Law Report: Receivers adopted contracts: Re Leyland Daf Ltd; Re Ferranti International plc - Chancery Division (Mr Justice Lightman) 26 July 1994

Administrative receivers of a company who continue to pay the company's employees in accordance with the contracts of employment with the company adopt the contracts and are personally liable on the adopted contracts, unless the administrative receivers enter into new contracts with the company's employees excluding personal liability.

Mr Justice Lightman declared that the administrative receivers of Leyland Daf and Ferranti had adopted certain contracts of employment within section 44 of the Insolvency Act 1986.

In each case the receivers, on their appointment, wrote to the employees of the company stating that the receivers would continue to pay remuneration in accordance with the contracts of employment but that they had not adopted and would not adopt the contracts. Certain employees were subsequently made redundant. The questions raised by the receivers were whether the contracts of those made redundant were adopted by the receivers within section 44 so that the receivers were personally liable to make payment for damages for wrongful dismissal, contractual notice, pension benefits, medical insurance, holiday pay and redundancy.

Patrick Elias QC and Mark Phillips (Wilde Sapte; Allen & Overy) for the receivers; Charles Purle QC and David Bean (Rowley Ashworth) for the redundant employees.

MR JUSTICE LIGHTMAN said that the provisions in sections 44 and 19 of the Insolvency Act were made to overrule the effect of Nicoll v Cutts (1985) BCLC 322, where the court held that it had no power to order the receiver to pay for services provided by an employee.

The first issue was the meaning of 'adoption' in section 44. Adoption in cases of receivership had a special meaning. In the context of section 44 the word 'adopted' must be given the meaning 'treated as continuing in force'. The construction in Powdrill v Watson (1994) ICR 395 was to that effect, namely the express or implied acceptance of the contract's continuance, namely acts or acquiescence indicative of the intention to treat the contract as on foot.

There could be no dispute that the contracts of the employees were adopted by the receivers. The protestations by the receivers that they were not could not negate or qualify the legal effect of their actions.

There was nothing to prevent receivers in new contracts of employment contracting out of personal liability. For exclusion of the statutory incident of personal liability, what was required was a contract to that effect between the receiver and the affected employees and nothing else would do. But the court should be slow to infer that the employees had entered into such contracts surrendering their statutory rights unless it was plain that they had given a full and informed consent.

Since the receivers' letters excluding personal liability had no immediate practical effect on the employees, it would be totally unrealistic and unfair to treat the continued performance by the employees as an acceptance of a new contract by way of variation of their contract of employment excluding personal liability.

Parliament plainly did not intend that liability in respect of adopted contracts should be avoided by anything less than liability under new contracts entered into by the receiver.

The liabilities assumed by the adopting receiver were all liabilities whenever incurred of whatever kind under the adopted contract and attached at and from the date of adoption and was not retrospective to the date of appointment.

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