Statutory redundancy claims are not administration expenses

On 10 February 2005 the High Court ruled that any statutory liabilities for redundancy or unfair dismissal of employees of a company in administration are not payable as an expense of the administration. (Allders Department Stores Limited (in administration), Allders Stores Limited (in administration), Allders Limited (in administration) [2005] EWHC 172 (Ch)).

Background

Administrators appointed over the Allders group of companies wanted to dismiss a large number of employees. The administrators sought directions from the court to clarify whether employee claims for statutory redundancy payments or statutory unfair dismissal arising from the dismissals would be payable as an administration expense. If they were an administration expense, they would be payable out of the companies' assets before the remuneration of the administrators, and before all the other creditors (except for fixed charge holders). This is an important point of general interest in administrations involving a large work force. Paying the statutory employee claims as an administration expense could potentially exhaust the available assets, leaving the administrators and the company's other creditors with little or nothing.

Under the pre-Enterprise Act 2002 administration regime, statutory redundancy and unfair dismissal payments were not considered to be administration expenses. Some of the claims (specified in the legislation) were preferential and the remainder unsecured. However the Enterprise Act 2002 reforms expanded the definition of administration expenses and introduced some doubt as to whether these statutory employee claims should be treated as administration expenses.

The Insolvency Service for the Department of Trade and Industry put the argument for the employees.

Summary of the Judgment

Holding in favour of the administrators, Mr Justice Lawrence Collins' conclusions can be summarised as follows:

1. The statutory priority of payments in Schedule 6 of the Insolvency Act 1986 gives certain redundancy payments (but not all statutory employee claims) preferential status in insolvencies. This implies that the remaining statutory employee claims have a priority that is lower than preferential. It would be inconsistent if these statutory employee claims were in fact administration expenses (because that would give them a higher priority than preferential).
2. Counsel for the Insolvency Service relied in argument on the case of Re Toshoku Finance UK plc [2002] UKHL 6 (which relates to liquidation expenses). Mr Justice Lawrence Collins held, however, that the Re Toshoku case does not require any liability that is not provable as a debt to be an administration expense.
3. Elevating statutory redundancy and other statutory employment payment liabilities to the status of an administration expense would have such adverse policy consequences on the administration regime that it is impossible to see that such a result could have been intended.

Comment

This case usefully removes the ambiguity in relation to administration expenses that was introduced by the Enterprise Act 2002, and confirms that the pre-Enterprise Act status quo has been maintained. These statutory redundancy and unfair dismissal claims will, as before the Enterprise Act 2002 was introduced, to a limited extent be accorded preferential status, and otherwise be unsecured.