 (“ IA 1986”). The application is very urgent and is made without the joinder of any respondent and without any adversarial argument from any other party. As I shall explain a little later, this has caused me to consider whether it was appropriate for me to grant any relief, but for reasons which I will explain, I have concluded that in the very unusual circumstances of the present case it is appropriate for the court to give limited directions to assist the Administrators in charting the right way forward.

2

The directions sought relate to the question of whether the contracts of employees who have been “furloughed” pursuant to the Company's participation in the Coronavirus Job Retention Scheme (“JRS”) will be adopted by the Administrators (within the meaning of paragraph 99(5) of Schedule B1) if the employees remain furloughed and the Administrators take no further action in relation to these employees except to pay to them amounts that are to be reimbursed to the Company through its participation in the JRS. In the Administrators' skeleton argument these are defined as the Relevant Circumstances, a definition which I shall also use in this judgment. The precise terms of the order sought by the Administrators is a declaration that:

None of the contracts of employees who have been furloughed will be adopted by the Joint Administrators if the employees remain furloughed and the Joint Administrators take no further action in relation to these employees except for issuing such communications as may be required to confirm the terms of the employees' ongoing engagement and to seek any required consent in relation to such terms and to pay to the furloughed employees amounts that are to be reimbursed to the Company through its participation in the Coronavirus Job Retention Scheme.”

3

The Administrators were appointed by the directors of the Company on 9 April 2020. The urgency of the application flows from the fact that they need to make a decision in the next few days as to whether or not to dismiss a significant number of the Company's employees. That decision will be informed in part by the answer to the question raised by the application. The reason for this is that, if the contracts of employment are adopted, the relevant employees will then enjoy super-priority status in the administration in respect of their wages or salary referable to periods post-adoption pursuant to paragraphs 99(5) and 99(6) of Schedule B1. This means that they will rank ahead both of the provable claims of other creditors and of other expenses of the administration, a consequence which may have a significant effect on the future conduct of the administration.

4

As Mr Smith QC and Mr Fisher QC say in their skeleton argument in support of the application, the financial consequences of adopting contracts of employment mean that these types of decision can be difficult in any administration. This is particularly acute in the present case because the Company has more than 15,000 employees, the majority of whom have already been furloughed.

5

It is said that the viability of a rescue of the business through an administration will be significantly affected by the decision which the Administrators have to make. The reason for this is that the Company's business has been very severely affected by the closure of its retail estate made necessary by the Government's response to the Covid-19 pandemic. There is significant uncertainty as to when this will change and when an exit from administration can be achieved. The Administrators consider that the workforce will have an important role in ensuring the viability of the future business and continued trading in the future.

6

It is also said by the Administrators that it may well be the case that they would have no alternative but to dismiss the furloughed employees (who are not providing any services to the Company, and cannot do so under the terms of the JRS) if there is exposure to a super-priority liability for wages or salary over and above the amounts which will be reimbursed under the JRS. Because of the way that the JRS works (with which I will deal later in this judgment), and subject to the impact of consents which have been received from a large number of the furloughed employees, the extent of the exposure is the 20% shortfall between the JRS proposed reimbursement of 80% of wages subject to a £2,500 cap, and the liabilities under the contract of employment which are referable to the period after the time of its adoption (paragraph 99(5)(b) of Schedule B1). Subject to a substantial reduction for the consents I have mentioned, this exposure is estimated to amount to over £3 million a month.

7

Before summarising a little more of the factual background, I should explain that similar but not identical questions have arisen in the case of Carluccio's Limited, a company which went into administration on 30 March 2020. One of the differences in that case was that the administrators were seeking directions before implementing their intention to place a large number of that company's employees on furlough pursuant to the JRS, and they wanted the court's directions as to the IA 1986 consequences of doing so, while in the present case most of the employees have already been furloughed. The Carluccio administrators obtained directions from Snowden J during the course of last week and on Monday 13 April the judge handed down a comprehensive judgment ( In Re Carluccio's Limited [2020] EWHC 886 (Ch) (“ Carluccio”)) dealing with a number of issues on the interrelationship between the JRS and the principles underpinning the adoption of contracts of employment by administrators. As will appear, Snowden J's conclusions on some of those issues are directly applicable to the matters which I have been asked to determine.

8

In the ruling that I gave at the end of the oral argument on Wednesday 15 April I declined to make the declaration sought by the Administrators but indicated that I would give them directions as to the course of action which they were at liberty to take. Those directions were that the Administrators be 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 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.

These are my reasons for giving those directions.

The Company and its administration

9

The Company's business is well known. It is part of a group (the “Group”) which operates 142 department stores in the UK and is the largest such retailer in the country. Its stores are located in high streets, shopping centres and retail parks. It also operates department stores in the Republic of Ireland and Denmark and franchise stores in other countries. There is also an online business which generates approximately 19% of its usual trading revenues.

10

Even before the intense pressures caused by the Covid-19 pandemic the Group was experiencing significant trading difficulties. This led in April 2019 to the then-holding company of the Group, Debenhams plc, entering administration followed by an immediate sale of the shares it held in other group companies to a new holding company owned by its finance creditors. Shortly thereafter, CVAs under Part 1 of IA 1986 were approved in relation to the Company and its sister company, Debenhams Properties Limited, the purpose of which was to rationalise their portfolio of leases and certain other liabilities in order to facilitate the implementation of the Group's turnaround strategy.

11

The approval of the CVAs was controversial and the Company's CVA was challenged by some of its landlords. In a judgment handed down in September 2019 ( Discovery (Northampton) Ltd v Debenhams Retail Ltd [2020] BCC 9), Norris J dismissed all but one of the grounds of challenge, modified the CVA to deal with the provisions of the CVA which he had held to be in excess of the jurisdiction conferred by Part 1 of IA 1986 and declared that the CVA as modified was valid and enforceable.

12

Notwithstanding the CVAs, trading conditions for the Group remained difficult, a state of affairs which was exacerbated by the Covid-19 pandemic. This has proved to be what the Administrators have described as an acute challenge to the business since March 2020 which is expected to continue for several months. Initially there was a substantial reduction in footfall with a corresponding impact on revenue. This was then followed by...

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