Case - Krasner v McMath

[2005] 4 All ER 886,[2006] ICR 205,[2005] IRLR 995., Court of Appeal - Frederic Reynold QC

The administrators of two companies (X) and the employees of a company in administration (Y) in two appeals appealed against decisions regarding the priority to be attached to protective awards under the Trade Union and Labour Relations (Consolidation) Act 1992 s.189 and awards of pay in lieu of notice. In the case of Huddersfield Fine Worsteds Ltd, Re (2005) EWHC 1682 (Ch) the judge had decided that administrators were obliged to pay protective awards and payments in lieu of notice to employees, whose contracts of employment had been adopted, in priority to the expenses of the administration pursuant to the Insolvency Act 1986 Sch.B1 para.99(4) to (6) because those payments were a "liability arising under a contract of employment". In the case of Ferrotech Ltd, Re the judge took the opposite view. On appeal Y argued that para.99(5) should be read with para.99(6), that the effect of para.99(6)(d) was that protective awards were treated as "wages and salary", and once it was established that a protective award was wages and salary for the purposes of para.99(5), it followed that such a payment was treated by that paragraph as "a liability arising under a contract of employment". Furthermore, Y argued that by getting through the "gateway" of para.99(5)(c), a protective award would expressly be deemed to be or be treated as "wages or salary".

HELD: (1) In the light of the natural meaning of para.99(5) and (6) as reinforced by practical and policy considerations, a protective award did not fall within para.99(6)(d), and even if it did, would not have the consequence of bringing a protective award within the ambit of para.99(5)(c). It followed that such an award could not enjoy super-priority by virtue of para.99(5). Paragraph 99(5) required a liability to get through a "double gateway", namely that erected by the opening words as well as that erected by sub-para.(c), before it could be said to be within the ambit of that paragraph. Therefore even if a protective payment could satisfy the requirements of para.99(5)(c) by virtue of para.99(6)(d), that would not thereby render such a payment as one "arising under a contract of employment", when it would not otherwise do so. Where, as a matter of ordinary language, a provision imposed two separate conditions that had to be satisfied, it would require a very cogent case before one could conclude that satisfaction of one condition meant that the other condition was thereby to be treated as satisfied. (2) Payments in lieu fell into four categories as identified by Lord Browne-Wilkinson in Delaney v RJ Staples (t/a De Montford Recruitment) (1992) 1 AC 687 , Delaney applied. Payments in the first category, where an employer did not require an employee to work during his notice period and paid his wages attributable to that period in a lump sum, as a matter of ordinary language would be wages, whereas payments in the latter three would not be. In the light of the conclusion that payments in the first category were wages, there was no reason not to give the word wages in para.99(5)(c) its natural meaning. (3) Accordingly the appeal in the case of Huddersfield was allowed, and the appeal in the case of Ferrotech was dismissed save that any payments in lieu falling within the first category in Delaney's case were entitled to priority under para.99(4) and (5).

Judgment accordingly.

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