Rescue parties

The Court of Appeal has recently handed down a judgment that goes some way to clarifying whether protective award payments and payments in lieu of notice rank as administration expenses, and are therefore payable in priority over an administrator’s remuneration and expenses or preferential claims.

In Huddersfield Fine Worsteds (2005), the administrators of Huddersfield and others asked for a declaration that “liabilities for protective awards under Section 189 of the Trade Union Labour Relations (Consolidation) Act 1992 and payments in lieu of notice are not payable in priority to the expenses of the administration”.

The Court of Appeal ruled in their favour on 12 August 2005, overturning the first instance Huddersfield judgment and upholding Re Ferrotech, which was also on appeal in Huddersfield.

This seems like the right decision, as was Re Allders Department Stores earlier this year. However, it is difficult to follow either case in terms of: the legislation, being Insolvency Act 1986, Schedule B1, paragraph 99, and Rules 2.67 and 4.218 of the Insolvency Rules 1986; and the fact that Allders was only a first instance judgment, Huddersfield is Court of Appeal, but only considers paragraph 99, and Re Toshoku Finance (2002) is a House of Lords decision but on 4.218 (liquidation, not administration).

The concern is that, while practitioners try to interpret these provisions and case law, the lack of clarity could lead to another case such as Paramount Airways, where emergency legislation had to be introduced to clarify the law.

Returning to Huddersfield and the rescue culture, the principal objective of administration is rescuing the company as a going concern.

Balanced against this, the law recognises employees as a potentially vulnerable class of creditors, so gives some priority to their wages, as it also does to administrators’ fees.

For administrators, paragraph 99(3) of the Insolvency Act provides that, where a person ceases to be the administrator of a company, their remuneration and expenses shall be charged on, and payable out of, the property that they previously administered. In respect of employees, paragraph 99(4) says that wages or salary due under employment contracts adopted by the administrator are also charged on the property and are in fact to be paid in priority to the administrator’s remuneration and expenses.

In both Huddersfield and Allders, the broader the interpretation of wages or salary, the more money would be available for employees. However, both courts were influenced by policy concerns that, with less money for cashflow and creditor distributions, fewer companies might be rescued, and as wages or salary rank ahead of administrators’ expenses, administrators would accept fewer appointments.

In Allders, the Attorney-General “contended that all statutory employment payments, including unfair dismissal payments, were payable as expenses of the administration” in priority to the remuneration of the administrator. In Ferrotech, he appeared to argue contrarily (although he may have simply taken Allders as the precedent), saying protective awards and payments in lieu of notice are not payable in priority to expenses of the administrative procedure. While that summarises the policy issue, the court in Huddersfield focused mainly on paragraph 99.

For employee payments to enjoy priority under 99(4), they should pass a double gateway, being both a liability arising under a contract of employment and wages or salary. Lord Justice David Neuberger concluded that, even though the relevant paragraph 99(6)(d) “is a thoroughly unsatisfactory piece of drafting”, a protective award is not wages or salary.

Neither do payments in lieu come within paragraph 99, except for Lord Browne-Wilkinson’s first category in Delaney v Staples (1992), being payments where an employer gives proper termination notice but does not require the employee to work the notice period and pays the remaining wages in a lump sum.

While the conclusion may be that paragraph 99 would benefit from a redraft, why did Huddersfield focus on that provision exclusively? It applies only where a person ceases to be an administrator, whereas Rule 2.76 lists the order for payments of expenses during an administration. The most important are (a) expenses incurred properly by the administrator in performing their functions in the administration of the company. This is followed by (f) any necessary disbursements by the administrator in the course of the administration, and (h) the remuneration of the administrator.

In Allders, which raised similar issues in respect of redundancy and unfair dismissal claims, the Attorney-General argued:

  • That under Rule 2.67(1)(f), “necessary disbursements” by the administrator in the course of the administration are payable as an expense.
  • That Rule 2.67(1)(f) mirrors Rule 4.218(1)(m) (liquidation), in relation to which it was held in Toshoku that if the company incurred an obligation post-liquidation for which the creditor cannot prove, it will be a necessary disbursement.
  • The liability for redundancy or 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.

While this logic was not presented to the Court of Appeal, it seems reasonable that it should apply to the Huddersfield protective awards, meaning that they rank ahead of the administrator’s expenses, contrary to the Court of Appeal’s decision and with awkward implications for any rescue culture.

In fact, Mr Justice Lawrence Collins rejected the argument in Allders. But while he did not disagree with the Attorney-General’s first and third points, he did say that the second point did not reflect the ratio of Toshoku. This is curious, as the point does represent what was widely thought to be the position, leaving this reasoning open for consideration.

Collins J gave other reasons for his decision, including concerns about disturbing the priority of preferential debts and other employee-related payments, there being no reason to apply liquidation case law to administration and “adverse policy consequences on the administration regime”.

These are fair considerations, but the relationship of paragraph 99 and Rule 2.67 and the liquidation and administration case law is clearly unsatisfactory. While the courts have tried to preserve the rescue culture in Huddersfield and Allders despite this uncertainty, it may be time to clarify the working of these provisions to aid the next round of administrators, employees and judges.

Paul Vine is a senior partner in the finance department at Norton Rose