Goal to Leeds

An insolvent football club has helped clarify the rules on administrators' liability for payments under contracts of employment

The Journal, October 2007, page 38

In the May 2005 Journal I commented on various recent decisions on the priority of payment of expenses in administration pursuant to the Insolvency Act 1986, sched B1, para 99, particularly the definition of “wages or salary” as discussed and reported in Re Allders Department Stores Ltd [2005] 2 All ER 122 and Re Huddersfield Fine Worsted Ltd [2005] 4 All ER 886.

The matter has recently been revisited by the administrators of Leeds United FC (see Re Leeds United Association Football Club Ltd: Fleming v Healy [2007] All ER (D) 385). On their appointment by a qualifying charge holder, the administrators immediately sought agreements with the club’s footballers to vary their contracts of employment so that all or part of the remuneration due was deferred until the administrators could be confident that they could pay all or part of the deferred remuneration either as an expense in the administration or under the TUPE regulations on the sale of the club’s business to another company. Several players did not reach agreement with the administrators within the 14 days following the administrators’ appointment. Readers will be aware that administrators will be held to have adopted the staff employment contracts of the company in administration if they have not taken steps within that period which are not compatible with adoption.

The Leeds dilemma

The problem facing the administrators was that, if they did not adopt the contracts of employment, the club would lose its most valuable assets, as the players would be free to move to another club which under Football Association rules would have no obligation to pay Leeds United any compensation or transfer fee. On the other hand, without agreement on a deferral, if the contracts were adopted the club might subsequently incur substantial liabilities if the players were not paid. Accordingly, the administrators sought a declaration that any liabilities for damages for wrongful dismissal to footballers employed by the club were not payable as expenses of the administration, were not payable by reason of the provisions of para 99(4) to (6) inclusive of sched B1, and were not “necessary disbursements” within rule 2.67(1)(f) of the Insolvency Rules 1986 (as amended). The players did not appear.

Briefly, para 99(4) provides that a sum payable in respect of a debt or liability arising out of a contract entered into by the administrator is payable in priority to the administrator’s remuneration and expenses and also in priority to any floating charge creditor. Subparagraph (5) applies subpara (4) to a liability arising under a contract of employment adopted by the administrator, but also provides that no account shall be taken of a liability to make a payment other than wages or salary. By subpara (6), “wages or salary” includes holiday pay, sick pay and contributions to occupational pension schemes. The question was therefore whether, in addition to these matters, “wages or salary” includes sums payable as damages for wrongful dismissal.

Normal meaning

As Pumfrey J stated in the Leeds case, para 99(6) is in no sense a definition of “wages or salary”. He therefore referred back to Delaney v Staples [1992] 1 AC 687, where the House of Lords considered the meaning of “wages” in s 7 of the Wages Act 1986. Their Lordships had considered the word in its normal sense, divorced from the special definition in s 7. Pumfrey J pointed out that whilst the opening words of subpara (5) were wide, applying subpara (4) to any liability arising under the contract of employment, the effect of subpara (5)(c) was to restrict the provision to payments of “wages or salary” alone, that term then being broadened to include the matters itemised under subpara (6).

In his view this structure strongly suggested that the words “wages or salary” were being used in para 99 in their normal meaning. A payment in respect of unfair dismissal was a damages payment for breach of contract and evidently not wages, which following Delaney was payment for work done or to be done under the contract of employment. The judge therefore adopted the ratio of Huddersfield Fine Worsted and came to the same conclusion as that reached by Lawrence Collins J, as he then was, in Allders Department Stores.

The judge then considered an argument that statutory liabilities for redundancy payments or unfair dismissal claims would count as “necessary disbursements” for the purpose of rule 2.67(1)(f) of the 1986 Rules (which apply only in England). In such an event they would not have super priority but would rank in priority to ordinary creditors. Again the judge followed Lawrence Collins J, noting that David Richards J had agreed with him in Trident Fashions (Exeter City Council v Bairstow), on which see the discussion in the Journal, April 2007, 43.

Alistair Burrow, Head of Recovery, Tods Murray LLP