Appeal issues and outcome
The key issue addressed (as confirmed in the Court of Appeal authority of Re Paramount Airways Ltd ) was whether the administrator has “continued” the employment of the relevant employees. If so, super-priority payment status for the liabilities would be due under the contracts of employment. By contrast, doing nothing involves no continuation by the administrators of the employment.
The Court of Appeal found that the joint administrators had “continued” the employment of the furloughed employees for the following reasons:-
- The joint administrators will continue to pay wages/salaries of the furloughed employees up to the furlough scheme cap;
- The furloughed employees who have agreed to continue their employment on these revised terms will remain bound by their contracts of employment (save for the obligation to be available for work during the furlough);
- In continuing to pay the furloughed employees, the joint administrators are acting with the objective of rescuing the company as a going concern.
The appeal court was also satisfied that the joint administrators had adopted the furloughed employee contracts for the purposes of Paragraph 99. It therefore dismissed the appeal.
The appeal court also addressed the potential financial impact of the adoption. Due to the terms agreed with the vast majority of the company’s employees (as outlined above), it determined that wages or salary in excess of the amounts payable under the furlough scheme would not enjoy super-priority payment status.
However, entitlements to full holiday pay may enjoy super-priority payment status. If that applies here, over a three month period, the excess holiday pay not covered under the furlough scheme would amount to some £1.28 million.
The judgment will leave administrators facing a hard decision. Should employees be retained after the initial 14 day appointment period if substantive super priority payments may arise and cannot be met by the administration estate?
This surely undermines the rescue culture intended not only by the furlough scheme, but the intended purpose of many administrations, where the objective is to seek to rescue the business as a going concern.
The judgment concluded that “.. there may be good policy reasons for excluding action restricted to implementation of the Scheme from the scope of “adoption” under Paragraph 99 but noted that such exclusion cannot be accommodated under the law as it stands.”
The message to the government is clear. Either the terms of the furlough scheme itself needs to be clarified and/or emergency legislative changes need to be put in place to address these super-priority payment issues.
It was notable that no representative of government attended the appeal hearing to address any of these issues. It will be interesting to see whether government will now take action in this regard in light of this further judgment.