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Administrators’ adoption of employment contracts

Leeds United's administration has insolvency interest not only because of potential breaches of s216 Insolvency Act 1986 (see our earlier post), but also because of the administrators' concerns about personal liability for wrongful dismissal of players.

Administrators have been concerned about the adoption of employment contracts since the well known Paramount case (Powdrill v Watson [1994] 2 All ER 513 (CA)) (summarised at para 15),  where the administrators had to pay pre-appointment employment liabilities as an administration expense and all manner of upheaval was caused to the estates of earlier administrations due to the retrospective effect of the decision.

The legislature moved immediately to restore the rescue culture and amend the offending s19 Insolvency Act 1986, introducing the Insolvency Act 1994, so that s19 applied only to employment liabilities arising after the date of administration.

One of the problems with Paramount was that although the administrators wrote to the employees within 14 days stating that they were not adopting the contracts of employment, the court found that the administrators had in fact adopted the contracts by their conduct in continuing the staff's employment and paying them in accordance with the contracts.

Paramount was distinguished in Re Antal International Limited ([2003] EWHC 1339 (Ch)), a case where I was the administrator. In that case, although I did not know that the employees in question were employees of the company until more than 14 days after my appointment, I then simply dismissed them and was found not to have adopted their contracts. (Why didn't I know about them? Well, they were employed in the group's Paris office, which the directors had told me and the accounts showed was a subsidiary that was not in administration, but which proved to be a branch. "Simply" is perhaps the wrong word for me to use to describe the dismissals, since the employment contracts were subject to French law.)

With the advent of the Enterprise Act 2002, the administration regime was changed and para 99, Schedule B1, Insolvency Act 1986 replaced parts of s19.

It was held in Re Allders Department Stores Ltd. & Ors [2005] EWHC 172 (Ch) (16 February 2005) that redundancy payments and unfair dismissal payments were not "wages and salaries" and therefore were not afforded priority by para 99, Schedule B1.

Then in Krasner v McMath [2005] EWCA Civ 1072 (10 August 2005), overturning the first instance decision of Peter Smith J and upholding those of Etherton J in Ferrotech Ltd and Granville Technology Group Ltd, the Court of Appeal held (with some criticism of the drafting of para 99, which was inexplicably changed from s19) that neither protective awards nor payments in lieu were afforded priority.

In Re Leeds United Association Football Club Ltd [2007] EWHC 1761 (Ch) (25 July 2007), Pumfrey  J  held that damages for wrongful dismissal were not payable in priority to other expenses pursuant to para 99(4) to (6) of Sch B1 to the Insolvency Act 1986.

The current position appears therefore now clearly to be that only straightforward (post-appointment) wages and salaries are payable as an administration expense where employment contracts are adopted by administrators.

 

 

Date: 2nd August, 2007
Author: Chris Laughton

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