Krasner v McMath
| Jurisdiction | England & Wales |
| Judge | Lord Justice Neuberger |
| Judgment Date | 12 August 2005 |
| Neutral Citation | [2005] EWCA Civ 1072 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case Nos: A2/2005/1731 & A2/2005/1744 |
| Date | 12 August 2005 |
[2005] EWCA Civ 1072
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
(CHANCERY DIVISION)
Mr Justice Peter Smith
Mr Justice Etherton
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Clarke
Lord Justice Jacob
Lord Justice Neuberger
In the Matter of Huddersfield Fine Worsteds Limited
and in the Matter of Globe Worsted Company Limited
and in the Matter of the Insolvency Act 1986
Case Nos: A2/2005/1731 & A2/2005/1744
Miss Felicity Toube (instructed by Messrs Brooke North) for the administrator of Huddersfield Fine Worsteds Limited and of Globe Worsted Company Limited
Mr Frederic Reynold QC and Miss Corinna Ferguson (instructed by Messrs Wilkinson Woodward and Boococks) for Mr McMath
Ms. Jane Giret QC (instructed by Messrs Matthew Arnold & Baldwin) for the Mr Tipper and Mr Harris
Mr. David Oliver QC and Mr Jeremy Goldring (instructed by Messrs Denton Wilde Sapte) for the administrators of Ferrotech Limited and (instructed by Messrs Lovells) for the administrators of Granville Technology Group Limited
Mr Nicholas Caddick (instructed by the Treasury Solicitor) intervening for the Her Majesty's Attorney-General
Introduction
This is the judgment of the court on these appeals, which came on urgently for hearing on the afternoon of 9 August 2005, and which raise substantially the same issues. They concern the effect of paragraph 99 of Schedule B1 to the Insolvency Act 1986 ("the 1986 Act") as amended by the Enterprise Act 2002 ("the 2002 Act"). The appeals raise an issue of importance to administrators, and indeed to the administration system, under the 1986 Act as amended. The issue concerns the extent of administrators' liabilities to employees of a company in administration, whose contracts of employment have been "adopted" by the administrators.
The issues which we have to determine are encapsulated in the declaration sought by the administrators of Ferrotech Limited ("Ferrotech") and Granville Technology Group Limited ("Granville") and granted by Etherton J in each case, namely:
"A declaration that:
(1) liabilities for protective awards under section 189 of the Trade Union Labour Relations (Consolidation) Act 1992; and
(2) payments in lieu of notice;
are not payable in priority to expenses of the administration pursuant to paragraph 99(4) to (6) of Schedule B1 to the Insolvency Act 1986".
In a judgment given on 27 July 2005 in Re Huddersfield Fine Worsteds Ltd [2005] EWCA Civ 1682 (Ch), Peter Smith J had answered this question, in relation to protective awards and payments in lieu of notice, in the negative. In other words, he held that the administrators of a company were obliged to pay protective awards and payments in lieu of notice to employees, whose contracts of employment they had adopted, in priority to the expenses of the administration. However, Etherton J, in a judgment given on the morning of 9 August 2005, in re Ferrotech Ltd took the opposite view, holding that the liability for protective awards, and indeed for payments in lieu of notice, in respect of such employees did not have priority to the expenses of the administration.
We heard argument on the two appeals during the afternoon of 9 August, because the administrators of Granville had to decide whether or not to dismiss over 150 employees of that company by the morning of the following day, and that decision was to be determined by the outcome of the appeals. We were therefore asked to announce our decision at the end of the argument, which we did. We allowed the appeal against the decision of Peter Smith J, and (save in one small respect) we dismissed the appeal against the decision of Etherton J. These are our reasons.
The legal background
In order to explain the origin and significance of this issue, it is necessary to set the problem in its juridical context. Administration was introduced by the 1986 Act as a means of attempting to rescue potentially viable businesses; hence the expression "rescue culture". Administration normally involves the administrators continuing the operation of the business of the company concerned, which will itself require all or some of the employees of the company to be retained. Accordingly, an important part of the statutory administration code has always dealt with the rights of employees, and, in particular, whether the liabilities of the company to its employees are payable in priority to the expenses of the administration. As such expenses themselves have priority over most other debts, any liability which enjoys priority over those expenses is often referred to as having "super-priority".
Before the amendments effected by the 2002 Act, the extent of the super-priority enjoyed by employees of the company was governed by section 19 of the 1986 Act ("section 19"), and in particular subsections (6) to (10) inclusive. However, following amendments to the 1986 Act by the 2002 Act, the relevant provisions governing such priority are contained in paragraph 99 of Schedule B1 to the 1986 Act ("paragraph 99").
Paragraph 99(1) provides that the paragraph applies "where a person ceases to be the administrator of a company". Paragraph 99(3) effectively provides, inter alia, that such a "former administrator's claim for remuneration and expenses" should generally have priority over other debts of the company. However, paragraph 99(4) provides that priority over such remuneration and expenses, i.e. super-priority, is to be enjoyed by:
"A sum payable in respect of a debt or liability or arising out of a contract entered into by the former administrator or a predecessor before [he ceases to be the company's administrator]."
We quote paragraphs 99(5) and (6) in full. They provide as follows:
"99(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.
99(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."
It is, quite rightly in our view, common ground that paragraph 99(5) operates to extend super-priority to a liability which satisfies the requirements of paragraph 99(5), as a contract of employment entered into by the company would not normally fall within paragraph 99(4) because it would not have been "entered into by the former administrator or a predecessor [of his]". The effect of paragraph 99(5) is that any "liability arising under a contract of employment" which satisfies the requirements of paragraphs 99(5) and (6) will enjoy super-priority provided that the contract in question was "adopted" by the administrators. Such adoption will effectively occur in respect of a contract of employment if the administrators do not dismiss the relevant employee within 14 days of their taking office—see paragraph 99(5)(a).
Hence the urgency of the appeal in Granville's case: Etherton J gave his decision effectively 24 hours before the 14 day period expired, and the decision of the administrators whether or not to dismiss over 150 employees of Granville turned on his decision. It was for the same reason that we acceded to the application to hear and decide the appeal in Granville's case on the afternoon of the same day.
As the declarations granted by Etherton J show, the potential liabilities to employees relevant for present purposes are liabilities for protective awards and liabilities for payments in lieu of notice.
Protective awards arise under section 189 of the Trade Union Labour Relations (Consolidation) Act 1992 ("the 1992 Act"). By virtue of Section 188 of the 1992 Act, an employer is normally obliged to consult before dismissing more than 19 employees on the ground of redundancy. Although this duty can be avoided where there are special circumstances which render such consultation not reasonably practicable, it has been held that insolvency, at least per se, does not...
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