The Insolvency Act 1986 says, among other things, that administrators' claims for pay and expenses should generally have priority over any other debts a company might have.

In Krasner v McMath and two other cases (2005, IRLR 995; IDS 792), the Court of Appeal has said that protective awards and payments in lieu of notice do not take priority over money and expenses owing to the administrators.

What was the background?

In July 2005, Krasner, the administrators of Huddersfield Fine Worsteds Ltd and Globe Worsted Co Ltd asked the High Court to clarify the priorities in which they had to make certain payments under the Insolvency Act.

The Judge held that, as administrators, they had to pay protective awards and payments in lieu of notice to employees (whose contracts had been "adopted"), before paying their own administration expenses.

Two weeks later, however, a Judge considering an application by Duggins, the administrators of Ferrotech Ltd and Granville Technology Group, came to the opposite conclusion.

What is the relevant law?

Under paragraph 99(3) of Schedule B1 to the Insolvency Act, administrators can generally claim priority for their expenses over other company debts.

However, paragraphs 99(4) to (6) state that any wages or salary due to be paid under a contract of employment that has been "adopted" by the administrators have to be paid before their expenses. This gives them what is known as "super priority" status.

The Judge in Krasner decided that protective awards and payments in lieu of notice fell within para. 99(6)(d), saying they should be treated as wages or salary under social security legislation and therefore qualified for priority.

The Judge in Duggins, on the other hand, decided that the reference to "a period" in para. 99(6)(d) was to a period of holiday or a period of illness, and did not, therefore, cover protective awards or payments in lieu of notice.

The issue to be decided in the Court of Appeal, therefore, was whether protective awards and payments in lieu of notice are "wages and salary".

What did the Court of Appeal decide?

Protective awards: the Court of Appeal said protective awards could not take priority over administration expenses because they did not satisfy two vital conditions. Firstly, they did not constitute the term "wages or salary" in the legislation, because reference to "a period" in para 99(6)(d) was to a period of holiday or a period of illness. Secondly, the right had to come out of a contract of employment, whereas these came from a statute.

Payments in lieu of notice: Relying on the case of Delaney v Staples (1992, IRLR 191), the Court of Appeal said that wages can only attract "super priority" status if certain conditions are satisfied. Namely, if the employer has given proper notice of termination to the employee, told them that they do not need to work until the termination date and given them the wages for the notice period in a lump sum. This was the only type of payment that could be characterised as "wages" under paras 99(5) and (6).


INSOLVENCY ACT 1986, SCHEDULE B1

Paragraph 99(5)
"Sub-paragraph (4) shall apply to a liability arising under a contract of employment which was adopted by the former administrator or a predecessor before cessation, and for that purpose -
(b) no account shall be taken of any liability which arises, or in so far as it arises, by reference to anything which is done or which occurs before the adoption of the contract of employment, and
(c) no account shall be taken of a liability to make a payment other than wages or salary."
 
Paragraph 99(6): 'wages or salary' includes
(a) a sum payable in respect of a period of holiday (for which purpose the sum shall be treated as relating to the period by reference to which the entitlement to holiday accrued)
(b) a sum payable in respect of a period of absence through illness or other good cause
(c) a sum payable in lieu of holiday
(d) in respect of a period a sum which would be treated as earnings for that period for the purposes of an enactment about social security.