The story continues: Debenhams and the application of furlough schemes to companies in administration

The company is part of a group which operates 142 department stores in the UK and is the largest such retailer in the country. Prior to the COVID-19 pandemic the Group was experiencing financial difficulties. This led to the holding company of the Group (Debenhams Plc) entering administration in April 2019.

Between 25 March and 9 April 2020, the company wrote to just under 14,000 employees informing them that they were being furloughed until further notice with effect from the following day. Employees were informed that they would not receive any pay above that payable under the furlough scheme.

Joint administrators were appointed by the company directors on 9 April 2020. They considered that retaining the company workforce would help to ensure the viability of the business and future continued trading of the company. However, the employees had not been asked by their employer if they consented to the furlough scheme arrangements.

The joint administrators therefore sought such consent from the furloughed employees to avoid any doubt as to their agreement to all terms and received over 12,700 consents.

The joint administrators intended to pay each furloughed employee 80% of their salary up to the £2,500 monthly cap from the company’s cash reserves on the basis that the company would then be reimbursed via the furlough scheme. However, they were concerned they would be deemed to have “adopted” the relevant employment contracts as a result of this course of action. In those circumstances, super priority would apply to employee wages/sick pay and all benefits over and above the amounts reimbursed to the company via the furlough scheme.

The potential extent of the 20% shortfall which could be payable as a super priority administration expense was estimated to be over £3 million a month. Additionally, many of these costs would be payable ahead of the majority of the costs and expenses of the administration itself. Accordingly, the joint administrators considered they may have no alternative but to dismiss the furloughed employees.

They were also concerned that this would have an adverse impact on the rescue culture underlying the administration regime.

Mr Justice Trower disagreed with the joint administrator’s arguments, especially the argument that the scheme could not be applied in a manner consistent with Paragraph 99. In finding that the joint administrators had adopted the employee contracts, Mr Justice Trower:

1. Determined that the joint administrators will be engaging in “positive conduct” which presupposes that the furloughed employee contracts continue to exist
2. Disagreed that the absence of services being provided under the employment contract was of itself good reason why those contracts should not be treated as being adopted
3. Considered it appropriate to identify Paragraph 99 as the source of the obligation to pay wages as a super priority administration expense
4. Considered that the acts of participation and payment (in relation to the furlough scheme) were consistent not just with the joint administrators treating the contracts of employment as continuing but also with the company in administration having continuing liabilities under them. Those liabilities are entitled to the super priority payment status for which Paragraph 99 (5) provides.