Law Report: Employees' contracts adopted: Powdrill and another v Watson and another - Court of Appeal (Lord Justice Dillon, Lord Justice Leggatt and Lord Justice Henry), 22 February 1994

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Administrators of a company who continued to pay the company's employees in accordance with the company's contracts of employment and who had not negotiated new contractual terms of employment had adopted the contracts of employment even though they expressly denied such adoption. Therefore when the administrators summarily terminated the contracts, the employees' contractual entitlements to pay in lieu of notice and holiday pay were to be paid out of the company's property in priority to any charge for the administrators' remuneration and expenses and any floating charge pursuant to section 19 of the Insolvency Act 1986.

The Court of Appeal dismissed an appeal by the joint administrators of Paramount Airways Ltd from Mr Justice Evans-Lombe's decision that two employees of the company were entitled to claim payments under their contracts of employment under section 19(5) of the Insolvency Act 1986.

The administrators of the company, who were appointed on 7 August 1989, wrote to the company's employees on 14 August saying their salaries and other sums to which the employees were contractually entitled under their contracts of employment would be paid but that the administrators were not adopting the contracts of employment. The administrators hoped to sell the company's business as a going concern. In September, they wrote to the employees and repeated that the administrators were not adopting any contracts of employment. However, a buyer for the business was not found and in December letters of dismissal were sent terminating their contracts summarily from 30 November. Two employees petitioned under the Insolvency Act for their entitlement under their contracts of employment to pay in lieu of notice and holiday pay.

Under section 19 of the Insolvency Act what an administrator does within 14 days of his appointment cannot be relied on as showing he has adopted a contract of employment and any sums payable under contracts of employment adopted by an administrator are to be paid out of any property of the company in priority to any charge for administrator's remuneration and expenses or a floating charge.

The administrators claimed they had not adopted the contracts of employment.

Michael Crystal QC, Mark Phillips (Wilde Sapte) for the administrators; Robin Potts QC, Richard Snowden (Burrough & Co, Cardiff) for the employees.

LORD JUSTICE DILLON said the administrator was deemed to act as the company's agent and was not personally liable under contracts he made or adopted. If the administrators continued substantially after 14 days to employ staff and pay them in accordance with their previous contracts they would be held impliedly to have adopted those contracts of employment.

The whole function of administration would normally require that the administrators carry on the company's business. They would therefore want employees. But if they wanted to use the existing staff, they must either adopt the existing contracts or negotiate new contracts. If they were going to negotiate new contracts they must not be sham.

The letter of 14 August was too obscure to be construed as an offer of employment on other terms. The mere assertion by an administrator that he was not adopting the contract was mere wind with no legal effect, because adoption was a matter not merely of words but of fact. Here all the facts pointed to the administrators having adopted the contracts. It was therefore unnecessary to consider what might or might not be permissible to include in a contract in lieu of a subsisting contract.

The employees were entitled to have salary in lieu of notice, pension contributions, and liability for holiday pay under the contracts of employment adopted by the administrators paid out of any property of the company in the custody or under the control of the administrators.

Lord Justice Leggatt concurred and Lord Justice Henry agreed.