We review the Court of Appeal's decision to dismiss the appeal by the administrators. Please refer to our previous article on Re Debenhams for background facts and the decision of the High Court. 


Issue

The issue is whether by paying only the amounts which may be claimed under the furlough scheme ("Scheme") to employees while they are furloughed and therefore not permitted to work for the company, the administrators have adopted the contracts of those employees. 

Appeal grounds

After unsuccessfully arguing that Trower J in the High Court applied the wrong test of adoption as observed in Paramount, the administrators sought to argue that the employment contracts of furloughed employees cannot be taken to be adopted because: 

  • Furloughed employees cannot provide any services to the company. 
  • Whilst furloughed, their remuneration is limited to the amount claimed under the Scheme which means the company is merely the conduit for government funds. 
  • Any decision to terminate the contracts will have to wait until the Scheme ends which means there is an element of unpredictability. 

Judgment 

The test of adoption as set out by Lord Browne-Wilkinson in Paramount does not introduce as a relevant factor the intentions of the administrator, even if objectively determined. It is a question of law: is the conduct of the administrator such that he must be taken to have to accept that the relevant amounts falling due under the employment contract enjoys super-priority? The central issue is whether the officeholder has "continued" the employment of the relevant employees. 

The following facts support the conclusion that the administrators have continued the employment of the furloughed employees: 

  • The administrators will continue to pay the wages of the furloughed employees albeit limited to the amounts claimed under the Scheme. These payments are pursuant to their employment contract and the employees' entitlement to those payments is derived exclusively from their contracts. 
  • All the furloughed employees who have accepted the continuation of their employment on these terms will remain bound by their contracts of employment. 
  • In continuing to pay the furloughed employees, the administrators are acting with the objective of rescuing the company as a going concern, that being the purpose of the administration and in the interests of the company's creditors as a whole. 

Key takeaways 

David Richards LJ, in giving the judgment, has not moved one iota from the judgments of Snowden J and Trower J in Carluccio's and Debenhams respectively, endorsing both judgments as to both the law of adoption and its application to the respective facts. The benefit of this is that it brings clarity and certainty to any future cases as to how any particular conduct of the administrators will be interpreted as to whether it gives rise to adoption of the employment contracts. 

Key contact

Sungjin Park

Sungjin Park

Knowledge Lawyer, Employment
London

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