Krasner v McMath
| Jurisdiction | England & Wales |
| Judge | THE HONOURABLE MR JUSTICE PETER SMITH,MR. JUSTICE ETHERTON |
| Judgment Date | 09 August 2005 |
| Neutral Citation | [2005] EWHC 1682 (Ch),[2005] EWHC 1848 (Ch) |
| Date | 09 August 2005 |
| Court | Chancery Division |
| Docket Number | Case No: 4193 AND 4194 OF 2005,Case Nos: 5417–2005/5006–2005 |
[2005] EWHC 1682 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
The Honourable Mr Justice Peter Smith
In the Matter of Huddersfield Fine Worsteds Ltd
And in the Matter of Globe Worsted Company Ltd
And in the Matter of the Insolvency Act 1986
Case No: 4193 AND 4194 OF 2005
William Trower QC and Felicity Toube ( instructed by Brooke North) for the Applicant
Frederic Reynold QC and Edmund Cullen (instructed by Wilkinson Woodward and Boococks) for the Respondent
Hearing dates: 19 th July 2005
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.
Peter Smith J:
INTRODUCTION
This judgment arises out of 2 identical applications issued on the 24 th June 2005 by Gerald Morris Krasner ("the Administrator") who was appointed Administrator of the two companies Huddersfield Fine Worsteds Ltd ("HFW") and Globe Worsted Company Ltd ("GWC" (together "the Companies")) on 20 th August 2004. The Administrator seeks a declaration that liabilities for protective awards under section 189 Trade Union Labour Relations (Consolidation) Act 1992 and awards of pay in lieu of notice should be treated as unsecured claims in the administration of the Companies (and not as falling within paragraphs 99 (4)—(6) of Schedule B1 to the Insolvency Act 1986).
FINANCIAL IMPLICATIONS
The Administrator is concerned that if the true construction of paragraph 99 is that responsibility for those payments falls to be paid in priority to all other payments (including the Administrators' remuneration and preferential creditors) that will have a large impact on the recoveries in the two Companies. It may well also have a wider impact in other administrations. As regards the Companies the maximum exposure of the Administrator for protective awards claims and payments in lieu of notice are in the region of £515,000. The net realisations across the two Companies are estimated to be in the region of £3,300,000. As I have said the impact of the employees' claims would affect both preferential creditors and the floating charge holders. No preferential creditors have yet been identified but the debenture holder is owed approximately £6,000,000. No payments therefore will in any event be payable to the unsecured creditors; the loss in effect if any if the issue is determined against the Administrator will fall on the debenture holder.
The Administrator is concerned as to the particular impact on the Companies but also sets out in paragraph 13 of his witness statement his concerns on the prospects of Administrations being successful if there was a general rule of giving protective awards and payments in lieu of notice as priority. It seems to me that concern is nothing like for example the concerns that arose as a result of the decision in Powdrill v Watson [1994] 2 BCLC 118 C.A. The result of that decision and subsequent House of Lords decision ( [1995] 2 AC 394) will be dealt with further in this judgment.
If the payments referred to above ("the Payments") are not held to be "qualifying liabilities" in all probability they will be unsecured and will not be preferential payments. This arises from section 387 IA 1986 which provides a definition of the "Relevant Date" for the purposes of the preferential payments set out in schedule 6. Where a company is either going into administration or entered into a company voluntary arrangement the date of the entry of administration or the voluntary arrangement is the relevant date (section 387 (2)).
Where a company is to be wound up and the winding up is by the court immediately upon the discharge of the Administration Order the date is the date upon which the company went into administration. If the winding up is by the court and the winding up order is made following conversion of the administration into winding up the relevant date is the date on which the company went into administration. In other cases when the company has been wound up by the court and had not commenced to be wound up voluntarily before the making up of the winding up order the relevant date is the date of the first appointment of a provisional Administrator or the winding up order.
The significance of that is that any preferential payment for employees in category 5 of schedule 6 is an amount payable in any part of the period 4 months next before the relevant date and does not exceed so much as prescribed by order made by the Secretary of State (schedule 6 paragraph 9 (B)).
It follows therefore that any entitlement which accrues after the administration order and all these payments do will not become preferential because they do not fall in the relevant date for the purposes of the administration. Nor if the Companies are subsequently wound up unless that winding up order occurs less than 4 months after the making of the administration order will they be preferential in a subsequent liquidation unless the court makes an order directing that to be the case on the making of the winding up order see for example re: TXU [2003] 2 BCLC 341. I stress of course that any decision by a court to approve such a payment will of course depend on the facts of each administration as it appears before the court from time to time. I can say however that there is a possibility that the loss of priority could be protected in some way but it cannot be regarded as anything more than a possibility.
It follows therefore that the liabilities will either achieve super priority over everything else or no priority whatsoever.
BACKGROUND
The dispute arises out of a wording of schedule B1 paragraph 99 IA 1986. It provides as follows:
99 (1) This paragraph applies where a person ceases to be the administrator of a company (whether because he vacates office by reason of resignation, death or otherwise, because he is removed from office or because his appointment ceases to have effect).
(2) In this paragraph-
"the former administrator" means the person referred to in sub-paragraph (1), and
"cessation" means the time when he ceases to be the company's administrator.
(3) The former administrator's remuneration and expenses shall be-
(a) charged on and payable out of property of which he had custody or control immediately before cessation, and
(b) payable in priority to any security to which paragraph 70 applies.
(4) A sum payable in respect of a debt or liability arising out of a contract entered into by the former administrator or a predecessor before cessation shall be-
(a) charged on and payable out of property of which the former administrator had custody or control immediately before cessation, and
(b) payable in priority to any charge arising under sub-paragraph (3).
(5) Sub-paragraph (4) shall apply to a liability arising under a contract of employment which was adopted by the former administrator or a predecessor before cessation; and for that purpose-
(a) action taken within the period of 14 days after an administrator's appointment shall not be taken to amount or contribute to the adoption of a contract,
(b) no account shall be taken of a liability which arises, or in so far as it arises, by reference to anything which is done or which occurs before the adoption of the contract of employment, and
(c) no account shall be taken of a liability to make a payment other than wages or salary.
(6) In sub-paragraph (5)(c) "wages or salary" includes-
(a) a sum payable in respect of a period of holiday (for which purpose the sum shall be treated as relating to the period by reference to which the entitlement to holiday accrued),
(b) a sum payable in respect of a period of absence through illness or other good cause,
(c) a sum payable in lieu of holiday,
(d) in respect of a period, a sum which would be treated as earnings for that period for the purposes of an enactment about social security, and
(e) a contribution to an occupational pension scheme.
These provisions were inserted by the Enterprise Act 2002. They replaced section 19 (4)—(10) IA 1986 which themselves were inserted in section 19 as a result of the Powdrill case in the Court of Appeal. Prospectively the provisions were altered.
The two categories of payments sought to be claimed are payments in lieu of notice in accordance with a contractual right of the employee when the contracts are terminated and protective employment awards made under section 189 (3) TULR (C) Act 1992. This is an order for the payment by an employer to an employee of " remuneration" for the protected period. The protected period is the date when the dismissals take effect and such length as a tribunal determines just and equitable arising out of the seriousness of the employer's default in complying with any requirement under section 188 (not to exceed 90 days). The complaint arises out of a failure of the employer who is proposing to dismiss 20 or more employees within a period of 90 days to consult all employees about the proposed dismissal (section 188).
I was also told by Mr Reynold QC who with Mr Cullen appears on behalf of Mr McMath a representative employee respondent that in practice the employees will receive up to 75% of such award in any event payable by the Secretary of State. The losses therefore will be the balance between any award of payment in lieu of notice and the amount which the Secretary of State makes.
Despite the apparent significance as regards the National Insurance Fund as to this decision the Insolvency...
To continue reading
Request your trial
-
Krasner v McMath
...Fine Worsteds Ltd and Globe Worsted Co Ltd against a decision of Mr Justice Peter Smith in the Chancery Division (unreported (2005) EWHC 1682 (Ch)) in which he held that an administrator was obliged to pay protective awards and payment in lieu to employees of the companies, represented by M......
- Re Huddersfield Fine Worsteds Ltd ((in Administration)) and another; Krasner v McMath; and other appeals