Background

In the Leeds United case, the football club had entered administration. The administrators did not wish to terminate the players’ contracts, as they would lose the club’s most valuable assets – the players could move to another club without any compensation or transfer fee being paid. However, if the contracts were adopted, the club might subsequently incur substantial liabilities if the players were not paid. Accordingly, the administrators sought to defer all or part of the remuneration payable to the players until they could be sure that all or part of the deferred remuneration could be paid – either as an expense of the administration or by a purchaser under the Transfer of Undertakings Regulations, which would apply on a sale of the club’s business to another company.

The administrators applied to court for a declaration on whether compensation for any future wrongful dismissal claims would:

  • have the ‘super priority’ afforded ?? by paragraph 99 of Schedule B1 to the Insolvency Act 1986 (Schedule B1); or, if not
  • count as necessary disbursements for the purpose of rule 2.67(1)(f) of the Insolvency Rules 1986 (the Rules).

The decision

The paragraph 99 issue – damages for wrongful dismissal not wages Pumfrey J provided a useful summary of how paragraph 99 of Schedule B1 works. Paragraph 99(4) provides that a sum payable in respect of a debt or liability arising out of a contract entered into by the administrator has priority to the administrator’s remuneration and expenses and to any floating charge holder – ie such amounts have super priority. Paragraph 99(5) applies sub-paragraph (4) to any liability arising under an adopted employment contract. However, the effect of paragraph 99(5)(c) is to reduce the width of that provision to payments of ‘wages or salary’ alone. That term is broadened to include the matters listed in sub-paragraph (6), although that paragraph does not contain a definition of ‘wages or salary’. The issue to be decided was whether, in addition to the matters specified in paragraph 99(6), the phrase ‘wages or salary’ included sums payable in respect of damages for wrongful dismissal. Pumfrey J held that it did not.

Pumfrey J determined that the words ‘wages or salary’ are to be given their normal meaning and cited the House of Lords decision in Delaney v Staples, dealing with the then Wages Act. This case held that for a payment to constitute wages in its ordinary meaning it should be ‘referable to an obligation on the employee under a subsisting contract of employment to render his services’. Lord Browne-Wilkinson then identified four types of wages in lieu of notice, the fourth of which was concerned with payments made in breach of contract. According to the House of Lords (approving another House of Lords case, Gothard v Mirror Group Newspapers Ltd), such payments were designed by the employer to extinguish any claim for damages for breach of contract – ie wrongful dismissal – and during the period to which the money in lieu relates, a person is not employed by his employer. As such, they could not be wages.

Accordingly, Pumfrey J held that if the administrators were to adopt the players’ contracts and subsequently dismiss them, any damages payable for wrongful dismissal would not be wages within paragraph 99(5) (c). Further, Pumfrey J referred to the Court of Appeal decision in Re Huddersfield Fine Worsteds Ltd, which considered the meaning of the word wages in paragraph 99. Pumfrey J was bound by that decision, which had held that payments falling within Lord Browne- Wilkinson’s fourth class of payments in lieu are not entitled to super priority.

The rule 2.67 issue – damages for wrongful dismissal not necessary disbursements Counsel suggested on behalf of the players that liabilities for wrongful dismissal would count as ‘necessary disbursements’ for the purpose of rule 2.67(1)(f) so as to have priority as administration expenses (but not the super priority afforded by paragraph 99).

Collins J had held, in Re Allders Department Stores Ltd, that the statutory liabilities for (i) redundancy payments or (ii) unfair dismissal claims were not necessary disbursements and to hold otherwise would have such adverse policy consequences on the administration regime that it was impossible to see that such a result could have been intended. Pumfrey J held that, in respect of the liabilities for wrongful dismissal claims, he should follow the decision of Collins J in Re Allders and noted that Richards J had agreed with the decision of Collins J in Re Trident Fashions: Exeter City Council v Bairstow earlier this year.

Accordingly, payments in respect of damages for wrongful dismissal are not necessary disbursements under rule 2.67(1)(f).

Comment

The position on liabilities under adopted employment contracts in this case would seem to be fairly clearly covered by the decision of the Court of Appeal in Re Huddersfield Fine Worsteds Ltd referred to by Pumfrey J in his judgment and, quite rightly, taken by him as binding on him. Indeed, one might ask why the administrators felt the need to bring this case at all.

It is highly likely that the administrators felt this area of the law has become so complicated that the protection of a court order was desirable. Given the decision of David Richards J in Trident Fashions earlier this year, such a feeling would not be unreasonable. That case held that the statutory liability to pay non-domestic rates was a necessary disbursement within rule 2.67(1)(f). In contrast, the decision in Re Allders had held that the statutory liabilities to make redundancy and unfair dismissal payments were not necessary disbursements within that same rule. Both decisions took into account the underlying purpose of promoting business rescues when construing the provisions of Schedule B1 and the Rules on new-style administrations. Although it is not suggested that either decision was wrongly decided, they do go to show how the area of administration expenses is left somewhat complicated by the drafting of paragraph 99 of Schedule B1 and rule 2.67 of the Rules.

Employee related insolvency claims are common. Clarification as to their treatment is to be welcomed and this decision is helpful in that regard. However, what this decision points to is the inability of the insolvency legislation (both the main act and the rules) to give clarity in this area – something the Trident Fashions case also exposed regarding administration expenses more generally. Indeed, the Court of Appeal in Re Huddersfield criticised some of the legislative drafting in this area.

The table (click here)n highlights the treatment of employee related claims in the post Enterprise Act administration regime.