Law Report: Workers' insolvency rights clarified

Powdrill and another v Watson and others; Talbot and another v Cadge and another. House of Lords

Powdrill and another v Watson and others; Talbot and another v Cadge and another.

House of Lords (Lord Keith of Kinkel, Lord Browne-Wilkinson, Lord Mustill, Lord Woolf and Lord Lloyd of Berwick).

16 March 1995.

Under sections 19 and 44 of the Insolvency Act 1986 the administrator or receiver of a company adopted the whole of an employee's contract of employment if the employee continued in employment for more than 14 days after the appointment of the administrator or receiver, and had to give priority to liabilities under the contract incurred during the period of administration or receivership.

The House of Lords unanimously dismissed appeals by the joint administrators of Paramount Airways Ltd and the administrative receivers of Leyland Daf Ltd and Ferranti International Ltd from decisions that they had adopted contracts of employment within the Insolvency Act 1986.

The administrators and receivers who were appointed when the companies were in severe financial difficulties continued the companies' businesses as going concerns. Within two weeks of their appointment they informed the employees that they had not adopted the employees' contracts of employment with the companies. Some employees were subsequently dismissed or made redundant. They claimed that section 19, which related to administrators, and section 44, which related to administrative receivers, gave employees who continued to be employed the right to payments under their contracts of employment.

Jonathan Sumption QC, Patrick Elias QC and Mark Phillips (Wilde Sapte; Allen & Overy) for the administrators and receivers; Robin Potts QC and Richard Snowden (Burrough & Co) for the Paramount employees; Charles Purle QC and David Bean (Rowley Ashworth) for the Leyland Daf and Ferranti employees.

LORD BROWNE-WILKINSON said that if contracts were "adopted" the retained employees became entitled to super-priority, ahead not only of secured, preferential and ordinary creditors but even of the costs of administration, and in relation to receiverships, receivers became personally liable for all liabilities on contracts.

Under the Insolvency Act 1994, the liability of administrators and receivers on contracts adopted after 15 March 1994 was restricted, but the 1994 Act had no impact on contracts adopted before 15 March 1994. Adoption in sections 19 and 44 could only connote some conduct by the administrator or receiver which amounted to an election to treat the continued contract of employment with the company as giving rise to a separate liability in the administration or receivership.

The concept of adoption was inconsistent with an ability to pick and choose between different liabilities under the contract. The contract as a whole was either adopted or not. The contract of employment was inevitably adopted if the administrator or receiver caused the company to continue the employment for more than 14 days after his appointment.

Under section 19, the employees were entitled to payment in lieu of notice, including pension contributions in respect of the notice period. Liability for holiday pay referable to months of service expiring before the administrator's appointment were not incurred during the administration and the employee would only be entitled to a sum referable to the months of employment since appointment. The liability of a receiver was also restricted to liabilities incurred under the contract while he was receiver. The consequence of adoption was to give priority only to liabilities incurred during the administrator's or receiver's tenure of office.

Ying Hui Tan, Barrister