Allders Department Stores Ltd. & Ors, Re

Mr Justice Lawrence Collins:

I Introduction

1. This is an application by the Administrators of companies in the Allders Department Stores group (“the Companies”). The appointment in relation to Allders Stores Ltd and Allders Department Stores Ltd was made on January 26, 2005, and in relation to Allders Ltd on February 4, 2005. The Administrators of the Companies seek directions in relation to the treatment of redundancy payments which will be due if the Administrators terminate the contracts of certain employees of the Companies. The position of the Insolvency Service of the Department of Trade and Industry is that all statutory employment payments, including unfair dismissal payments, are payable as expenses of the administration, and Mr William Trower QC has appeared for the Attorney General to argue that position.

2. The Administrators propose to treat certain liabilities to employees as preferential in part under the provisions of Schedule 6 to the Insolvency Act 1986 (“the 1986 Act”), and give the relevant liabilities priority under the 1986 Act, Schedule B1, paragraph 99. As to the balance of the sums which will be due to employees, and in particular the bulk of those sums due by way of redundancy payments or unfair dismissal payments, these liabilities will be unsecured claims in the administration and any eventual liquidation.

3. The Administrators seek directions and a declaration that any statutory liabilities for redundancy or unfair dismissal due to employees of the Companies following termination of their employment are not required to be paid as an expense of the Administration whether under Rule 2.67(1)(f) of the Insolvency Rules or otherwise.

4. The matter came on in the applications court on February 10, 2005, and at the conclusion of the hearing I indicated that I would give directions in the sense for which the Administrators contended, with reasons to be given later.

II The arguments

5. The arguments were mainly concerned with redundancy payments, although most of the same considerations apply to unfair dismissal claims. Mr Richard Sheldon QC argued for the Administrators that redundancy payments are not to be regarded as expenses because (a) the effect of paragraph 99 of Schedule B1 to the 1986 Act is that liabilities which have been adopted by the administrator and which are “wages or salary” are payable prior to the administrator’s expenses; (b) “wages or salary” do not include redundancy payments; (c) the effect of paragraph 99 is not altered by the general expenses provisions in Rule 2.67 of the Insolvency Rules; (d) in particular, redundancy payments are not “necessary disbursements” by the administrator in the course of the administration for the purposes of Rule 2.67(1)(f) or the “remuneration or emoluments of any person who has been employed by the administrator to perform any services for the company;” and (e) special provision is made for the preferential position of “remuneration under a protective award under section 189 of the Trade Union and Labour Relations (Consolidation) Act 1992 (redundancy dismissal with compensation)”: 1986 Act, Schedule 6, paragraph 13(2).

6. The argument of Mr William Trower QC for the Attorney General was as follows: (a) under Rule 2.67(1)(f) of the Insolvency Rules necessary disbursements by the administrator in the course of the administration are payable as an expense; (b) Rule 2.67(1)(f) mirrors Rule 4.218(1)(m) (liquidation), in relation to which it was held in Re Toshoku[2002] UKHL 6, [2002] 1 WLR 671 (HL) that if the company incurred an obligation post liquidation for which the creditor cannot prove, it will be a necessary disbursement; (c) the liability for redundancy/unfair dismissal is a liability incurred by the company post-liquidation, and is not provable in the administration, because it is not a liability to which the company may become subject after the commencement of the administration by reason of an obligation incurred before that date (Rule 13.12(1), applied by Rule 13.12(5) to administration), because liabilities for redundancy/unfair dismissal are not liabilities arising out of the contracts of employment.

III Legislation

Insolvency Act 1986, section 8 and Schedule B1

7. Section 8 of the 1986 Act provides that Schedule B1 shall have effect in relation to the administration of companies.

8. By paragraph 65(1) of Schedule B1 the administrator may make a distribution to a creditor, subject to compliance with the rules as to preferential debts: para 65(2). But permission of the court is required to make a distribution to a creditor who is neither secured nor preferential.

9. When a person ceases to be an administrator, the former administrator’s “remuneration and expenses” shall be charged and payable out of the property of which the administrator had custody or control immediately before cessation, and payable in priority to floating charges: para. 99(3).

10. Paragraphs 99(4), (5), and (6) provide:

“(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.”

11. Prior to the amendment of section 19 of the 1986 Act by the Insolvency Act 1994, section 19(5) provided: “Any sums payable in respect of debts or liabilities incurred, while he was administrator, under contracts entered into or contracts adopted by him … in the carrying out of his … functions” was to be charged on the assets in priority to floating charges. The provisions of section 19(4)-(10) introduced by the 1994 Act limited the extent of the liabilities incurred by an administrator after adoption of a contract which are to be treated as an expense in priority to his own remuneration (and other expenses). They were enacted in response to the decision in Powdrill v. Watson[1995] 2 AC 394 that the contract of employment was inevitably adopted if the administrator caused the company to continue the contract of employment for more than 14 days after appointment. Paragraph 99 of Schedule B1 replaced section 19(4)-(10) of the 1986 Act when the new regime was introduced by the Enterprise Act 2002.

12. Even before the effect of Powdrill v. Watson[1995] 2 AC 394 was reversed by the Insolvency Act 1994, it was held that unfair dismissal payments were not entitled to priority, because they arose under statute (the Employment Protection (Consolidation) Act 1978) and not under the relevant contract of employment: Evans-Lombe J at first instance [1994] 2 BCLC 118 at 132e, which was not appealed on this point to the House of Lords, and was applied in relation to redundancy payments in Hughes v. Secretary of State for Employment EAT/204/94 Transcript, December 13, 1995.

Insolvency Rules 1986

13. The Insolvency Rules 1986 are made under section 411 of the 1986 Act, which confers power to make rules for the purpose of giving effect to Parts I to VII of the Act (which include administration and winding up) and provision as to the fees, costs, charges and other expenses that may be treated as properly incurred by the administrator of a company: section 411(2)(a) and Sched 8, para 18.

14. By Rule 13.12(1) “debt” for the purposes of winding up (and the definition is extended to administration by Rule 13.12(5)) means

“(a) any debt or liability to which the company is subject at the date on which it goes into liquidation;

(b) any debt or liability to which the company may become subject after that date by reason of any obligation incurred before that date …”

15. The relevant rule on administration expenses is contained in Rule 2.67. It provides:

“(1) The expenses of the administration are payable in the following order of priority—

(a) expenses properly incurred by the administrator in performing his functions in the administration of the company;

…

(f) any necessary disbursements by the administrator in the course of the administration (including any expenses incurred by members of the creditors' committee or their representatives and allowed for by the administrator under Rule 2.63, but not including any payment of corporation tax in circumstances referred to in sub-paragraph (j) below);

(g) the remuneration or emoluments of any person who has been employed by the administrator to perform any services for the company, as required or authorised under the Act or the Rules;

…

(j) the amount of any corporation tax on chargeable gains accruing on the realisation of any asset of the company …”

16. Rule 2.67 largely mirrors Rule 4.218, which applies in the context of liquidation. By section 115 of the 1986 Act: “All expenses properly incurred in the winding up, including the remuneration of the liquidator, are payable out of the company’s assets in priority to all other claims.”

17. In Re Toshoku Finance UK plc[2002] UKHL 6, [2002] 1 WLR 671 (HL) the company was liable in respect of an accounting period after its liquidation for corporation tax on profits computed on the assumption that it had received interest contractually payable to it by a sister company. The interest was not received because the sister company was heavily insolvent. The company agreed to accept from the sister company a small proportion of its indebtedness and nothing was paid in respect of interest which had accrued after the liquidation date. The liquidators applied to the court for directions as to whether the tax was an “expense properly incurred in the winding up” which they were required by section 115 to pay in priority to other claims.

18. Lord Hoffmann, who delivered the only reasoned speech, approved Re Mesco Properties Ltd [1979] 1 WLR 558 (Brightman J, affd [1980] 1 WLR 96, CA), which was a case in which the tax legislation provided that the company was chargeable to corporation tax on a capital gain arising in the winding up. It was held that it was a tax which the liquidator was bound to discharge by payment, and that the payment was a “necessary disbursement” for the purposes of the winding-up rules. The House of Lords held that the rules in Rule 4.218(1) were not subject to a discretion or any implied qualification. In the course of his discussion as to whether there was a discretion (as opposed to his discussion of what was an expense properly incurred) Lord Hoffmann said ([2002] 1 WLR at 679, para [25]) after referring to the definition of provable debts in Rule 13.12(1): “Thus debts arising out of pre-liquidation contracts such as leases, whether they accrue before or after the liquidation, can and prima facie should be proved in the liquidation. In this respect they are crucially different from normal liquidation expenses, which are incurred after the liquidation date and cannot be proved for.”

19. Lord Hoffmann also said ([2002] 1 WLR at 680, 683) :

“[30] …Expenses incurred after the liquidation date need no further equitable reason why they should be paid. Of course it will generally be true that such expenses will have been incurred by the liquidator for the purposes of the liquidation. It is not the business of the liquidator to incur expenses for any other purpose. But this is not at all the same thing as saying that the expenses will necessarily be for the benefit of estate. They may simply be liabilities which, as liquidator, he has to pay. For example, there will be the fees payable to fund the Insolvency Service, ranking as paragraph (c) in rule 4.218(1), where the benefit to the estate may seem somewhat remote. There would be little point in a statute which specifically imposed liabilities upon a company in liquidation if they were payable only in the rare case in which it emerged with all other creditors having been paid.

…

[42] I therefore respectfully adopt the simple approach of Brightman J in Re Mesco Properties Ltd [1979] 1 WLR 558, 561. The statute expressly enacts that a company is chargeable to corporation tax on profits or gains arising in the winding up. It follows that the tax is a post-liquidation liability which the liquidator is bound to discharge and it is therefore a ‘necessary disbursement’ within the meaning of the Insolvency Rules.”

Insolvency Act 1986, Schedule 6: preferential debts

20. The 1986 Act, Schedule 6, paragraphs 9 to 16, provides that certain liabilities to employees are to be treated as preferential debts, including remuneration in respect of the period of 4 months before the relevant date (defined in section 387). One of those liabilities is that under paragraph 13(2) for “remuneration under a protective award under section 189 of the Trade Union and Labour Relations (Consolidation) Act 1992 (redundancy dismissal with compensation)”.

IV Conclusions

21. The liabilities which are payable by virtue of paragraph 99 of Schedule B1 in priority to the administrators’ expenses are those liabilities which have been both adopted after 14 days of appointment and which are “wages or salary”. Redundancy payments or unfair dismissal payments are not “wages or salary” and therefore do not have priority under paragraph 99.

22. The position set out in paragraph 99 is not in my judgment affected by the general administration expenses provisions in the Insolvency Rules. The general provisions of Rule 2.67 of the Insolvency Rules should not be construed to override the lex specialis of paragraph 99 in Schedule B1 to the 1986 Act.

23. Although Mr Richard Sheldon QC anticipated reliance on Rule 2.67(1)(g), Mr William Trower QC did not in the event argue that it had any application. The provision in Rule 2.67(1)(g) for “remuneration or emoluments of any person who has been employed by the administrator in the course of the administration” only applies to persons actually employed by the administrator and could not apply to statutory employment liabilities such as unfair dismissal or redundancy claims.

24. I do not consider that the statutory liabilities for redundancy payments or unfair dismissal claims would be “necessary disbursements” for the purposes of Rule 2.67(1)(f). First, it would be inconsistent with the scheme of the legislation if the payments referred to in Schedule 6 were to be treated as preferential, and yet all other employee-related payments are to be paid as an expense of the administration. That would be to give the Schedule 6 payments (which include protective awards) a lesser priority than other types of payments, when the policy appears to have been to give them a greater priority. Second, there is nothing in my judgment in Re Toshoku Finance UK plc[2002] UKHL 6, [2002] 1 WLR 671 (HL) which requires a different conclusion. It is not the ratio of that case that any liability imposed on a company which is not provable as a debt is thereby rendered a “necessary disbursement.” The context in which Lord Hoffmann referred to the fact that certain debts could not be proved shows that he was justifying the treatment of certain debts as expenses, and not offering a definition of what liabilities were disbursements. Even if that were the crucial test for winding up, there would be no reason to apply it to administration. Although the current regime envisages a distribution to secured and preferential creditors without a subsequent liquidation, in the normal case of an administration which does not succeed in rescuing the company, the company will go into liquidation and the statutory payment obligation will be a provable debt under Rule 13.12. Finally, a construction of Rule 2.67(1)(f) which applied it to statutory redundancy payment liabilities and other statutory liabilities would have such adverse policy consequences on the administration regime that it is impossible to see that such a result could have been intended.

25. I am fortified in my conclusion by the fact that the leading practitioner texts proceed on the basis that, because statutory employment claims are not covered by paragraph 99 of Schedule B1 or by Schedule 6 to the 1986 Act, they are unsecured claims. It is fair to say, however, that the argument put forward on behalf of the Attorney General that they might be necessary disbursements is not considered by them: see Fletcher, Higham and Trower, Corporate Administrations and Rescue Procedures, especially paras 7.11, 7.18, 7.22, and 7.27; Totty and Moss, Insolvency, 2004, sections H15-09 and H15-10; cf Lightman and Moss, Receivers and Administrators of Companies, 3^rd ed. 2000, para 19-019.