Debenhams Retail Ltd ((in Administration))

JurisdictionEngland & Wales
CourtCourt of Appeal
JudgeLord Justice David Richards
Judgment Date06 May 2020
Neutral Citation[2020] EWCA Civ 600
Docket NumberCase No: A2/2020/0631

[2020] EWCA Civ 600

IN THE COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE HIGH COURT OF JUSTICE

BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES

Mr Justice Trower

CR-2020-002113

Royal Courts of Justice

Strand, London, WC2A 2LL

Before:

THE CHANCELLOR OF THE HIGH COURT

Lord Justice Bean

and

Lord Justice David Richards

Case No: A2/2020/0631

In the Matter of Debenhams Retail Limited (In Administration)

and

In the Matter of the Insolvency Act 1986
(1) Geoff Rowley
(2) Alastair Massey (as Joint Administrators of Debenhams Retail Limited)
Appellants

Tom Smith QC and Richard Fisher QC (instructed by Freshfields Bruckhaus Deringer LLP) for the Appellants

Hearing date: 22 April 2020

Approved Judgment

Lord Justice David Richards (giving the judgment of the Court):

Introduction

1

Following the hearing of this appeal, we announced on 24 April 2020 that the appeal was dismissed, for reasons to be given later. In this judgment, we give our reasons.

2

The appeal concerns the inter-relationship between the Government's Coronavirus Job Retention Scheme (the Scheme) and the “adoption” of contracts of employment by administrators under the Insolvency Act 1986 (the Act). Specifically, the issue is whether by paying only the amounts which may be claimed under the Scheme to employees while they are “furloughed” under the Scheme and therefore not permitted to work for the Company, the administrators have adopted the contracts of those employees.

3

In summary, the effect of the adoption of a contract of employment is that the wages or salaries, together with some other amounts such as sick pay and holiday pay, for the period after adoption until termination of the employment or, if earlier, the end of the administration, are payable as expenses of the administration ahead of not only pre-administration unsecured liabilities but also many of the costs and expenses of the administration.

4

We refer in more detail to the Scheme below, but its essential feature is that the Government will reimburse or fund a proportion of the salaries of employees who are furloughed as a result of the measures taken to combat the Covid-19 pandemic.

The facts

5

Debenhams Retail Limited (the Company) is part of a group which carries on retail business, principally through department stores. The Company has some 15,550 employees. Following the introduction of lockdown measures by the Government to combat the spread of the Covid-19 infection, the Company closed its stores and on 25 March 2020 wrote to approximately 13,000 employees, informing them that they were being placed on furlough under the Scheme. A further 867 employees were similarly furloughed in the following days.

6

On 9 April 2020, administrators of the Company were appointed under schedule B1 of the Act by the directors of the Company. This provides protection to the Company by means of a moratorium against actions against the Company and its property by creditors. The purpose of the administration is to seek to rescue the Company as a going concern. The administrators have consented to management continuing to exercise their functions, with the aim of resuming trading from its stores once the lockdown measures are lifted.

7

The administrators considered that the purpose of the administration would be best furthered if the employees remained on furlough under the Scheme. They would continue to pay salaries up to the limits reimbursed or funded under the Scheme, but they would not make any further payments to top up salaries. They wrote on 10 April 2020 to all or most of the furloughed employees seeking their express consent to being furloughed and to the consequent reduction in pay. By the hearing of the appeal, express consents had been received from 13,056 employees, with 10 employees having failed to reply and 4 employees refusing to give their consent.

The proceedings

8

By an application notice issued on 10 April 2020, the administrators sought directions under paragraph 63 of schedule B1 to the Act as to whether by participating in the Scheme they would be adopting the contracts of the furloughed employees. They sought a declaration as follows:

“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.”

9

The application was heard by Trower J on 15 April 2020. On the same day, he announced his decision, declining to make the declaration sought by the administrators and holding that it was likely that they would be found, in the circumstances contemplated by the declaration, to have adopted the contracts of employment of the furloughed employees. He declared and directed that the administrators be at liberty to act on that basis. He handed down a reasoned judgment two days later, on 17 April 2020.

10

The order made by the judge was in the following terms:

“The Joint Administrators be at liberty to act on the basis that they will be taken to have adopted (for the purpose of and within the meaning of paragraph 99(5) of schedule B1 to the Act), 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 after 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 reimbursed to the Company by a grant under the Scheme; or

(2) the Joint Administrators make an application in respect of such employee or employees under the Scheme.”

11

The submissions on behalf of the administrators on this appeal have focussed on the consequences of the making of payments by the administrators, as envisaged in paragraph (1) of the order. No separate submissions were addressed to paragraph (2).

12

In the absence of any respondent to the administrators' application, in particular any employee of the Company, the judge for good reason did not feel it was right to make a declaration in final terms as to whether the contracts of employment would be adopted. The order he made was nonetheless of value because it provided a practical answer to the question and it permitted the administrators to proceed on the stated basis, without risking any personal liability to creditors or others for doing so.

13

In doing this, the judge followed the course adopted by Snowden J on 9 April 2020 when he gave similar directions on an application by the administrators of Carluccio's Limited, which has a chain of over 70 restaurants with some 2,000 employees. The restaurants had closed in accordance with the lockdown measures and an administration order was made by the court on 30 March 2020. As recorded by Snowden J in his judgment at [13], the administrators' strategy was to “mothball” the business and to seek a sale of it. As part of that strategy, they wished to put the employees on furlough under the Scheme. Snowden J heard the application in parts over 6–9 April 2020. Again, there was insufficient time to serve employees or to join a representative employee, but the judge heard submissions made by leading and junior counsel instructed by Unite the Union. Snowden J handed down a reasoned judgment on 13 April 2020: see Re Carluccio's Limited [2020] EWHC 886 (Ch) ( Carluccio's).

14

As was the position before Trower J, we heard no opposing submissions, but we had the advantage of the judgments at first instance in this case and in Carluccio's. rejecting in each case the administrators' submissions. We were told that the Government had been informed of the application before Trower J and of the present appeal.

15

We would like to pay tribute to the comprehensive and careful judgments given by Snowden J and Trower J, which have been of great assistance to us and are all the more impressive for the speed with which they were produced in difficult circumstances.

The Scheme

16

The Scheme was announced by the Chancellor of the Exchequer on 20 March 2020. The statutory basis for the Scheme is a direction given by HM Treasury to the Commissioners for HM Revenue and Customs (HMRC) on 15 April 2020, pursuant to sections 71 and 76 of the Coronavirus Act 2020 (the Direction). HMRC have issued guidance statements, initially on 26 March 2020 and subsequently updated on a number of occasions. The directions and the more recent iterations of the guidance post-date both judgments, but they do not contain any changes material to the issue on the appeal.

17

Paragraph 2 of the Direction, headed “Purpose of scheme”, includes the following:

“2.1 The purpose of CJRS is to provide for payments to be made to employers on a claim made in respect of them incurring costs of employment in respect of furloughed employees arising from the health, social and economic emergency in the United Kingdom resulting from coronavirus and coronavirus disease.

2.2 Integral to the purpose of CJRS is that the amounts paid to an employer pursuant to a claim under CJRS are only made by way of reimbursement of the expenditure described in paragraph 8.1 incurred or to be incurred by the employer in respect of the employee to which the claim relates.”

18

The Guidance issued by HMRC states that the Scheme “is designed to help employers whose operations have been severely affected by coronavirus (COVID-19) to retain their employees and protect the UK economy. However, all employers are eligible to claim under the...

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