Disappointment for Debenhams: Court of Appeal JaRS with rescue culture of JRS

June 5, 2020

2 min read

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What's going on here?

The Court of Appeal upheld an earlier High Court judgment about Debenhams’ administration, ruling that placing employees on the Job Retention Scheme (JRS) amounts to an adoption of employment contracts.

What does this mean?

Following store closures in September (read here), Debenhams filed for bankruptcy in April for the third time this year (covered here).  Its administrators, advised by city firm Freshfields, asked the High Court whether their use of the JRS amounts to “adoption” of the employment contracts.  “Adoption” means wages are given “super-priority status”, over other liabilities (even administrators costs) under insolvency law.  Debenhams’ case follows a similar direction sought by the administrators of Carluccio’s (read about its administration here).  

 The High Court ruled in April that placing employees on the JRS amounted to adoption.  Debenhams’ administrators then took the case to the Court of Appeal, where it was given urgent status, requiring a decision to be made by a remote court within 2 weeks.  The Court of Appeal upheld the High Court’s decision, but added there are “good policy reasons” for excluding the JRS from the definition of “adoption”, although it was beyond the current law. 

What's the big picture effect?

The purpose of the JRS is to delay decisions on redundancies, until the business outlook has improved, as it is expected to  at the end of the scheme.  With that rescue purpose, the JRS may be accessed by companies in administration where it is reasonable to assume furloughed workers will be rehired.  Administrators typically have 14 days after appointment before any positive actions – such as paying wages or giving employees work – constitutes adoption of the employment contract..  Thus, administrators typically make redundancies within the first 14 days. 

Debenhams’ placed employees on furlough prior to appointing administrators, and the administrators did not change this status. Since employees don’t work and only receive wages because of the grant under the furlough scheme, and because it allows redundancy decisions to be delayed, Debenhams’ administrators argued they did not show any intention to adopt the contracts. However, the Court of Appeal ruled that by accessing the JRS, Debenhams had taken active steps to continue employment, adding that the administrators’ intention was not relevant.  

The Court found that the administrators had shown intention to adopt the contracts as: : 

  1. Employees will be paid according to their contracts;
  2. Employees remain bound by their contracts, subject to JRS requirements; and
  3. Making payments outside the order of priority to employees must be because the administrators consider it likely to help with the purpose of administration – in this case, a light-touch administration designed to see Debenhams through the crisis.

As wages not covered by the JRS such as holiday pay will become super-priority liabilities under this ruling, newly-appointed administrators may make redundancies or contract variations in the future, even with furloughed employees.  Debenhams employees won’t be affected as a result of the decision.  The government may amend the scheme so that holiday pay can neither be taken nor gained. 

Report written by Sophie Belcher

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