Factual and Procedural Background
This opinion concerns an application by the Administrators of companies within the Allders Department Stores group ("the Companies"). The appointments of the Administrators were made in early 2005 for the relevant companies. The Administrators sought directions regarding the treatment of redundancy payments payable if they terminate certain employees' contracts. The Insolvency Service of the Department of Trade and Industry, represented by counsel for the Attorney General, contended that all statutory employment payments, including unfair dismissal payments, should be treated as expenses of the administration.
The Administrators proposed to treat some employee liabilities as preferential under Schedule 6 to the Insolvency Act 1986, giving those liabilities priority under Schedule B1, paragraph 99 of the 1986 Act. However, the bulk of redundancy and unfair dismissal payments were proposed to be unsecured claims in the administration and any subsequent liquidation.
The Administrators requested a declaration that statutory liabilities for redundancy or unfair dismissal payments following termination are not payable as administration expenses under Rule 2.67(1)(f) of the Insolvency Rules or otherwise. The matter was heard in the applications court on February 10, 2005, where the court indicated it would give directions supporting the Administrators' position, with reasons to follow.
Legal Issues Presented
- Whether statutory redundancy and unfair dismissal payments due to employees following termination must be paid as expenses of the administration under Rule 2.67(1)(f) of the Insolvency Rules or otherwise.
- Whether such payments qualify as "wages or salary" under paragraph 99 of Schedule B1 to the Insolvency Act 1986 and thus have priority over the administrator’s expenses.
- The proper interpretation and interaction of Schedule B1 paragraph 99 and Rule 2.67 of the Insolvency Rules in relation to employee liabilities during administration.
Arguments of the Parties
Appellant's (Administrators') Arguments
- Redundancy payments are not expenses of the administration because liabilities adopted by the administrator that are "wages or salary" have priority under paragraph 99 of Schedule B1, but redundancy payments do not fall within "wages or salary".
- The general expenses provisions in Rule 2.67 do not alter the effect of paragraph 99.
- Redundancy payments are not "necessary disbursements" for the purposes of Rule 2.67(1)(f), nor are they remuneration or emoluments of persons employed by the administrator under Rule 2.67(1)(g).
- Special statutory provisions accord preferential status to remuneration under protective awards, but redundancy payments do not enjoy such preferential treatment.
Appellee's (Attorney General's) Arguments
- Under Rule 2.67(1)(f), necessary disbursements by the administrator in the course of administration are payable as expenses.
- Rule 2.67(1)(f) mirrors Rule 4.218(1)(m) applicable in liquidation, where post-liquidation liabilities not provable as debts are treated as necessary disbursements, as established in Re Toshoku Finance UK plc.
- Liabilities for redundancy and unfair dismissal arise post-liquidation and are not provable debts because they do not arise from obligations incurred before administration, and thus should be treated as expenses of the administration.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Powdrill v. Watson [1995] 2 AC 394 |
Determination of when contracts of employment are adopted by administrators, affecting priority of liabilities. |
Referenced to explain the legislative changes limiting liabilities treated as expenses and to clarify the 14-day adoption rule under paragraph 99 of Schedule B1. |
| Re Toshoku Finance UK plc [2002] UKHL 6, [2002] 1 WLR 671 |
Whether certain post-liquidation liabilities are "necessary disbursements" payable as expenses in winding up. |
The court distinguished post-liquidation liabilities that must be paid as expenses, but held this principle does not automatically apply to administration or statutory redundancy liabilities. |
| Re Mesco Properties Ltd [1979] 1 WLR 558 |
Post-liquidation corporation tax as a necessary disbursement payable by liquidators. |
Approved by the House of Lords and cited as authority for the interpretation of "necessary disbursements" in insolvency contexts. |
| Evans-Lombe J [1994] 2 BCLC 118 |
Unfair dismissal payments do not have priority as they arise under statute, not contract. |
Applied to distinguish statutory redundancy and unfair dismissal payments from preferential wage claims. |
| Hughes v. Secretary of State for Employment EAT/204/94 |
Application of priority principles to redundancy payments. |
Followed the reasoning that statutory redundancy payments are not preferential liabilities. |
Court's Reasoning and Analysis
The court analysed the statutory scheme governing administration expenses and employee liabilities. It found that paragraph 99 of Schedule B1 to the Insolvency Act 1986 clearly limits priority to liabilities adopted after 14 days that constitute "wages or salary," explicitly excluding redundancy and unfair dismissal payments.
The court held that the general provisions of Rule 2.67 of the Insolvency Rules should not override this specific statutory framework. Rule 2.67(1)(g) was considered inapplicable as it relates only to remuneration of persons employed by the administrator, not statutory employee claims.
Regarding Rule 2.67(1)(f), the court rejected the argument that statutory redundancy or unfair dismissal liabilities are "necessary disbursements," reasoning that such a construction would conflict with the legislative intent to give certain employee claims preferential treatment under Schedule 6, and that treating all statutory claims as expenses would undermine this hierarchy.
The court also distinguished the authority of Re Toshoku Finance UK plc, clarifying that its ratio does not define all non-provable liabilities as necessary disbursements, especially in administration contexts where subsequent liquidation remains a possibility and statutory payments become provable debts.
Finally, the court noted that leading practitioner texts align with the conclusion that statutory employment claims are unsecured and not payable as administration expenses, reinforcing the decision’s consistency with established practice.
Holding and Implications
The court's final decision was to grant the Administrators' application and declare that statutory redundancy and unfair dismissal payments are not payable as expenses of the administration under Rule 2.67(1)(f) of the Insolvency Rules or otherwise.
The implication is that such statutory liabilities do not have priority over the administrator’s expenses and are treated as unsecured claims in both administration and any subsequent liquidation. This maintains the legislative priority scheme under the Insolvency Act 1986 and clarifies the treatment of employee claims in administration proceedings. No new precedent altering the established hierarchy of claims was created.