Neutral Citation Number: [2005] EWHC 1682 (Ch)
Case No: 4193 AND 4194 OF 2005
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 27/07/2005

Before :

THE HONOURABLE MR JUSTICE PETER SMITH

In the matter of Huddersfield Fine Worsteds Ltd
And In the matter of Globe Worsted Company Ltd
And In the matter of the Insolvency Act 1986

 Between :

	Gerald Morris Krasner (The Administrator of Globe Worsted Company Limite d & Huddersfield Fine Worsteds Limited)	Applicant	
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	Mr McMath (Representing all employees of the Companies)  	Respondent	

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William Trower QC and Felicity Toube (instructed by Brooke North) for the Applicant
Frederic Reynold QC and Edmund Cullen (instructed by Wilkinson Woodward and Boococks) for the Respondent

Hearing dates: 19th July 2005
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Judgment

Peter Smith J : 

INTRODUCTION
1.	This judgment arises out of 2 identical applications issued on the 24th June 2005 by Gerald Morris Krasner (“the Administrator”) who was appointed Administrator of the two companies Huddersfield Fine Worsteds Ltd (“HFW”) and Globe Worsted Company Ltd (“GWC” (together “the Companies”)) on 20th August 2004.  The Administrator seeks a declaration that liabilities for protective awards under section 189 Trade Union Labour Relations (Consolidation) Act 1992 and awards of pay in lieu of notice should be treated as unsecured claims in the administration of the Companies (and not as falling within paragraphs 99 (4) – (6) of Schedule B1 to the Insolvency Act 1986). 
FINANCIAL IMPLICATIONS
2.	The Administrator is concerned that if the true construction of paragraph 99 is that responsibility for those payments falls to be paid in priority to all other payments (including the Administrators’ remuneration and preferential creditors) that will have a large impact on the recoveries in the two Companies.  It may well also have a wider impact in other administrations.  As regards the Companies the maximum exposure of the Administrator for protective awards claims and payments in lieu of notice are in the region of £515,000.  The net realisations across the two Companies are estimated to be in the region of £3,300,000.  As I have said the impact of the employees’ claims would affect both preferential creditors and the floating charge holders.  No preferential creditors have yet been identified but the debenture holder is owed approximately £6,000,000.  No payments therefore will in any event be payable to the unsecured creditors; the loss in effect if any if the issue is determined against the Administrator will fall on the debenture holder.
3.	The Administrator is concerned as to the particular impact on the Companies but also sets out in paragraph 13 of his witness statement his concerns on the prospects of Administrations being successful if there was a general rule of giving protective awards and payments in lieu of notice as priority.  It seems to me that concern is nothing like for example the concerns that arose as a result of the decision in Powdrill v Watson [1994] 2 BCLC 118 C.A. The result of that decision and subsequent House of Lords decision ([1995] 2 AC 394) will be dealt with further in this judgment.
4.	If the payments referred to above (“the Payments”) are not held to be “qualifying liabilities” in all probability they will be unsecured and will not be preferential payments.  This arises from section 387 IA 1986 which provides a definition of the “Relevant Date” for the purposes of the preferential payments set out in schedule 6.  Where a company is either going into administration or entered into a company voluntary arrangement the date of the entry of administration or the voluntary arrangement is the relevant date (section 387 (2)).  
5.	Where a company is to be wound up and the winding up is by the court immediately upon the discharge of the Administration Order the date is the date upon which the company went into administration.  If the winding up is by the court and the winding up order is made following conversion of the administration into winding up the relevant date is the date on which the company went into administration.  In other cases when the company has been wound up by the court and had not commenced to be wound up voluntarily before the making up of the winding up order the relevant date is the date of the first appointment of a provisional Administrator or the winding up order.
6.	The significance of that is that any preferential payment for employees in category 5 of schedule 6 is an amount payable in any part of the period 4 months next before the relevant date and does not exceed so much as prescribed by order made by the Secretary of State (schedule 6 paragraph 9 (B)).
7.	It follows therefore that any entitlement which accrues after the administration order and all these payments do will not become preferential because they do not fall in the relevant date for the purposes of the administration.  Nor if the Companies are subsequently wound up unless that winding up order occurs less than 4 months after the making of the administration order will they be preferential in a subsequent liquidation unless the court makes an order directing that to be the case on the making of the winding up order see for example re: TXU [2003] 2 BCLC 341.  I stress of course that any decision by a court to approve such a payment will of course depend on the facts of each administration as it appears before the court from time to time.  I can say however that there is a possibility that the loss of priority could be protected in some way but it cannot be regarded as anything more than a possibility.
8.	It follows therefore that the liabilities will either achieve super priority over everything else or no priority whatsoever.  
BACKGROUND
9.	The dispute arises out of a wording of schedule B1 paragraph 99 IA 1986.  It provides as follows:
99 (1) This paragraph applies where a person ceases to be the administrator of a company (whether because he vacates office by reason of resignation, death or otherwise, because he is removed from office or because his appointment ceases to have effect). 
 (2) In this paragraph- 
  	"the former administrator" means the person referred to in sub-paragraph (1), and
 	"cessation" means the time when he ceases to be the company's administrator.
 (3) The former administrator's remuneration and expenses shall be- 
 	(a) charged on and payable out of property of which he had  custody or control immediately before cessation, and
(b) payable in priority to any security to which paragraph 70 applies.
(4) A sum payable in respect of a debt or liability arising out of a contract entered into by the former administrator or a predecessor before cessation shall be-  
(a) charged on and payable out of property of which the former administrator had custody or control immediately before cessation, and
(b) payable in priority to any charge arising under sub-paragraph (3).
(5) Sub-paragraph (4) shall apply to a liability arising under a contract of employment which was adopted by the former administrator or a predecessor before cessation; and for that purpose-  
(a) action taken within the period of 14 days after an administrator's appointment shall not be taken to amount or contribute to the adoption of a contract,
(b) no account shall be taken of a liability which arises, or in so far as it arises, by reference to anything which is done or which occurs before the adoption of the contract of employment, and
(c) no account shall be taken of a liability to make a payment other than wages or salary.
(6) In sub-paragraph (5)(c) "wages or salary" includes- 
 
(a) a sum payable in respect of a period of holiday (for which purpose the sum shall be treated as relating to the period by reference to which the entitlement to holiday accrued),
(b) a sum payable in respect of a period of absence through illness or other good cause,
(c) a sum payable in lieu of holiday,
(d) in respect of a period, a sum which would be treated as                                              earnings for that period for the purposes of an enactment about social security, and
 	(e) a contribution to an occupational pension scheme.
These provisions were inserted by the Enterprise Act 2002.  They replaced section 19 (4) – (10) IA 1986 which themselves were inserted in section 19 as a result of the Powdrill case in the Court of Appeal.  Prospectively the provisions were altered.
10.	The two categories of payments sought to be claimed are payments in lieu of notice in accordance with a contractual right of the employee when the contracts are terminated and protective employment awards made under section 189 (3) TULR (C) Act 1992.  This is an order for the payment by an employer to an employee of “remuneration” for the protected period.  The protected period is the date when the dismissals take effect and such length as a tribunal determines just and equitable arising out of the seriousness of the employer’s default in complying with any requirement under section 188 (not to exceed 90 days).  The complaint arises out of a failure of the employer who is proposing to dismiss 20 or more employees within a period of 90 days to consult all employees about the proposed dismissal (section 188).
11.	I was also told by Mr Reynold QC who with Mr Cullen appears on behalf of Mr McMath a representative employee respondent that in practice the employees will receive up to 75% of such award in any event payable by the Secretary of State.  The losses therefore will be the balance between any award of payment in lieu of notice and the amount which the Secretary of State makes. 
12.	Despite the apparent significance as regards the National Insurance Fund as to this decision the Insolvency Service indicated that they did not wish to attend to make representations or to be joined as an intervener.  It is the government agency responsible for administration of the redundancy payments out of the National Insurance Fund.  
STATUTORY HISTORY IN RESPECT OF PARAGRAPH 99
13.	The original section 19 (3) – (5) provided as follows:-
‘(3) Where at any time a person ceases to be administrator, the next two subsections apply. ”
 (4) His remuneration and any expenses properly incurred by him shall be charged on and paid out of any property of the company which is in his custody or under his control at that time in priority to any security to which section 15(1) then applies.
(5) Any sums payable in respect of debts or liabilities incurred, while he was Administrator, under contracts entered into or contracts of employment adopted by him or a predecessor of his in the carrying out of his or the predecessor’s functions shall be charged on and paid out of any such property as is mentioned in subsection (4) in priority to any charge arising under that subsection. 
For this purpose, the administrator is not to be taken to have adopted a contract of employment by reason of anything done or omitted to be done within 14 days after his appointment.’
14.	Under subsection (5) upon ceasing to be an administrator he became under an obligation to pay all debts or liabilities incurred whilst he was administrator under contracts entered into or contracts of employment adopted by him or his predecessor. 
15.	At first instance Evans-Lombe J in Powdrill held that if the administrators continued substantially to employ staff after 14 days they would have taken to have impliedly adopted the contracts and would be liable as part of the administration expense to pay salary in lieu of notice and holiday pay on dismissal of employees of the company.  That was affirmed by the Court of Appeal.  
16.	I should also observe that Evans-Lombe J also held (page 132 e) the claims for unfair dismissal did not attract protection under section 19 (5) because those rights arose as a result of the provisions of the Employment Protection (Consolidation) Act 1978 and not under the relevant contract “albeit the compensation became due under the act is calculated by reference to such contract” that decision was never appealed.  A similar argument is capable of being maintained in respect of the protective awards claims as I shall set out in this judgment below. 
17.	The House of Lords varied the decisions below in respect of holiday pay there by excluding complete months of service expiring before the date of the administrator’s appointment and held that they were not liabilities that fell upon him under section 19 (5).  Apart from that they confirmed the decisions of the courts below.  This had potentially very large impacts on administration and led as I have said to amendments contained in the IA 1986.  Before I refer to those amendments however I should refer to important parts of the judgment of Lord Browne-Wilkinson who gave the lead judgment in the House of Lords.  He reviewed the history of the legislation.  A common law receiver appointed by the court was not the agent of the company and was therefore personally liable for any contract entered into by him.  A different position applied to receivers appointed out of court by the debenture holders which normally provided that the receiver was the agent of the company as a result of which contracts made by such a receiver after his appointment were made on behalf of the company as principal.  That was altered by section 369 (2) Companies Act 1948 which made a receiver appointed out of court personally liable on any contract entered into by him in the performance of his functions but gave him an indemnity out of the assets of the company.  He then of course would  be subrogated to the other party to the contract in priority to any debenture holders.  The section however did not deal with the liabilities of the receiver on contracts entered into by the company before his appointment.
18.	As Lord Browne-Wilkinson observed the appointment of a receiver by debenture holder (like a company going into liquidation) absent an express clause did not of itself put an end to the contract of employment.  As a result of a decision in Nicoll v Cutts [1985] BCLC 322 the insolvency bill going through Parliament was altered by the creation of section 44 of the Insolvency Act 1986 which introduced as regards receivers provisions which made administrative receivers appointed under the IA 1986 personally liable on contracts they entered into.  In addition the 1986 Act introduced for the first time the machinery of a court appointed administrator.  This was as a result of a desire to change the approach to companies which became insolvent and to create a “rescue culture” which seeks to preserve viable businesses.  That approach of course is continued with the Enterprise Act 2002 and its alterations.  As Lord Browne-Wilkinson’s judgment shows (page 452 a) as regards the adoption of a contract there is no distinction in the case of employees between the regime of administrative receivership under section 44 and administration under section 19.  One factor in coming to the decision he did was that he thought it was impossible to believe that Parliament intended to confer greater rights on the employee in a receivership.  His approach to the construction of sections 19 and 44 was set out at page 445 as follows:-
“The approach to construction
I cannot accept that this two-stage approach to the construction of ss 19 and 44 of the 1986 Act is correct. The words used by Parliament must be construed as a whole and in their context including, if it can be discovered, the mischief aimed at. In the present case the mischief aimed at (the inability of the employees to obtain unpaid wages payable in respect of services actually rendered to a receiver) is clearly identified. Parliament may intend to go further than remedying an identified mischief, but it is difficult to attribute to Parliament an intention not only to remedy an identified mischief but to create a new and greater one. 
In my judgment, in order to determine Parliament's intention it is necessary to look at the joint effect of adoption followed by the statutory consequences said to flow from it. If the words used by Parliament have a meaning which is consonant with its presumed intention not to frustrate the rescue culture and not to produce unworkable consequences, then in my judgment that construction should be adopted. If, having had regard to those factors, it is impossible to detect a more limited Parliamentary intention then the literal words of the sections must be given effect to. Only if the consequences of not departing from the literal meaning of the words produces an absurd result is it legitimate for the court to reject those words and seek to determine what Parliament in fact meant. I will therefore first consider the consequences of the decisions appealed from in somewhat greater detail, before turning to the proper construction of the statutory words”.
19.	Mr Trower QC who with Miss Felicity Toube appeared for the Administrator urged that approach upon me also concerning the construction of paragraph 99.  He submitted the provisions are to be construed against the backcloth of the rescue culture intended.   He submits that the words should be used consonant with that presumed intention not to frustrate the rescue culture and not to produce unworkable consequences.  Second if having regard to those factors it is impossible to detect a more limited intention then the literal words of the section should be given effect.  Only if the consequences of not departing from the literal meaning produces an absurd result is it legitimate for the court to reject those words and seek to determine what Parliament in fact meant.  Thus the literal words as I understand it should not be given effect to if they produce an absurd result.
20.	 I have had no evidence put before me to suggest what the intention of Parliament was behind paragraph 99.  Equally whilst I have had concerns expressed about the consequences of the decision against the Administrator it seems to me that those consequences are far less than the consequences contemplated by the Powdrill decision.  It should of course be appreciated that not-withstanding the approach to construction the House of Lords rejected the submission that a decision against the administrator was contrary to the construction to be arrived at against the backcloth of the rescue culture.
21.	The consequences of the Powdrill decision at first instance and the Court of Appeal led to the changes created by IA 1994 in respect of contracts adopted after 15th March 1994 but not before.
THE 1994 AMENDMENTS
22.	The revised provisions as a result of IA 1994 are as follows.
23.	First under 19 (6) where a contract of employment is adopted sums payable “to the extent that the liabilities are qualifying liabilities, [they shall] be charged on and paid out ofany such property as is mentioned in sub-section (4) and enjoy the same priority as any sums to which sub-section (5) applies”.  Once again the administrator is given 14 days to decide whether or not to adopt a contract of employment.  The qualifying liabilities are identified in 19 (7) and are wages or salary or contribution to an occupational pension scheme and in respect of services rendered wholly or partly after the adoption of the contract. Section 19 (8) expressly provides that any qualifying liabilities which represents payments for services rendered before the adoption are to be disregarded.
24.	For the purposes of those two subsections section 19 (9) deems wages or salary payable for a holiday or absence through sickness or a sum payable in lieu of holiday as being “wages or salary”.  In addition 19 (10) provides that the reference to wages in respect to a period of holiday includes any sums of which if they had been paid would have been treated in relation to the enactments related to social security as earnings in respect of that period.  
25.	I accept that the apparent purpose of the amendments to section 19 was to make an administrator liable only to make the identified payments when they arose during the period of the adoption of the contract.  That is in accordance with the rescue culture concept identified by Lord Browne-Wilkinson in my view.
26.	In passing I should refer to the decision of Lawrence Collins J in re Allders Department Stores Ltd [2005] EWHC 172 (Ch) in that case he held that redundancy or unfair dismissal payments were not “wages or salary” for the purposes of paragraph 99.  That decision followed the decision of Evans-Lombe J effectively at first instance in Powdrill.  A second argument under rule 2.67 was not relied upon by Mr Trower QC before me (just as he did not rely upon it in Allders).  The decision however in my view has no other assistance except to show that statutory payments are not made “under” the contract of employment (see 99 (5)).  Mr Reynold did not seek to argue that the statutory award in this case was payable under a contract.  His whole argument is that the two relevant payments are both wages or salary for the purposes of paragraph 99 as a result of the construction of paragraph 99 (6).
COMPARISON OF SECTION 19 WITH PARAGRAPH 99
27.	Under section 19 pension contributions are included  (19 (7)) and as I have said holiday or sick pay or sums payable in lieu of holidays are included and are deemed to be wages or salary.  Under paragraph 99 (6) once again holiday pay is included (a) sums in lieu of holiday are included (item (c)) and contributions to occupational pension schemes (item (e)).
28.	The major difference is item (d) which states “[“wages or salary” includes] (d) in respect of a period a sum which will be treated as earnings for that period for the purposes of an enactment about social security”.
29.	The entirety of the arguments has centered around that sub-paragraph.  I have (this is not a criticism) not been provided with any background material explaining how that provision came to be inserted.  It seems to me that the draughtsman intended to provide a shorthand way of marrying for the purposes of paragraph 99 as wages or salary anything that would be from time to time be identified as wages or salary for the purposes of the relevant social security legislation.  This seems to me to make sense.  It avoids confusion and everyone understands precisely what is intended.  If it is wages or salary for the purpose of one statutory regime it should also be wages or salary for the purposes of another parallel regime.
DEFENITION OF WAGES AND SALARY IN SOCIAL SECURITY LEGISLATION
30.	Mr Reynold points to paragraph 9 of the Social Security Benefit (Computation of Earnings) Regulations 1996 which provides as follows:- 
“Earnings of employed earners

 9(1)  Subject to paragraphs (2) and (3), "earnings", in the case of employment as an employed earner, means any remuneration or profit derived from that employment and includes— ”
 (a) any bonus or commission;
 (b) any payment in lieu of remuneration except any periodic sum paid to a claimant on account of the termination of his employment by reason of redundancy;
 (c) any payment in lieu of notice;
 (d) any holiday pay except any payable more than four weeks after the termination or interruption of employment;
 (e) any payment by way of a retainer;
 (f) any payment made by the claimant’s employer in respect of expenses not wholly, exclusively and necessarily incurred in the performance of the duties of the employment, including any payment made by the claimant’s employer in respect of— 
 (i) travelling expenses incurred by the claimant between his home and place of employment;
 (ii) expenses incurred by the claimant under arrangements made for the care of a member of his family owing to the claimant’s absence from home;
 (g) any award of compensation made under section 112(4) or 117(3)(a) of the Employment Rights Act 1996[18] (remedies and compensation);
 (h) any such sum as is referred to in section 112(3) of the Contributions and Benefits Act (certain sums to be earnings for social security purposes);
 (i) where— 
 (i) a payment of compensation is made in respect of employment which is not part-time employment and that payment is not less than the maximum weekly amount, the amount of the compensation less the deductible remainder, where that is applicable;
 (ii) a payment of compensation is made in respect of employment which is part-time employment, the amount of the compensation;
 (j) any remuneration paid by or on behalf of an employer to the claimant in respect of a period throughout which the claimant is on maternity leave or is absent from work because he is ill”.
           There is a comprehensive definition of what for the purposes of the regulations are earnings. It includes item (c) any payment in lieu of notice and item (h) which includes the protective award by reference to section 112 (3) (c) of the Social Security Contribution and Benefits Act 1992 (“SSCBA 1992”) by which a protective award is capable of being an employment protection entitlement.
31.	Therefore Mr Reynold says quite simply item (d) refers to an enactment about social security and the enactments and the statutory instruments made there under as set out above are enactments about social security.  In those regulations the two items which are the subject matter of the application before me are treated as earnings.  They are therefore correspondingly treated as wages or salary for the purpose of paragraph 99.  
32.	In my view that makes sense. It cannot be said to achieve an absurd result in my view if construed as Mr Reynold submits. In a supplemental argument Mr Trower QC suggested that the purpose of item (d) was to introduce earnings that are not earnings at all but are deemed earnings for the purposes of regulation 4.  Those areas are where a claimant cannot identify his earnings.  In such a case the adjudicating authority treats him as possessing such earnings as was reasonable in all the circumstance of the case having regard to the hours worked and the earnings paid for comparable employment.  The second case is where a person provides services for another person but that person makes no payment.  Unless it is established that the person for whom the service is provided is incapable of making the payment or it is reasonable for him to provide a service free of charge the “employee” is assessed as having received an income comparable to what would be a reasonable sum to be paid for those services.  
33.	Mr Trower says that is why item (d) refers to treated just like paragraph 4.  There are problems with the arguments.  It seems to me that the use of the word treated in a way contended for by Mr Trower QC is far too narrow.  Against that Mr Reynold was forced to acknowledge that if item (d) was intended to dovetail to the existing regulation (regulation 9) the draughtsman of paragraph 99 could not have had that regulation in front of him.  Had he have done so he would have noted that paragraph 99 duplicates (but not precisely) some of the items set out separately in regulation 9 see for example regulation 9 (d).
34.	Nevertheless I do not accept that a construction against the Administrator will go against the rescue culture.  In my view if the draughtsman had intended to have the limited effect contended for by Mr Trower QC he would have said so more explicitly by reference to regulation 4.  It seems to me that the wording of paragraph 99 (6) (d) should be given effect to as contended for by Mr Reynold.  It includes “in respect of a period” any sum which would be treated as earnings for that period for the purposes of a social security enactment.  In my view that is logical and understandable.  It would be unfortunate if items were treated differently under different heads of legislation.  
35.	Accordingly despite Mr Trower’s ingenious and compelling submissions I am not persuaded that the regulation is as he contends for on behalf of the Administrator.  I accordingly determine that wages, payments in lieu of notice and protective award payments for the period of the adoption of the contract (by virtue of paragraph 99 (5) (b)) are wages and salary for the purposes of paragraph 99 they are therefore payable in priority as provided in that paragraph.