The sword of Damocles that finally fell over the City

The Paramount case has hung like a sword over the heads of receivers, bankers and the financial community ever since the Court of Appeal's decision in Feburary 1994 overturned eight years of accepted practice.

Michael Heseltine, President of the Board of Trade, went some way towards solving the problem last March when he passed emergency legislation to save receivers from the effects of the Paramount ruling. But he refused pleas to make his action retrospective, leaving receivers and banks with claims from employees of bust companies running back to 1986.

The case turns around the responsibility of receivers towards employees in companies which have collapsed and been put into receivership. Until the Paramount case everyone had assumed that the Insolvency Act 1986, which sought to build a "rescue culture" for troubled companies, allowed receivers to sack employees as and when they needed to, without paying out compensation and pension contributions under their contracts of employment.

An anomaly was noticed at the time. The Act seemed to indicate that unless administrators sacked employees within two weeks, or negotiated a new employement contract with them, then the administrators had "adopted" all the workers' rights under their original contract.

Administrators and receivers were convinced, however, that a 1987 court case, Specialised Mouldings,got them off the hook. This case suggested that a letter from the receiver setting out the employees' new rights and obligations until the business was either sold or liquidated, would be sufficient.

Then in 1991 two airline pilots sacked from Paramount Airways after it went into administration in 1989 challenged this interpretation of the law in the courts.

The pilots lost in the first instance but won on appeal. Politicians, unions and business leaders all realised the damaging potential of this ruling. Mr Heseltine brought in an emergency Bill just weeks after the Paramount ruling - but he refused to make it retrospective.

Administrators of Paramount were joined by receivers from Ferranti and Leyland Daf in an appeal to the Law Lords to find out whether they would face retrospective claims.