// High Court rules that Debenhams’ administrators could be liable for furloughed staff’s full wages
// The ruling could place thousands of jobs at risk
// Administrators from FRP Advisory may pursue an appeal against the judge’s decision
Thousands of jobs at Debenhams may be at risk after the High Court today ruled that its administrators could be liable for furloughed staff’s full wages.
The department store chain appointed administrators from FRP Advisory last week as it entered administration for the second time in the past 12 months.
Debenhams’ 142 UK stores remain closed in line with government-enforced lockdown orders and the retailer has said it will work to “re-open and trade as many stores as possible” when restrictions are lifted.
- Debenhams officially files for administration
- Debenhams files notice of intent to appoint administrators
- Debenhams fails to top-up pensions scheme as administration looms
Around 13,000 of its employees in the UK are currently being paid under the government’s coronavirus job retention scheme (JRS), which covers 80 per cent of the salaries of furloughed staff up to £2500 a month.
FRP Advisory said it was “necessary to ‘mothball’ the business during the Covid-19 pandemic in order to seek to rescue it in the months to come”, and that it wanted to continue paying furloughed staff under the JRS.
However, lawyers representing FRP Advisory have now said it may be forced to make “a large part of the significant number of employees of Debenhams” redundant if it is responsible for staff wage liabilities.
The administrators applied to the High Court for a declaration that the contracts of staff who had been furloughed prior to last week’s administration filing would not be “adopted” by FRP Advisory if they continued to pay 80 per cent of furloughed employees’ wages.
Under insolvency law, if an employee’s contract is “adopted” wage liabilities enjoy “super-priority status”, meaning they are payable before the expenses of the administration and the claims of creditors.
FRP Advisory alternatively applied for a declaration that any potential wage liability should be limited to the 80 per cent of wages which will be reimbursed by the government under the JRS.
However, following a remote hearing today, Justice Trower refused to make a declaration.
“I think it is likely that the participation by companies in administration in the JRS and the payment of equivalent amounts to furloughed employees… means that the contracts of employment… will have been adopted by the administrators,” he said.
During the hearing, FRPAdvisory’s barrister Tom Smith QC said if the contracts were considered to have been adopted, the administrators would have to decide “whether they are able to adopt the employment contracts of all or some of the furloughed employees, or – as seems more likely – will be compelled to make the majority of them redundant”.
Smith added that such a decision would have to be made before the end of the “14-day grace period” from the appointment of administrators on April 9.
He said that “unsurprisingly” Debenhams’ business has been “very severely impacted by the government-required closure of its retail estate”.
Smith also said that “some limited trading currently continues online”, amounting to just under 20 per cent of Debenhams’ usual trading revenues, but “even that trading is threatened with closure as a result of the Covid-19 measures”.
“There is significant uncertainty as to when this will change and when an exit from administration can be achieved,” he said.
Smith said Debenhams’ workforce “will have an important role in ensuring the viability of the future business and continued trading in the future”.
However, he added that FRP Advisory were “unlikely to be able to justify continuing to employ the furloughed employees… if there is exposure to liabilities for wages or salary – enjoying super-priority over other claims – over and above those that will be reimbursed under the JRS”.
The court heard that the total cost of Debenhams’ salary and benefits payments to employees was approximately £18 million a month prior to employees being put on furlough.
The court also heard that the retailer has “sufficient cash available to make the required payments for a period of at least the next payroll period, and possibly further periods”.
Smith submitted that allowing FRP Advisory to not adopt employees’ contracts would “ensure that employees continue to benefit from the JRS while Debenhams is in administration” and also allow the administrators “to consider and maximise Debenhams’ options for exiting administration, without adopting or dismissing any employees”.
After Justice Trower’s ruling, Smith indicated that FRP Advisory might pursue an appeal against the judge’s decision.
In response to the High Court ruling, Debenhams issued the following statement:
“The administrators are working with the existing management team to get the business into a position to re-open and trade as many stores as possible again when restrictions are lifted.
“In line with government guidelines, colleagues are being supported through the Coronavirus Job Retention Scheme until such time as our stores can reopen.
“In the meantime Debenhams continues to trade online and customer orders, gift cards and returns are being accepted and processed normally.”
with PA Wires