Insolvency practitioners in London are worried that attempts to rescue at least four big companies using the administration procedure may now collapse with the loss of all jobs because of the decision.
Receivership specialists described the decision in the Paramount Airways case as stunning. It centres on the ability of administrators to decide whether they want to take over the contracts of employment held by employees in companies they are sent in to run.
There is also a fear that the judgement will apply to receiverships, which are far more numerous.
Under the Insolvency Act 1986 administrators and receivers have 14 days during which they are free from the liabilities produced by employees' contracts of employment.
But this week's ruling says that if they keep people on during this 14- day period and pay them, this amounts to adopting the existing employment contracts.
In other words, unless administrators fire everyone immediately they will be personally liable for redundancy costs, and claims for unfair or wrongful dismissal.
This will make administrations vastly more expensive. If the judgement is extended to receiverships as well, receivers will choose to sack employees rather than try to keep businesses trading and sell them on.
Colin Bird, a partner in Price Waterhouse and chairman of the Society of Practitioners of Insolvency's technical committee, said: 'Reports of the judgement appear to disclose a serious situation, which puts a spoke in the wheel of our ability to rescue businesses.
'The profession will be making an urgent approach to the Government, but we are waiting for the judgement to be published formally (on Monday) before formulating our response.
'In any receivership that starts now, any receiver is almost bound to come to the view that he must fire the workforce - which is not what is required.'
The judgement on the Paramount Airways case was passed down by the Right Honourable Lord Justice Dillon in mid-week, but the text of his judgement will not be available until Monday.
The decision will also affect banks since if fewer companies are rescued their profits will be hit by higher bad debts.
If the judgement is as harsh as the insolvency profession fears, individual receivers could face claims stretching back to 1986, when the legislation came in, since receivers are personally liable for the finances of their cases.
Roger Powdrill and Jo Atkinson of Touche Ross were appointed administrators to Paramount Airways in 1990, and there have been three sets of litigation on the case since then.
The judgement comes at a time when the Government is considering changes to insolvency legislation in order to promote a rescue culture. Receivers have relied since 1987 on a previous ruling related to Specialised Mouldings, a company that went into receivership.
This was taken to confirm that letters from receivers to employees could be used in the 14-day period to tell employees how their terms of employment would be changed under the receivership.
This meant receivers could retain staff and keep the business trading, without taking over the liabilities of previous contracts of employment.
It is understood that this week's judgement prevents administrators from using such letters, and the fear is that this ruling will extend to receiverships.
Serena Tierney, a senior assistant with the London solicitors Brecher & Co, said: 'If it is the case that merely by keeping employees on and paying them out of the administration's funds, the administrator is going to be taken to have adopted the contracts of employment, this will have a serious impact on the cost of corporate rescue.
'It may mean that, where some companies could have been rescued, it now will not be feasible to do so.'Reuse content