Carluccio's Ltd, Re Insolvency Act 1986

Paragraph 99 of Schedule B1 (“Paragraph 99”) deals with charges and liabilities on an administrator’s vacation of office. Paragraphs 99(3) to (5) provide:

By virtue of Paragraph 99(6), the expression “wages or salary” includes holiday pay and contributions to an occupational pension scheme. It does not, however, extend to all liabilities under a contract of employment. In particular it does not extend to redundancy payments, unfair dismissal payments, payments in lieu of notice, and protective awards in relation to employees whose employment has been terminated: see Re Huddersfield Fine Worsteds and others[2005] BCC 915.

The effect of these paragraphs is that liabilities for wages or salary arising out of contracts of employment adopted by an administrator following the onset of administration (subject to the condition that no act taken within the first 14 days of the administrator’s appointment may amount or contribute to such adoption) are payable out of the assets held by the administrator in priority to the administrator’s remuneration and expenses, which in turn have priority over the claims of floating charge creditors and unsecured creditors.

This order of priority is confirmed at Rule 3.51(1) of the Insolvency (England and Wales) Rules 2016, which states (before setting out the priority among expenses of the administration) as follows:

“Where there is a former administrator, the items in paragraph 99 of Schedule B1 are payable in priority to the expenses in this rule.”

In contrast, employees whose contracts of employment are not adopted in the first 14 days (in other words, whose employment is terminated by administrators during this time or whose employment contracts are not adopted for some other reason), do not

Paragraph 66 of Schedule B1 (“Paragraph 66”) provides,

“The administrator of a company may make a payment otherwise than in accordance with paragraph 65 or paragraph 13 of Schedule 1 if he thinks it likely to assist achievement of the purpose of administration.”

For completeness I should observe that paragraph 65 of Schedule B1 relates to distributions to creditors and paragraph 13 of Schedule 1 to the Insolvency Act confers a power on an administrator to make a payment which is necessary or incidental to the performance of his functions. Neither counsel suggested that those provisions would enable an administrator to make the payments to employees in respect of the postadministration wages or salary which are in issue in the instant case, and I also do not think that they could apply. Payments to post-administration creditors are not “distributions”, and they would not be sufficiently connected to the performance of the administrator’s functions.

The first issue to address is whether the Variation Letter has served validly to amend the contracts of employment of the employees to whom it was sent.

In my judgment, it is plain that the Variation Letter has had precisely that effect in the case of Consenting Employees who have expressly agreed to its terms. It will also have the same effect in relation to those Non-Responding Employees who subsequently agree to it. That is a critical step in the analysis, because the varied contracts mean that the Company cannot be liable for wages or salary in any amount which exceeds the amount of the grant paid to the Company under the Scheme in respect of the employee, and the Company is not obliged to pay the employee before receipt of the grant funds. It is equally clear that the Objecting Employees who have rejected the Variation Letter will be made redundant and their existing contracts of employment will be terminated. Mr. Segal QC agreed with these conclusions and did not seek to argue to the contrary.

The issue of the Non-Responding Employees is less clear. Mr. Segal QC submitted that, depending upon the facts, mere silence or inaction on the part of an employee can eventually be equated with agreement or consent to a variation of his contract of employment, and that is more likely to be the case where the variation is for the benefit of the employee. He suggested that this might enable me to find that the NonResponding Employees had consented to the terms of the Variation Letter.

The principles in relation to implied variation of employment contracts were considered by the Court of Appeal in Abrahall v Nottingham CC [2018] ICR 1425. The case involved the issue of whether employees who had not expressly accepted a contractual variation to their contracts, but whose unions had initially protested, should, by continuing to work for two years, be taken implicitly to have agreed to a variation which involved a pay freeze by removal of a right to pay progression.

After considering the authorities, Underhill LJ stated, at [85] – [89],

“85.

….A contractual offer can of course be accepted by conduct, and that must include the offer of a variation. Under a contract of employment the parties are in a complex relationship in which they are both required to perform their mutual obligations on a continuous basis, and those obligations are frequently modified by their conduct towards each other. I can see no reason why an employee's conduct in continuing to perform the contract, in circumstances where the employer has made clear that he wishes to modify it, may not—in principle— be reasonably understood as indicating acceptance of the change….

86.

However, to say that in some circumstances continuing to work following a contractual pay cut may be treated as acceptance does not mean that it will always do so. On the contrary, what inferences can be drawn must depend on the particular circumstances of the case. …. The authorities illustrate some specific points about the proper approach to the question of when continuing to work may constitute acceptance. I briefly identify them as follows.

87.

First and foremost, the inference must arise unequivocally. If the conduct of the employee in continuing to work is reasonably capable of a different explanation it cannot be treated as constituting acceptance of the new terms: that is why Elias J in [Solectron Scotland v Roper [2004] IRLR 4] used the phrase “ only referable to”. That is simply an application of ordinary principles of the law of contract (and also of waiver/estoppel). It is not right to infer that an employee has agreed to a significant diminution in his or her rights unless their conduct, viewed objectively, clearly evinces an intention to do so. To put it another way, the employees should have the benefit of any (reasonable) doubt.

88.

Secondly, protest or objection at the collective level may be sufficient to negative any inference that by continuing to work individual employees are accepting a reduction in their contractual entitlement to pay, even if they themselves say nothing. This is clear from Rigby v Ferodo Ltd [1988] ICR 29…

89.

Thirdly, Elias J's use in para 30 of his judgment in Solectron of the phrase “after a period of time” raises a point of some difficulty. It is easy to see how it may not, depending on the circumstances of the particular case, be right to infer acceptance of a contractual pay cut as from the day that it is first implemented: the employee may be simply taking time to think. Elias J's formulation is intended to recognise that a time may come when that ceases to be a reasonable explanation. However, it may be difficult to identify precisely when that point has been reached on anything other than a fairly arbitrary basis… I do not think that the difficulty in identifying the precise moment at which an employee should be treated as first accepting a contractual pay cut means that the question has to be answered once and for all at the point of implementation.”

Sir Patrick Elias gave a short judgment to similar effect. He said, at [107] – [110],

“107.

In practice employees will often agree to a variation by conduct. This will readily be inferred, for example, where the change is to the employee's benefit, such as where he is given a pay increase. Unless the contract is wholly exceptional, he will not have expressly to confirm acceptance before the increase takes effect: see Attrill v Dresdner Kleinwort [2013] IRLR 548, paras 97–98. Similarly, if he is promoted, is given a new contract and acts in accordance with its terms, he will be deemed to have accepted the whole of the terms, and that is so even though the new contract may contain certain disadvantageous provisions and even though they do not immediately bite: see FWFarnsworth v Lacy [2013] IRLR 198, where an employee was treated as having agreed to the imposition of a restrictive covenant on this basis.

108.

The difficulty arises where the variation is to the employee's disadvantage, as in this case, and there is either no compensating advantage, or it is being imposed to avoid a potentially worse disadvantage, such as being made redundant. The employment judge seems to have taken the view that a

failure to complain which was referable to a fear of redundancy could never constitute a variation of the contract. He said this, at para 135.1:

“An employee's failure to complain about a breach of contract that is referable to his fear of losing his job if he does so is manifestly not only referable to his having accepted the new terms imposed by the employer.”

109.

I think there is force in Mr Laddie's criticism of this paragraph. I do not see why in an appropriate case the employee should not be taken to have accepted the variation in order to avoid the risk of redundancy. If the fear of redundancy can only be avoided by accepting the new terms, it is wholly artificial to treat these as separate and distinct reasons for failing to complain.

110.

It may be said that the employee should never be held to have accepted a variation simply by working without protest under the new terms without more. After all, a party can bring a claim for breach of contract within the limitation period without having to notify the other party that he objects to the breach, and why should this be different? I think that the answer lies in the fact that the employment relationship is typically a continuing relationship based on good faith, and exceptionally in that context it might be appropriate to infer that a failure to complain about a proposed variation of the contract for the future may be taken as agreement to that variation which prevents it constituting a breach. It might also be said that an employer can always put the position beyond doubt by lawfully terminating the contract on notice and introducing the varied contract which includes the new disadvantageous term or terms. No doubt the employer's reluctance to do that is in part motivated by a desire to avoid potential unfair dismissal claims. But there are also less selfish reasons. In the context of a continuing relationship based on good faith, dismissing and re-employing might appear to be an unnecessarily hostile stance, only to be adopted as a last resort. Attempts to secure agreement should not be discouraged and exceptionally the circumstances may justify the inference that the employee has agreed to the new terms even where he has been reluctant to do so formally.”

The judgments in Abrahall were of course set against the normal background in which an employee continues to attend for work after a variation has been proposed. In such a situation there is at least some conduct of the employee from which an inference of consent can be drawn. The current situation is, however, very different because the employees of the Company are unable to attend for work and there is no other conduct on the part of the Non-Responding Employees from which I can infer consent.

Further, reflecting the Scheme Guidance that furloughing should be done by agreement with employees, the terms of the Variation Letter expressly required employees to respond positively in order to agree the variation, and warned that a failure to respond could lead to them being considered for redundancy. These terms did not suggest that a failure to respond would be taken as consent to be furloughed, but suggested precisely the opposite.

In addition, only a matter of days has elapsed since the Variation Letter was sent. NonResponding Employees might not even have received it, still less considered it. It would, I think, require very strong evidence to reach a conclusion that, without more, the absence of objection over such a short period was to be equated to consent.

Finally, although the option of furlough proposed in the Variation Letter has been regarded as manifestly advantageous by the overwhelming majority of employees who have accepted it, there are nonetheless a few employees who have rejected it. I had no evidence to explain why they did so, or to enable me to conclude that similar considerations would not apply to some of the Non-Responding Employees.

Taking these factors together, I cannot reach the conclusion that the absence of a response from the Non-Responding Employees gives rise to the clear inference that they must have consented to the variation proposed. I do not say that such an inference

Paragraph 66 is drafted in very wide terms, and has proven useful to administrators in dealing with particular difficulties arising in administrations. These have included making payments other than in accordance with the normal order of priorities to key suppliers to ensure continuity of supply; and making payments to overseas employees in accordance with their local employment rights so as to dissuade them from seeking to open secondary proceedings which might frustrate the purpose of the administration as primary insolvency proceedings: see e.g. Re MG Rover Espana SA [2006] BCC 599, especially at [12]-[15].

However, it is clear that Paragraph 99 is the provision which is specifically designed to deal with the ability and obligation of administrators to pay wages or salary to employees in an administration. I do not consider, and Ms. Toube QC did not seek to argue, that Paragraph 66, as a lex generalis, can modify or override the lex specialis of Paragraph 99: c.f. Re Allders Department Stores [2005] ICR 867 at [22]. In my view it is therefore clear that any analysis of the present position must commence with Paragraph 99.

The leading case on the meaning of “adoption” in the context of Paragraph 99(5) is the decision of the House of Lords in Powdrill v Watson & Anor (Paramount Airways Ltd) [1995] 2 A.C. 394 (“Paramount”).

In Paramount, the relevant employees were pilots who had been employed by an airline which had gone into administration. A week after the commencement of the administration, the administrators wrote to them and the other employees, confirming that their salaries and other contractual entitlements would continue to be paid in the administration, but unilaterally asserting that the administrators would not be adopting their contracts of employment or accepting personal liability in respect of them. At the time this practice was widespread among office-holders and its supposed efficacy was based upon an unreported 1987 decision, Re Specialised Mouldings Ltd, in which the judge had not given reasons.

Following such letters, the pilots continued to work for the company and were paid their wages whilst the administrators sought a buyer for the business as a going concern. After about four months, those attempts to find a buyer having failed, the administrators summarily terminated the employment of the pilots and their colleagues. The pilots claimed that their contracts of employment had been adopted by the administrators notwithstanding the Specialised Mouldings letters. They also contended that under the then applicable legislation, section 19(5) of the Insolvency Act, they were entitled to super-priority payment of their contractual rights to salary in lieu of notice, pension contributions and holiday pay. The pilots’ claims succeeded in the High Court and in the Court of Appeal.

By the time the matter came to the House of Lords, the appeal in Paramount had been joined by leap-frog appeals in two administrative receivership cases, Leyland DAF and Ferranti. In those cases, Lightman J had agreed that the Specialised Mouldings letters were ineffective to avoid adoption of employment contracts by the administrative receivers. He had also held that on the wording of section 44 of the Insolvency Act, the receivers were “personally liable on” the contracts that they had adopted for all outstanding contractual liabilities, whenever incurred.

Giving the only substantive speech dismissing the appeals in the House of Lords, Lord Browne-Wilkinson noted at pages 440-441 that section 19(5) had been introduced into the Insolvency Act in relation to administrations, together with section 44 in respect of administrative receiverships, in response to the decision of the Court of Appeal in Nicoll v Cutts [1985] BCLC 322. In Nicoll v Cutts, decided under the Companies Act 1948, it had been held that where employees were retained by a receiver and manager who had been appointed by the debenture holder but was deemed in the debenture to be acting as agent for the company, such employees had no recourse against the receiver to enforce payment of their wages for the work that had been done. Lord BrowneWilkinson identified, at page 441E-F, that the new provisions in the Insolvency Act had been introduced to correct the mischief disclosed by Nicoll v Cutts, namely the risk that an employee who had rendered services during a receivership or administration would be unable to recover his wages for such services.

However, Lord Browne-Wilkinson also observed at page 442 that the result of the lower court decisions in Paramount, Leyland DAF and Ferranti was that the range of contractual liabilities to which super-priority attached in an administration, and for which administrative receivers were personally liable, went beyond the payment of wages for services actually rendered. He referred to what he described as the “furore” in the insolvency world that had followed the decision of the Court of Appeal in Paramount. He highlighted the inherent difficulties faced by insolvency office-holders who effectively had only what he described as a “quite inadequate” period of 14 days under the legislation within which to decide whether to adopt the relevant contracts of employment, and who faced potentially large liabilities for the company or personal liabilities for themselves if they did adopt the contracts. The alternative was simply to make the employees redundant and avoid the risk.

Lord Browne-Wilkinson indicated at pages 443F-444B that the combination of these factors was contrary to the rescue culture which the new Insolvency Act had been intended to promote. He also noted that Parliament had given some indication of its opinion of the decision of the Court of Appeal in Paramount, because it had moved with great speed after the decision to enact the Insolvency Act 1994 to limit the range of liabilities given super-priority in an administration or for which administrative receivers might be personally liable.

Against this background, Lord Browne-Wilkinson held at page 445A-D that the lower courts had been wrong to adopt a two-stage approach under which they asked first whether the contract had been adopted, and then secondly to ask what consequences flowed from that adoption. Lord Browne-Wilkinson indicated that in order to determine Parliament’s intention it was necessary to look at the joint effect of adoption followed by the statutory consequences said to flow from it. He said that if the words used by Parliament had a meaning which was consonant with its presumed intention not to frustrate the rescue culture and not to produce unworkable consequences, then that construction should be adopted.

So far as administrations are concerned, at pages 447E-448A, Lord Browne-Wilkinson noted that, in contrast to section 44 in relation to administrative receiverships, section 19(5) contained a temporal limit on the liabilities which qualified for super-priority, being only those sums payable in respect of debts or liabilities incurred during the administration. He concluded that this temporal limitation prevented the result reached by the Court of Appeal from being so absurd to enable the court to construe section 19(5) in a way which the words used did not sustain.

Having set the scene in this way, Lord Browne-Wilkinson turned to consider the meaning of “adopt”. He said, at pages 448E-449B:

“The meaning of the word ‘adopt’ in sections 19 and 44 of the 1986 Act therefore has to be gathered from the context in which it is used. It is important to bear in mind that the appointment of an administrator or receiver does not terminate the employee's contract of employment with the company. Only if the company (acting by the receiver or administrator) gives notice terminating the employment or, by failing to pay wages as they accrue due, repudiates the contract of employment will the contract with the company terminate. Therefore, so long as wages are paid by the company the employee remains the employee of the company. The Court of Appeal [1994] ICR 395, 402 lost sight of this factor when … they wondered how the employee continued to be employed if there had been no adoption by the administrators. Therefore, the mere continuation of the employment by thecompany does not lead inexorably to the conclusion that thecontract has been adopted by the administrator or receiver.

It is common ground that adoption does not mean an assumption of personal liability by the administrator … since there is no question of an administrator accepting personal liability under section 19. Nor in my judgment can it mean ‘fail to disclaim’ as in section 323 of the Companies Act 1948 since, as I have said, the issue is not whether the company is liable on the continued contract but whether the liability on the contract is to have a higher priority….In my judgment, as Mr Sumption submitted, adoption in sections 19 and 44 can only connote some conductby the administrator or receiver which amounts to an election totreat the continued contract of employment with the company asgiving rise to a separate liability in the administration orreceivership.”

(my emphasis)

Lord Browne-Wilkinson went on to consider whether the administrator could attach conditions to his adoption, adopting some but not other liabilities associated with the contract. On this point Lord Browne-Wilkinson concluded that adoption was an all-ornothing concept, stating, at pages 449F-450B:

“My views on this argument have varied. But eventually I am, with regret, forced to the conclusion that there is no halfway house such as Mr Sumption proposes. The mischief aimed at by the Act (i.e. the decision in Nicoll v Cutts) must mean that the concept of adoption of the contract covers at least accepting liability for payment for services rendered to the administrator under contracts which he has continued. If it were to be open to the administrator or receiver to exclude such liability, the Act fails to remedy the mischief. Therefore the concept of adoption of the contract is inconsistent with an ability to pick and choose between different liabilities under the contract. The contract as a whole is either adopted or not: the consequences of adoption are then spelt out by the Act. If the employment is continued for more than 14 days after the appointment of the administrator or receiver, there seems to be no escape from the conclusion that the whole contract has been adopted. If the result of this view would be to produce an absurdity it would be permissible to reject the plain meaning of the words. But in relation to administration, the consequences of giving the word ‘adoption’ its all or nothing meaning, although unfortunate, are not absurd. There is nothing absurd in the view that an administrator can only use the services of employees on the basis that they are entitled to be treated in accordance with their contract of employment and, for example, to be given contractual notice of termination or paid in lieu of notice.”

Finally, at page 452C-D, Lord Browne-Wilkinson summarised his views,

“I therefore reach the following conclusions: (a) for the purposes of both section 19 and section 44 an employee's contract of employment is "adopted" if he is continued in employment for more than 14 days after the appointment of the administrator or receiver; (b) it is not possible for an administrator or receiver to avoid this result or alter its consequences unilaterally by informing the employees that he is not adopting their contracts or only doing so on terms; (c) in the case of both administration and receivership the consequence of adoption of contracts of employment is to give priority only to liabilities incurred by the administrator or receiver during his tenure of office.”

Against that background, as I briefly outlined at the start of the judgment, the central issues are (i) how the Administrators can lawfully give effect to furlough arrangements with the employees who have agreed to the variation of their contract of employment on the terms of the Variation Letter, and (ii) whether the Administrators will be able to

I should first deal with a preliminary argument that Paragraph 99(5) is simply inapplicable in the current situation. Ms. Toube QC indicated that some commentators in the market apparently take the view that since Lord Browne-Wilkinson had identified that correction of the mischief in Nicoll v Cutts was the reason for the introduction of the forerunner to Paragraph 99(5) in the 1986 Act, and since the only identified mischief in Nicoll v Cutts was that employees might render services in the insolvency without payment, Paragraph 99(5) should be read as having no application whatever unless employees actually rendered services to the company in administration. Hence, so the argument goes, a contract which provides for an employee to be furloughed could never be adopted by administrators under Paragraph 99(5).

I reject that argument. It is certainly true that the mischief in Nicoll v Cutts involved an employee not being paid for services that they had rendered in an insolvency. But if Parliament had wanted to limit super-priority for wages and salary to cases where services are actually rendered to a company in administration, it could have said so simply and directly. Instead it chose to deploy the concept of adoption of the contract of employment itself, and to persist with that concept when making subsequent amendments to the Insolvency Act (first by the Insolvency Act 1994 and secondly by the Enterprise Act 2002 when introducing Schedule B1), long after any difficulties with that concept had become apparent.

Moreover, even in normal circumstances not involving COVID-19 or furlough, there are situations in which an administrator might, without committing any breach or repudiation of an employee’s contract of employment, not require the employee to work for a period during the administration, but where it would nevertheless be entirely appropriate for the administrator to be required to continue to pay their wages or salary. To give one example, take an employee who has particular skills or know-how regarding the company’s business which would, if available to a competitor, devalue the business which the administrator was seeking to sell. Even if there was no new work for the employee to do in the administration until it was known whether the business could be sold, it would be commercially important for the administrator not to terminate the employee’s contract. In that way, the employee would continue to be available to the purchaser of the business, the restrictive covenants in his contract would continue in effect, and the maximum post-termination period of restraint would be available for the potential benefit of the purchaser. Given those benefits to the administration, even if, with the permission of the administrator, the employee were not required to attend the premises to work, it would be wrong if they were not entitled to payment of their wages or salary.

Moreover, although the coronavirus and the concept of furlough were obviously not foreseen by Parliament when it enacted and amended the relevant insolvency legislation, or by the House of Lords when Paramount was decided, it is very clear from Lord Browne-Wilkinson’s speech at pages 441-442 and 445C-D that promotion of the rescue culture is an important consideration when interpreting the Insolvency Act. In the instant case, a conclusion that because furloughed employees could not provide services, their contracts of employment could not be adopted under Paragraph 99(5) would have the unwelcome result that the main statutory provision dealing with the issue of employment in administrations would have no application and would not enable furloughed wages or salary to be paid as the Scheme plainly envisages. That would be entirely contrary to the rescue culture in the current situation in which such an approach may be needed more than ever before.

I therefore see no reason whatever to strive to reach a conclusion that Paragraph 99(5) is wholly inoperable in the current situation. Instead, if it is possible to do so, Paragraph 99(5) should be interpreted to permit the Scheme to be given effect, and thus support the rescue culture and the Government’s efforts to deal with the economic consequences of the COVID-19 pandemic.

I therefore turn to examine the key concepts in Lord Browne-Wilkinson’s speech in Paramount as to the meaning and distinction between termination, continuation and adoption of a contract of employment.

The starting point is that identified by Lord Browne-Wilkinson in the first paragraph quoted at paragraph 66 above. The appointment of an administrator does not terminate a contract of employment, which will continue in effect unless and until notice to terminate is given or the contract is repudiated. It was for that reason that Lord Browne-

That reading is also consistent with what I believe Lord Browne-Wilkinson was alluding to in the second paragraph of his speech quoted at paragraph 66 above, where he indicated that adoption could not mean “fail to disclaim”. Since an administrator has no power to disclaim (unlike a liquidator), and given Lord Browne-Wilkinson’s use of quotation marks around the expression, I think he simply meant “fail to terminate”.

That conclusion led to the critical part of Lord Browne-Wilkinson’s analysis at the end of the second paragraph quoted in paragraph 66 above, namely that,

“…adoption in sections 19 and 44 can only connote some conduct by the administrator or receiver which amounts to an election to treat the continued contract of employment with the company as giving rise to a separate liability in the administration or receivership.”

In that analysis, Lord Browne-Wilkinson’s basic assumption was that the contract of employment is “continued” and hence that the liabilities under it continue to arise. But he held that adoption requires, in addition, some conduct by the administrator that amounts to an election or decision that those liabilities arising under the continued contract will be a “separate” (i.e. prior ranking) liability in the administration, rather than simply ranking as an unsecured claim.

In the context of the normal situation, as in Paramount itself, that conduct on the part of the administrator is likely to occur when the administrator communicates to the employee that the business remains open, and that the employee should attend for work in the usual way. In order to avoid the manifest mischief of Nicoll v Cutts, that conduct of the administrator objectively signifies a willingness that the funds of the company should be used to pay wages or salary for the work done in priority to unsecured claims.

The only doubt that might be cast upon that analysis arises because in the subsequent part of his speech at pages 449F-450B which I have quoted in paragraph 67 above, Lord

If taken out of context, these phrases could be thought to mean that a contract of employment will necessarily or automatically be adopted if an administrator simply fails to terminate it within 14 days. But read in context, I do not think that is what Lord Browne-Wilkinson meant.

In the first of these paragraphs, commencing at page 449F, Lord Browne-Wilkinson was addressing the question of whether an administrator could choose to adopt a contract in part rather than as a whole. He was not readdressing the meaning of “adoption”, which he had already decided.

Further, at the start of the paragraph, Lord Browne-Wilkinson spoke of “contracts which he [viz, the administrator] has continued”, and referred to circumstances in which the administrator accepted liability for services rendered to him under the contract. I think that it is clear that Lord Browne-Wilkinson was not there speaking about a mere non-termination of the contract, but of some conduct of the administrator relating to the employee.

As such, when Lord Browne-Wilkinson then referred to the employment being “continued for more than 14 days after appointment”, or summarised his conclusions at the end of his speech by referring to the employee being “continued in employment”, I believe that he was simply using shorthand for the same concept that he had described earlier - namely that the administrator’s conduct amounted to an acceptance that he had to pay for services to be rendered under the contract, and hence amounted to an election to give super-priority to the claims for wages or salary.

This analysis of Lord Browne-Wilkinson’s speech is consistent with the decision of Laddie J in Re Antal International Ltd [2003] 2 BCLC 406 (“Antal”). That case neatly illustrates the difference between (i) mere continuation or non-termination of the contract of employment (which does not amount to adoption), and (ii) some conduct of the administrator amounting to an election to give super-priority to the employee’s claims for wages and salary (which does amount to adoption).

In Antal, the administrators found out more than 14 days after the commencement of the administration that, contrary to their earlier belief that certain individuals were employees of a subsidiary company, they were actually employed by the company in administration. The administrators thereupon immediately terminated their contracts of employment. However, in order to clarify the position that had arisen, they sought directions from the court as to whether the contracts of employment had been automatically adopted on the expiry of the 14 day period.

Laddie J held, applying Lord Browne-Wilkinson’s explanation of the concept of adoption, that the mere failure to terminate the contracts within the first 14 days following the appointment (when the administrators did not know of the existence of the relevant contracts with the company) did not amount to adoption of the contracts. He held that it was necessary to look at the facts and to decide whether there had been some conduct by the administrators which could legitimately be treated as an election of the type required by Lord Browne-Wilkinson.

I respectfully agree with that decision. The mere fact that the contracts between the company and the employees had, unbeknown to the administrators, continued in existence for more than 14 days after the commencement of the administration did not amount to adoption. And as soon as the administrators learned of the existence of the contracts with the company, they acted to terminate them rather than adopt them.

With those principles in mind, I turn to analyse the position under Paragraph 99(5) as regards the Consenting Employees, the Objecting Employees and the Non-Responding Employees.

As indicated above, the Consenting Employees are now employed on the basis of a contract which has been varied according to the Variation Letter and thus only requires payment of wages and salary at a level equal to the grant received under the Scheme in respect of the employee, and only at a time when the grant has been received. That position has been reached within 14 days from commencement of the administration,

However, it seems to me clear that, as and when the Administrators make an application under the Scheme in respect of the Consenting Employees or make any payment to the employees under their varied contracts, this would amount to adoption of the varied contracts of employment. Alternatively, although this is not anticipated, if funds were unexpectedly to become available to the Administrators to make payments of wages to the furloughed employees prior to the receipt of monies from the Scheme, that too would amount to adoption of the varied contract. In either case, applying the concept of adoption as explained by Lord Browne-Wilkinson in Paramount at page 449B, the Administrators would be doing an act which could only be explicable on the basis that they were electing to treat the varied contract as giving rise to liabilities which qualify for super-priority.

Accordingly, I consider that such steps would enable super-priority payments to be made to the furloughed employees under Paragraph 99(5) using the grant monies as and when received under the Scheme; or in the alternative would enable payments to the employees to be made from other funds of the Company, which would be reimbursed when the grant money was paid.

The only argument which might be made against such a conclusion arises from some unfortunate wording that was included in the Variation Letter. After requesting that the employees accept the terms of the Variation Letter, the letter went on to set out, under the heading “Ongoing arrangements” some standard instructions about how the Company was to be operated under the control of the Administrators. In between a statement about compliance with fire, buildings, safety, food and hygiene requirements (which seems strange given that the employees to which the letter was sent would not be able to attend the Company’s premises), the letter stated,

“As noted above, you continue to be employed by the Company. The Administrators act as agents of the Company and will notbe adopting, and will not at any future date adopt, your contractof employment. The Administrators have not assumed, and will not at any future date assume, any personal liability in relation to your employment.”

(my emphasis)

Most of this paragraph is accurate as explaining that the Administrators merely act as agents for the Company and without personal liability, but the underlined words seem to be an echo of the type of wording used long ago in Specialised Mouldings letters. Paramount decided that such words have no effect when sought to be imposed unilaterally by administrators to prevent adoption of employment contracts. The potential difficulty here is that the words have been included in the Variation Letter which is the basis upon which the Consenting Employees have agreed to be furloughed. If given literal effect, they could arguably amount to an agreement to prevent the operation of Paragraph 99(5).

When I asked Ms. Toube QC whether those responsible for the drafting of the Variation

However, given the lack of prominence which the words had in the Variation Letter, which is otherwise admirably clear as to what the Administrators intended to do, together with the fact that, without further explanation, the words would have been as inexplicable to employees reading the letter as they seem to have been to those who included them, I do not consider that they should be taken to detract from the conclusion that I have reached that the varied contracts of employment of Consenting Employees will be adopted under Paragraph 99(5) in the manner that I have indicated.

For reasons that I have explained, the contracts of employment of the Objecting Employees will not either be varied or adopted by the Administrators, but will be terminated and the employees in question will be made redundant.

If Non-Responding Employees accept the offer in the Variation Letter (or any reiteration of it) prior to the expiry of 14 days into the administration, they will stand in precisely the same position as the Consenting Employees.

If, however, the Non-Responding Employees do not accept the offer in the Variation Letter (or any reiteration of it) prior to the expiry of 14 days into the administration, and nothing else happens, I consider that applying the principles set out by Lord Browne-Wilkinson in Paramount which I have explained above, the Administrators will not be treated as having adopted the unvaried contracts of employment of the NonResponding Employees by the mere failure to terminate those contracts prior to the expiry of the 14 day period. Moreover, although the unvaried contracts will continue in existence, the employees cannot attend for work, and there will be nothing done or said by the Administrators that could amount to an election to treat those unvaried contracts as giving rise to super-priority liabilities in the administration. This is the crucial analysis that will enable the Administrators to avoid having to take the precaution of dismissing the Non-Responding Employees prior to the expiry of 14 days into the administration.

Thereafter, provided that the Administrators have not first decided to withdraw the Variation Letter or terminate the contract, if a Non-Responding Employee chooses, belatedly, to accept the terms of the Variation Letter, I consider that this will have the effect of varying the contract of employment. Even though it occurs after 14 days, the late acceptance of the terms of the Variation Letter by the employees will not, however, amount to the adoption of the varied contract, because it is not an act of the Administrators.

Rather, as with the Consenting Employees, I consider that adoption of the varied contract of a late consenter will occur when the Administrators act upon the varied contract by making an application in respect of the employee under the Scheme, or by

Those Non-Responding Employees who continue not to respond to the Variation Letter will simply continue to be employed by the Company on the terms of their unvaried contract unless and until it is terminated, but they will merely be an unsecured creditor in the administration in respect of any claim under the contract. Their contracts will not be adopted in a situation in which they do not attend for work and the Administrators do nothing to amount to an election to treat the liabilities under the contract as qualifying for super-priority in the administration.

In argument, Mr. Segal QC raised the issue of whether the Administrators are under a duty to apply under the Scheme in respect of any of the employees to whom the Variation Letter was sent.

There is plainly no such duty as regards the Objecting Employees. As regards the Consenting Employees or those who accept the terms of the Variation Letter late, I do not need to reach a conclusion on the point because it is plainly the current intention of the Administrators to make just such an application. In that regard, I would only observe that whilst I can see that such a duty might well be implied from the terms of the Variation Letter, it would of course be subject to the provision in the Scheme Guidance to which I referred in paragraph 22 above, and also to the overriding restrictions on the exercise of powers and duties by the Administrators as regards the prospects for achieving the objective specified in paragraph 3(1)(b) of Schedule B1. I did not understand Mr. Segal QC to dissent from those propositions.

So far as the Non-Responding Employees are concerned, Mr. Segal QC relied on the principle that an employment contract involves an implied term of mutual trust and confidence, together with cases such as Aspden v Webbs Poultry & Meat Group(Holdings) Ltd [1996] IRLR 521 and Brompton v AOC International Ltd and Unum [1997] IRLR 639. As I understand it, those cases suggest that an employer may be under a duty not to dismiss an employee who is on long-term sickness absence until it has explored whether the employee will be covered under the provisions of a permanent health insurance policy which the employer has taken out with a third party insurer.

I do not think that the analogy is a good one in circumstances in which, unless and until the Non-Responding Employee agrees to the variation of their contract, there will have been no agreement by the employee to be placed on furlough, which is what the Scheme Guidance appears to require. Moreover, I see no good reason why the Administrators should be under a duty to do something which will incur the risk of having to face an argument that they have elected to adopt the unvaried contract, thereby incurring superpriority for liabilities that could not be covered by the grants available under the Scheme.

I shall therefore indicate that the Administrators are under no such duty, other than in respect of Consenting Employees or others who have agreed to the variation of their contracts in accordance with the Variation Letter.

Mr. Segal QC also raised the question of whether, in addition to sending the Variation Letter which sought the consent of the employees to be furloughed, and indicated that if they did not respond they might be made redundant, the Administrators were under a duty to employees to go one step further and send a letter which indicated that even non-responders would be taken to have accepted the offer of variation so as to enable an application to be made in respect of them under the Scheme.

I do not propose to determine that issue, since it would, I think, require more information about the potential recipients of the letter in order to be able to consider whether I would be able to draw the necessary inferences as to consent. That issue will have to await a case in which such a letter has been used, or a further application for directions in this administration.

What I can say, however, is that I was given to understand that the Administrators are making continued efforts to try to ensure that the Variation Letter has reached the NonResponding Employees and to assist them to make a decision in relation to it. That is, in my view, an entirely sensible and appropriate course for the Administrators to take. I also do not think that such a course should carry any risk of adoption of the non-varied contracts. A reiteration by the Administrators after 14 days of the offer of a varied contract is the antithesis of an act of adoption of the contract in its original form.

The conclusions that I have reached in relation to Paragraph 99 and the directions that I have given will enable the Administrators to proceed to implement their proposals for furloughing most of the employees of the Company without fear that they will be criticised in the future for acting inappropriately. That will be so even if the legal conclusions that I have reached turn out to be wrong or are overtaken by events or detailed legislation giving effect to the Scheme.

In the circumstances I do not propose to express any concluded views on the potential applicability of Paragraph 66 in the current situation. I will say, however, that I am attracted by the possibility that, as with cases such as MG Rover Espana to which I have referred, Paragraph 66 might be an appropriate way in which the Administrators could fill any gaps, or deal on an ad hoc basis with particular issues of detail that might arise in relation to the implementation of the Scheme.

I reiterate my gratitude to all those involved in bringing this matter before the court urgently and efficiently.

For convenience, the directions which I made on 9 April 2020 reflecting these reasons are set out in the Annex that follows.