Wages payable as an expense where administrator makes furlough payments

Under the insolvency legislation, where an administrator of a company “adopts” a contract of employment between the company in administration and the employee, the wages or salary owed to the employee under the employment contract after adoption become payable out of the administration assets with a super priority, ahead even the administrator’s own remuneration.

However, nothing done by the administrator in the first 14 days can be taken to have adopted the employment contract for this purpose. In effect the administrator is given a 14 day window to decide whether the employees should be kept on. Wages or salary for this purpose is defined to include, inter alia, holiday pay.

In Debenhams, employees had been furloughed prior to the administrators’ appointment and the administrators wished to continue the furlough. The question arose as to whether the administrators would, by paying the furlough sums to the employees, thereby adopt the employment contracts for the purpose of the insolvency legislation.

The Court of Appeal upheld the decision at first instance, holding that, by accessing the furlough scheme and paying employees on a furloughed basis, the administrators had adopted the contracts of furloughed employees, making the wages and salary of the furloughed employees, after adoption by the administrators, payable with super priority.

Administrators should be able to reduce the risk by agreeing a contract variation with the employee during the period of furlough under which their entitlement during the period of furlough is reduced to the amount paid out by the government. More difficult is the situation where the employee does not engage or refuses furlough – in either of these scenarios paying furlough sums to the employee will risk the contract having been adopted and all of the wages or salary becoming payable with super priority.

The court reached a similar conclusion at first instance in the earlier decision in Carluccio’s albeit that case differed slightly in that the employees were furloughed after the administration had commenced. Even as regards employees who do consent to a variation there may be concerns as to super priority beyond the wage or salary given the extension of the definition of these terms under the super priority provisions to include, e.g, holiday pay.

In re Debenhams Retail Limited (in administration) [2020] EWCA Civ 600

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