Krasner v McMath

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:

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.

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:

We quote paragraphs 99(5) and (6) in full. They provide as follows:

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 amount to a special circumstance: see Re Hartlebury Printers Ltd [1993] BCLC 902 at 911-912.

Where an employer’s obligation under section 188 of the 1992 Act is breached, an employee may complain to the Employment Tribunal under section 189. The Employment Tribunal “may… make a protective award” in favour of an employee who has “been dismissed as redundant or whom it is proposed to dismiss as redundant” and, in such a case, the employer will be required “to pay remuneration for the protected period” – see section 189(2) and (3). Section 189(4) provides that the protective period is to begin on the later of the date of dismissal or the date of the award, and is to last for such period as the tribunal considers appropriate, subject to a maximum of 90 days.

As for payments in lieu of notice, they were authoritatively discussed by Lord Browne-Wilkinson in Delaney –v- Staples [1992] 1 AC 687, where at 692D-H he set out the four “principal categories” of such payment in the following terms:

We turn, first, to consider whether a protective award under section 189 of the 1992 Act to an employee of a company, whose contract of employment the administrators are deemed to have adopted, enjoys super-priority as a consequence of paragraphs 99(5) and (6).

On the face of it at least, it would seem that the effect of the combination of the opening words and the provisions of sub-paragraph (c) of paragraph 99(5) is to require two separate conditions to be satisfied before an employee can contend that the sum due to him enjoys super-priority under the paragraph. The first condition appears to be that the sum is “a liability arising under a contract of employment”; the second is that the sum concerned can only be “wages or salary”, albeit that that expression is given an extended meaning by paragraph 99(6).

If this analysis, involving what might be called a “double gateway”, is correct, then it would appear to follow that a protective award would not enjoy super-priority, because it cannot be described as “a liability arising under a contract of employment”. It is a liability which no doubt arises because of the existence of a contract of employment, but it does not appear to us that it can fairly be said to “aris[e] under” the contract. That argument involves giving the words “arising under” in paragraph 99(5) their ordinary and natural meaning. The notion that the expression should not be given an artificially wide meaning is supported by the fact that the draftsman has used the rather wider words “arising out of” in paragraph 99(4).

In the course of his attractive submissions in support of the decision of Peter Smith J in Huddersfield’s case, Mr Reynold QC, who appeared with Miss Ferguson, realistically accepted that analysis as far as it went. However, his argument was that it is unrealistic to read paragraph 99(5) on its own, that it should be read together with paragraph 99(6), that paragraph 99(6)(d) had the effect of requiring protective awards to be treated as “wages and salary”, and that, once it is established that a protective award is “wages and salary” for the purposes of paragraph 99(5), it must follow that such a payment is treated by that paragraph as “a liability arising under [the relevant] contract of employment”.

This argument, which was supported by Ms. Giret QC, with punchy brevity, is said to suffer from two defects. We would certainly accept that paragraphs 99(5) and (6) have to be read together, and, indeed, they have to be construed in the context of paragraph 99 as a whole and as part of the regime relating to administration generally. However, we do not accept that a protective award falls within paragraph 99(6)(d), and, even if it did, we have strong doubts that that would have the consequence of bringing a protective payment within the ambit of paragraph 99(5).

The first issue, therefore, is whether a protective payment falls within paragraph 99(6)(d). The provisions of this paragraph appear to us to give rise to difficulties on any view. Mr. Reynold, again supported by Ms. Giret, contends that it clearly extends to a protective award in the light of section 112(3)(c) of the Social Security Contributions and Benefits Act 1992, which states that regulations may provide that “a sum payable by way of remuneration in pursuance of a protective award under [the 1992 Act]… should be deemed to be earnings.”

Ms. Toube, who represented the administrator appealing Peter Smith J’s Order in Huddersfield’s case, primarily contended that paragraph 99(6)(d) is in fact a reference to notional earnings as described in paragraph 4 of the Social Security Benefit (Computation of Earnings) Regulations 1996, SI 1996 No. 2745 (“the 1996 Regulations”). This provides that, in certain circumstances, an employee who earns less than the norm for his particular job can be “treated” for social security purposes, as earning the norm.

For the Attorney-General (who intervened before Etherton J for the purpose of persuading him not to follow the decision in Huddersfield’s case), Mr Caddick contended that paragraph 99(6)(d) is intended to be limited not merely to “a period” but “to a period of holiday”. In this connection, he referred to section 19(10). Section 19 had similarly extended super-priority to “a liability to pay a sum by way of wages or salary…” payable “under a contract of employment” which had been adopted by the administrators, and section 19(9)(a) extended the notion that the wages or salary to “wages or salary payable in respect of a period of holiday or absence from work through sickness…”. Section 19(10) provided:

Etherton J, whose conclusion on this point was supported by Mr. Oliver QC (who appeared with Mr. Goldring for the respondent administrators in Ferrotech’s and Granville’s case), decided that the reference to “a period” in paragraph 99(6)(d) was to one or other of the periods referred to in paragraph 99(6)(a) or (b).

On any view, paragraph 99(6)(d) is unsatisfactory. As Mr. Reynold readily conceded, his construction gives no meaning to the words “in respect of a period” or “for that period” in the paragraph, albeit that his construction otherwise involves, it may fairly be said, attributing an entirely natural meaning to the rest of the words of the sub-paragraph. An additional problem with Mr. Reynold’s construction is that it means that paragraph 99(6)(d) has such a wide ambit that it renders paragraphs 99(6)(a),(b), (c) and (e) otiose.

Ms. Toube’s contention is ingenious, and has the attraction that the word “treated” in paragraph 99(6)(d) is echoed in paragraph 4 of the 1996 Regulations. However, we think it somewhat fanciful to think that the legislature can have intended an employee, who is contractually entitled only to wages lower than the norm, should, at a time when the company is in administration and is therefore subject to the “rescue culture”, be entitled to demand super-priority for wages at a level greater, possibly far greater, than that to which he would contractually be entitled.

Given that, on Ms. Toube’s case, paragraph 99(6)(d) could apply in a case where paragraph 4 of the 1996 Regulations had not been implemented, it is hard to see quite what machinery would be invoked in order to decide whether a particular employee was being paid less than the norm, and what that norm was. Ms. Toube’s construction also suffers from two of the same problems as that of Mr Reynold, namely, that the difference between the actual wages and the norm is not a sum which falls within the opening words of paragraph 99(5), and that her contention fails to explain either of the two references to “period” in paragraph 99(6)(d).

Mr. Caddick’s construction effectively involves the court holding that the draftsman of paragraph 99(6) accidentally failed to carry into sub-paragraph (d) the words “of holiday” from section 19(10), as he intended to do. His argument requires us to conclude that it is so obvious that the “period” in paragraph 99(6)(d) is intended to be precisely identical to the “period of holiday” in section 19(10), that we should notionally insert, or somehow imply, the words “of holiday” after the word “period”, at least where it first appears. Quite apart from this, Mr. Caddick’s construction appears to give paragraph 99(6)(d) little, if any, meaning. Although he suggested that there might be some statutory provision in existence which would be within the scope of paragraph 99(6)(d) on his reading, he was unable to identify what it was.

The construction favoured by Etherton J, supported by Mr. Oliver (and also supported by Ms. Toube) faces two difficulties. The first difficulty is effectively identical to one of those facing Mr. Caddick’s construction, namely that it is very difficult to see what paragraph 99(6)(d) covers in practice, if the “period” referred to is one or other of the periods described in paragraph 99(6)(a) and (b). The other difficulty faced by Etherton J’s construction is that it would not involve a very natural reading of the words “a period” in paragraph 99(6)(d) if it is a reference back to one or other of the periods referred to in the preceding paragraphs, namely a period of holiday or a period of illness.

As already mentioned, and as must be clear from the number of possible interpretations that have been put forward, and the significant defects in each of these interpretations, paragraph 99(6)(d) is not merely opaque; it is a thoroughly unsatisfactory piece of drafting. It is scarcely surprising that it has led to the sharp difference of opinion between two judges in their respective careful judgments on the point at issue.

We have reached the conclusion that the most satisfactory, or, to be more accurate, the least unsatisfactory, construction of paragraph 99(6)(d) is that adopted by Etherton J. To give a short sub-paragraph a meaning which renders otiose not merely one reference but two references to a “period” appears hard to justify, and the difficulty of Mr Reynold’s construction is considerably further enhanced by the fact that the meaning renders all the other sub-paragraphs of the same paragraph redundant. Miss Toube’s contention that paragraph 99(6)(d) was intended to refer to paragraph 4 of the 1996 Regulations is ingenious, but we cannot accept that it could have been the legislature’s intention given the bizarre consequences.

It may well be that the draftsman carelessly omitted the words “of holiday” when transposing (in somewhat changed language) section 19(10) into paragraph 99(6)(d). However, we think it would require a thoroughly exceptional case before it would be legitimate for a court to take the course which Mr. Caddick proposed. The natural conclusion after comparing paragraph 99(6)(d) with section 19(10) must be that the omission of “a holiday” was intentional, and it would only be if that produced an impossible or absurd result that we could properly construe the subsequent provision on the basis that there had been an error in transposition.

We turn to the problems which exist on Etherton J’s construction of paragraph 99(6)(d). The point that the reference to “a period” is a somewhat strange and unnatural way of referring to the period mentioned earlier in sub-paragraphs (a) and (b) is entirely fair, but it remains the fact that precisely the same expression is used in each of the three paragraphs, namely “a period”. When compared with the problems in the other constructions which have been advanced, it strikes us as a pretty mild one. As to the contention that paragraph 99(6)(d) appears to have no discernible practical effect on Etherton J’s construction, it seems to us that there are two answers.

The first is that it is common ground between all the parties that exactly the same point can be made about paragraph 99(6)(d)’s statutory predecessor (irrespective of whether or not there is any error of transposition), namely section 99(10). In our opinion, it is very much easier to justify construing a legislative provision in such a way that it has, or may have, no discernible practical effect if its statutory predecessor similarly had, or may have had, no discernible practical effect either. Quite apart from this, it is perfectly possible that paragraph 99(6)(d) was included to deal with the possibility of a change in the social security legislation (by no means an unusual event), which would bring certain payments under employment contracts within the ambit of paragraph 99(6)(d) as interpreted by Etherton J.

Accordingly, we have concluded that a protective award does not appear to fall within the ambit of paragraph 99(6)(d), and therefore it is outside the ambit of paragraph 99(5)(c). It follows that such an award cannot enjoy super-priority by virtue of paragraph 99(5) unless, perhaps, there is some discernible policy reason for reaching the opposite conclusion. Before turning to that aspect, it is right to consider the second reason which was advanced for rejecting the contention that a protective award can fall within paragraph 99(5).

As already mentioned, it appears to us that paragraph 99(5) requires a liability to get through a double gateway, namely that erected by the opening words as well as that erected by sub-paragraph (c), before it can be said to be within the ambit of that paragraph. Accordingly, even if (contrary to the view we have so far reached), a protective payment could satisfy the requirements of paragraph 99(5)(c) by virtue of paragraph 99(6)(d), that would not seem thereby to render such a payment as one “arising under a contract of employment”, when it would not otherwise do so.

However, Mr Reynold pointed out that, by getting through the gateway of paragraph 99(5)(c), a protective award would be expressly be deemed to be, or be treated as, “wages or salary”. Accordingly, he contended that such an award would thereby get through the gateway of the opening words of that paragraph. In that connection he relied on observations of Lord Browne-Wilkinson in Delaney’s case at 692A-C, which were to this effect:

Applying those observations, it is said that, if paragraph 99(6)(d) causes a protective award to be “wages or salary” for the purpose of paragraph 99, then it must be treated as payable under a contract of employment.

Beguiling though that argument is, we have severe doubts whether it can be correct. First, Lord Browne-Wilkinson’s description of the normal meaning of “wages” cannot have been intended to be a definition for all statutory purposes. It was merely an explanation as to the normal meaning of the word “wages”. The fact that a word normally has a particular meaning certainly does not justify it being given that meaning, and no narrower or wider a meaning, in a particular statutory, or indeed a particular contractual, context. It may be trite, but in the present context it may be necessary, to point out that, when deciding what is meant by a particular expression, context is of vital relevance.

Further, it seems to us that Mr Reynold’s argument on this point may involve standing logic on its head. Where, as a matter of ordinary language, a provision imposes two, apparently separate, conditions which have to be satisfied, it would require a very cogent case before one could conclude that satisfaction of one condition meant that the other condition, which admittedly would otherwise not be satisfied, is somehow thereby to be treated as satisfied. The argument might be unkindly characterised as a classic attempt to get in through the back door when the front door is firmly shut.

Quite apart from this, the passage in the speech of Lord Browne-Wilkinson relied on by Mr. Reynold to support his contention could be said to be as much against his case as for it. Lord Browne-Wilkinson’s trenchant analysis of what normally constitutes “wages” serves to emphasise the difficulty in the way of arguing that a protective award “arise[es] under a contract of employment”. Accordingly, even if a protective award was within paragraph 99(6)(d), and therefore satisfied the paragraph 99(5)(c) gateway, we would strongly doubt whether it could be said to satisfy the gateway set up by the opening words of paragraph 99(5).

In reaching our conclusions so far, we have concentrated on the language of paragraph 99, and, indeed, of section 19 before it was repealed by the 2002 Act. However, it is legitimate, indeed appropriate, to consider the question of whether protective awards should indeed be given a super-priority, by reference to the wider context. In this connection, unlike Peter Smith J, Etherton J had the benefit of the evidence of one of the administrators of Ferrotech, Mr. David Duggins, an experienced insolvency practitioner, as to the effect of the decision in Huddersfield’s case.

He explained that, if the law was as decided in Huddersfield’s case, the administrators would not have been able to say, when seeking to put Ferrotech into administration, that the purpose of the proposed administration would have been likely to be achieved. That was because they would have anticipated having “to make the entire workforce redundant within 14 days” of their appointment, which would have “ruled out from day one the possibility of achieving a sale of the business as a going concern”. Mr. Duggins believed that, in this connection, there was nothing exceptional about the administration of Ferrotech.

As Mr. Oliver and Mr. Goldring put it in their skeleton argument, the decision in Huddersfield’s case would mean that “the costs to an administration arising out of the adoption of contracts of employment by administrators are likely to be substantially increased. Given the straitened circumstances of a company in administration, this will make it more difficult for administrators to adopt contracts of employment.”

In a passage in his judgment with which we agree, Etherton J said this:

The “rescue culture” there referred to was discussed by Lord Browne-Wilkinson in Powdrill –v- Watson [1995] 2 AC 394 in these terms at 441-442:

Of course, it would not be inherently surprising if the amendments effected to the 1986 Act by the 2002 Act resulted in some changes in the law. Indeed, it could be said to be surprising if amendments to a statute do not lead to any changes in the law. Having said that, it is clear that, before it was amended by the 2002 Act, the 1986 Act did not accord super-priority status to protective awards, and it would therefore be surprising if the amendments affected by the 2002 Act did result in such awards having super-priority, unless there was some justification for it. It would represent a change in the law which significantly weakened the rescue culture in many cases. It appears clear that it would be a change which was wholly unheralded by any actual or perceived abuse or unfairness in the administration regime before the 2002 Act came into force. There is no trace of any relevant recommendation or proposal, whether in a judgment, a textbook, a consultation paper, or an article in the relevant professional press.

Accordingly, we have reached the conclusion that, in light of the natural meaning of paragraph 99(5) and (6), as reinforced by practical and policy considerations, a protective award does not fall within the ambit of those paragraphs, and accordingly it does not enjoy super-priority.

Having come to this conclusion in relation to protective awards, we can deal with payments in lieu more shortly. In that connection, we refer back to the four types of payment in lieu identified by Lord Browne-Wilkinson in Delaney’s case. He explained that, at least as a matter of ordinary language, payments in the first of his categories of payments in lieu would be wages, whereas payments in the latter three categories would not be.

On this basis, it seems to us that it is relatively easy to dispose of the argument in relation to payments in the first, third and fourth categories. Payments in the first category are, as explained by Lord Browne-Wilkinson, wages within the normal meaning of that word. In the light of that, Mr. Oliver was initially disposed to accept that payments in the first category were indeed afforded super-priority in light of the provisions of paragraph 99(5)(c), although he subsequently sought to retreat from that position. In our view, his initial attitude was correct. In the light of Lord Browne-Wilkinson’s conclusion that payments in the first category of payments in lieu are, as a matter of ordinary language, wages, we see no reason not give the word “wages” in paragraph 99(5)(c) its natural meaning. (We should perhaps mention that that view is not inconsistent with our rejection of Mr. Reynold’s contention, because, of course, payments falling within Lord Browne-Wilkinson’s first category are plainly liabilities which fall naturally within the opening words of paragraph 99(5).)

So far as payments in the third and fourth categories of payments in lieu are concerned, it appears to us plain that they are not payments which fall within paragraph 99(5). They are not, at least as a matter of ordinary language, payments which can be characterised as wages, according to what Lord Browne-Wilkinson said in Delaney’s case. In any event, it cannot, in our view, be said that payments in either of these two categories “aris[e] under a contract of employment”, and we did not understand Mr. Reynold or Ms. Giret to contend otherwise.

Greater difficulty can, at least on the face of it, be said to arise in relation to payments in the second category of payments in lieu. Unlike those in the third and fourth categories, payments in the second category can fairly be said to satisfy the opening words of paragraph 99(5). Accordingly, there is plainly something in the point that such payments should be treated as wages, because, although they are not naturally within the meaning of wages according to Lord Browne-Wilkinson, they could be argued to satisfy the provisions of paragraph 99(6)(d). Indeed, that argument has the attraction of giving that paragraph an immediate practical effect which, as we have mentioned, it otherwise may well not have, unless one gives it the meaning for which Mr. Reynold or Ms. Toube contend.

Nonetheless, we have come to the conclusion that payments within Lord Browne-Wilkinson’s second category of payments in lieu do not fall within paragraph 99(5), and therefore are not to be accorded super-priority. First, as already explained, it seems to us that paragraph 99(6)(d) is referable only to payments in respect of holiday or sickness, in light of the fact that the reference therein to “period” relates back to that expression in paragraphs 99(6)(a) and (b). Secondly, payments falling within Lord Browne-Wilkinson’s second category of payments in lieu are really “one off” payments, and cannot be related to any particular period. Accordingly, unless one ignores the two references to a “period” in paragraph 99(6)(d), it appears difficult to say that payments falling within the second category can satisfy paragraph 99(6) and therefore fall within paragraph 99(5).

It was for these reasons that we:

allowed the appeal of the administrators from the decision of Peter Smith J in Huddersfield’s case; and

dismissed the appeals of the employees from the decision of Etherton J in Ferrotech’s and Granville’s cases, save that if there are any payments in lieu falling within Lord Browne-Wilkinson first category in Delaney’s case, they would be entitled to priority under paragraph 99(4) and (5).