Scottish Court of Session Decisions

The current legislation in regard to receivers in Scotland is contained in chapter II of part II of the Insolvency Act 1986, as amended. The original provisions, which were contained in part II of the Companies (Floating Charges and Receivers)(Scotland) Act 1972, followed upon the recommendation of the Scottish Law Commission in their Report on the Companies (Floating Charges)(Scotland) Act 1961 (1970 Cmnd. 4336). The Report set out a number of arguments in favour of the introduction of receivers, namely that the appointment might in some cases revive the fortunes of a company and prevent unnecessary liquidation; the rights of the holder of a floating charge were weakened by his inability to take possession of, and realise, the security subjects without liquidation; and the lack of receivership powers in Scotland constituted a major difference between Scots law and English law, which would almost certainly lead to difficulties where Scottish and English companies were in the same group or under the same control (paras. 37 and 38).

Section 55(2) of the 1986 Act confers on the receiver, in addition to any powers given by the instrument creating the charge (subsection (1)), a number of powers set out in schedule II, in so far as these are not inconsistent with the instrument. These powers include:

In terms of subsection (3), the first and second subsections apply subject to the rights of any person who has effectually executed diligence on all or any part of the property of the company prior to the appointment of the receiver, and of any person who holds over all or any part of the property of the company a fixed security or floating charge having priority over, or ranking pari passu with, the floating charge by virtue of which the receiver was appointed.

Section 60 of the 1986 Act, with which this reclaiming motion is principally concerned, makes provision for the order of priority in regard to the moneys received by the receiver. It states:

In view of the arguments advanced in this case it is also convenient at this point for me to refer to the terms of section 57 of the 1986 Act which is concerned with the agency and the liability of the receiver for contracts. It states:

It may be noted that, unlike section 55 (along with schedule II) and section 60, which are in substantially the same terms as corresponding provisions of the 1972 Act, the present form of section 57 is the result of a considerable amount of legislative activity. Section 17(2) of the 1972 Act had provided that the receiver should be personally liable "on any contract entered into by him in the performance of his functions, except in so far as the contract otherwise provides". However, section 57(2) of the 1986 Act, in its original form, replaced this with the following:

The present subsections (3), (4) and (5) were also enacted at the same time. These changes, as well as similar changes in the equivalent English legislation, arose out of the decision of the Court of Appeal in Nicol v. Cutts [1985] B.C.L.C. 22, in which it was held that a receiver appointed under a debenture trust was not personally liable to an employee, whose contract of employment he had continued, for wages earned after his appointment, in respect that there was no new contract (see Powdrill v. Watson [1995] 2 A.C. 394 per Lord Browne-Wilkinson at page 441). The latter part of subsection (2), unlike the first part, was specifically limited to contracts of employment and was not subject to any provision of the contract to the contrary.

The present form of subsection (2), along with subsections (1A), (2B), (2C) and (2D), were introduced by section 3 of the Insolvency Act 1994. These amendments, and similar amendments to the equivalent legislation in England, were made in order to limit the extent of the receiver's personal liability, in the light of a number of English decisions. In the event it was held by the House of Lords in Powdrill v. Watson that under the pre-existing law the liability of a receiver who had adopted a contract of employment was restricted to liabilities incurred during the receiver's tenure of office.

The facts of the present case are in short compass. The pursuer was appointed the managing director of the first defenders in terms of a service agreement dated 25 September 1992. He was employed by them in that capacity from 28 September 1992. On 2 February 1996 the second defenders were appointed joint receivers of the first defenders. The pursuer continued to be employed as managing director of the first defenders until 29 February 1996 when he was dismissed by the second defenders without notice. The pursuer seeks, inter alia, a declarator that he is entitled to payment by the first defenders of a certain sum, which represents salary and other benefits in lieu of notice, together with interest thereon; that in respect of that sum he is a creditor in respect of a liability incurred by or on behalf of the second defenders as receivers of the first defenders in terms of section 60(1)(c) of the 1986 Act; and that he is entitled to be ranked accordingly. It is not in dispute that, subject to the question of quantification, the pursuer is a creditor of the company. Further, it is not in dispute that para. (c) of section 60(1) relates to claims of creditors of the company, as distinct from para. (d) which relates to claims by the receiver himself. The question at issue is whether the pursuer's claim falls to be regarded as relating to a liability of the company which was "incurred by or on behalf of the receiver".

Counsel for the pursuer submitted that a receiver could incur a liability on the part of the company not only by entering into a new contract on its behalf but also by adopting an existing contract to which it was party. Adoption required a positive act on his part. In the case of a contract of employment it would be sufficient if he indicated that the company would continue to pay the wages of the employee. If the receiver adopted a contract, he incurred all the liabilities which arose thereafter. It was not possible for him to adopt the contract only to some extent. Thus he incurred not only the obligation to pay debts but also the obligation to pay damages. This involved the incurring of a separate liability, which, in accordance with its new status, fell to be ranked under para. (c) of section 60(1).

Counsel for the pursuer went on to submit that it was incorrect to regard the adoption of a contract of employment as relevant only to the personal liability of the receiver under section 57(2). The basis of the pursuer's claim to a ranking would have been the same under the 1972 Act which made no special mention of contracts of employment. The 1986 Act simply recognised the concept of the adoption of an existing contract which was already the basis for a prior ranking. The 1986 Act enabled employees to make an additional claim under section 57(2). It had advantages for employees since the receiver would be likely to be solvent, and a claim against him personally was immediate and did not require to go through the process of ranking, let alone litigation. There was no reason why an employee should not be able to pursue a claim under both section 57(2), so far as it availed, and under section 60(1)(c). There was no reason why contracts of employment should be treated in any different way from other existing contracts of the company, such as for the supply of goods. It was important to bear in mind that a person who dealt with a company which was in receivership ran the risk of not being paid unless he obtained the benefit of a ranking under para. (c) of section 60(1). It was fundamental to the rescue of a company, as well as being for the benefit of the holder of the floating charge, that such a person should be accorded a ranking ahead of the holder of the charge.

In the present case it was a matter of admission by the defenders in their pleadings that the second defenders "adopted the service agreement within the meaning of section 57(1A) of the Insolvency Act 1986". The second defenders terminated the pursuer's contract of employment on behalf of the first defenders. Junior counsel for the pursuer submitted that the second defenders incurred a liability from the moment when they adopted the pursuer's contract of employment. Senior counsel for the pursuer concentrated on the proposition that they incurred liability by reason of the termination of the contract.

Counsel for the defenders submitted that section 60 required to be considered in the context of the statutory provisions as a whole. It was wrong to read it simplistically on its own. That section was procedural in nature. The order of priority which it set out was subject to variation by the instrument. Para. (c) of subsection (1) presupposed that the receiver had incurred a liability on the part of the company. He could do so by means of the use of his power to carry on its business, and he could bargain for the best arrangement which he could obtain in the interests of the discharge of his duties as receiver. Thus, for example, he could offer to enter into a new contract with a supplier on the basis that he undertook that the supplier would be paid, putting the account with the supplier next in line after the claims to which paras. (a) and (b) related. He could also give a similar undertaking to confer a priority status on a party to an existing contract with the company. This would enable the business to be continued while those who dealt with the company would know where they stood. Such arrangements were different from the passive or automatic "adoption" of an existing contract. "Adoption" was a discrete concept. It did not follow from the fact that a receiver had adopted a contract that he thereby conferred a ranking on the creditor under para. (c) of section 60(1). For a receiver to adopt a contract was merely to allow the company's liability to continue. It did not create a liability. The contract continued with the company. It was important to note that the priority conferred by paras. (a) and (b) of section 60(1) reflected the qualifications of the receiver's power to act which were contained in section 55(3).

It was accepted that theoretically a receiver could confer priority status under section 60(1)(c) upon a claim under an employment contract. However, the commercial reality was that he was highly unlikely to do so. Parliament had taken an alternative route to conferring a direct preference on employees under para. (c). It had chosen instead to extend protection to employees by making the receiver personally liable when he had adopted the contract of employment. Accordingly as a practical matter the position of employees in regard to existing contracts of employment was governed by section 57. Employees in the event looked to the underlying assets, since a receiver would not in practice adopt a contract of employment unless there were adequate assets to cover any personal liability which he incurred as a result of continuing the contract of employment. However, if the pursuer's submissions were correct, it was unnecessary for Parliament to introduce the personal liability of the receiver under the 1986 Act or to modify the provisions in regard to that liability by means of the 1994 Act, since the employees' claims would have all along qualified for ranking under para. (c) of section 60(1). Further, there appeared to be no temporal restriction upon the liabilities which would be covered by para. (c). It also had to be noted that in para. (e) came the claims of "certain preferential creditors". These included employees in respect of their remunerations, limited in point of time and capped by a statutory maximum. However, if the pursuer was correct, damages in lieu of notice, i.e. in respect of work which, because of the dismissal, had not been done, ranked under para. (c) ahead of such claims which related to work which had been done. The outcome of the pursuer's approach was that a number of creditors of the company would obtain enhanced rights, even though in a liquidation they would have no more than unsecured claims. Thus the pursuer's submissions led to bizarre and potentially unfair results. If the position was, as senior counsel for the pursuer submitted, that any act which triggered a liability was an "incurring" by the receiver for the purposes of para. (c), this would occur whenever the contract was terminated by him.

In addition to making submissions in regard to the terms of the legislation counsel for both parties referred to the reports in Hansard of the discussion at the time when the Bills which led to the 1986 and 1994 Acts were before Parliament. As regards the discussion before the Scottish Grand Committee on 15 July 1972 and the First Scottish Standing Committee on 27 July 1972 it was submitted for the pursuer that this showed that employees were to be treated in the same way as any other contracting party, with the result that there was no difference in principle between the consequences of adoption in either case. For the defenders it was submitted that if it had been conceived that employees had a right to "automatic ranking" under para. (c) of section 60(1), the statements made by the Minister on each occasion would have taken a very different form. As regards the discussion in the House of Commons on 21 March 1994 the defenders emphasised that it was plain from the statement made by the Minister that liabilities, other than "qualifying liabilities", arising from a contract of employment were regarded as qualifying only as unsecured claims against the company.

Counsel for the defenders also submitted that account should be taken of the position in England, since it was desirable that, so far as was possible, the law in Scotland should be to the same effect. Counsel pointed out that in the 1986 Act there was no direct counterpart in England to the provisions of section 60. However, provision was made in England for the personal liability of administrative receivers on contracts of employment. Section 44 was to the same general effect as to section 57. Similar provisions were made in section 37 in regard to other receivers and managers appointed out of court. A different approach was taken in the case of administrators, who had no true counterpart in Scotland. It was provided in section 19(5) that the adoption by them of a contract of employment would lead to a direct and prior charge on the property which was the subject of administration.

Counsel referred to the extensive discussion of these English provisions in Powdrill v. Watson, in which the leading speech was delivered by Lord Browne-Wilkinson. At page 452 he stated the following conclusions:

Counsel for the defenders pointed out that in the course of his journey towards the first and third of these conclusions Lord Browne-Wilkinson observed (at pages 445-446) that the practical consequences of holding that employees who were retained in employment were entitled to be paid in full, and in priority to all other creditors, not only for services actually rendered during the administration or receivership but also other sums not referable to such services to which they were entitled under their contracts of employment with the company, was to produce unjust and haphazard results which were inimical to the rescue culture. It was improbable that Parliament intended to produce unfair disparity between some employees and others, depending entirely on whether they were dismissed within 14 days of the receiver's appointment. In the result he reached the conclusion that whereas the contract of employment was inevitably adopted if the receiver caused the company to continue the employment for more than 14 days after his appointment (page 450), the liability of a receiver "on" any adopted contract should be read as restricted to liabilities incurred under the contract while he was receiver (page 451).

The issue in the present case should, in my view, be resolved by means of interpretation of the provisions of the 1986 Act which apply to receivers in Scotland.

There are significant differences between the functions and effects of sections 57 and 60. Section 57(2) creates a personal liability on the part of the receiver when he enters into a new contract or, as the case may be, adopts an existing contract of employment, despite the fact that he is acting on behalf of the company in doing so. Thus the receiver's action in continuing an existing contract of employment after 14 days have elapsed since his appointment gives rise to a separate liability, separate, that is, from that of the company. Section 60, on the other hand, does not create any liability on the part of the company or the receiver which would not otherwise exist nor does it create any authority for the creation of any such liability. It sets out the order of priority for liabilities, according to the category into which they fall.

It is plain that para. (c) of section 60(1) was intended to cover liabilities in regard to any new contract entered into by the receiver in the performance of his functions. So liabilities in regard to such a contract are to have priority over liabilities in respect of an existing contract which the receiver terminates at the outset. Thus a creditor in respect of a liability under the latter category of contract would not qualify for ranking under para. (c). His claim would fall to be treated as a claim by an ordinary creditor of the company, save to the extent that he qualified under para. (e).

What then is the effect of the receiver "adopting" an existing contract, whether it is a contract of employment or any other contract? The immediate difficulty is in giving meaning to that concept in any context other than the limited one in section 57 where it is used solely in connection with personal liability of the receiver. The only link which this has with section 60 is that the receiver's liability would qualify for ranking under para. (d). Para. (c) says nothing about the adoption of a contract, let alone the adoption of a contract of employment. It is of some importance to note that in Powdrill v. Watson Lord Browne-Wilkinson rejected a two-stage approach to the significance of "adoption", namely to ask, first, whether there had been an adoption of the contract of employment and second, what was the consequence of such an adoption. He stated:

He went on at page 449 to express the view that adoption in sections 19 and 44

These observations can equally be made in regard to the significance of "adoption" for the purposes of section 57. However, they demonstrate how different is the position in regard to para. (c) of section 60. That paragraph says nothing about the adoption of a contract, let alone one of employment. It can hardly be said that the receiver incurs a liability on the part of the company by "adopting" such a contract. The contract of employment is between the employee and the company and is unaffected in any sense. When the receiver pays the wages of the employee he is entitled to treat that expenditure as one which falls under para. (d) of section 60(1). As I have already said, it cannot have been intended that a creditor whose contract is terminated by the receiver at the outset would obtain any right to rank under para. (c). There is nothing in the terms of that paragraph to enable one to draw a distinction between those whose contracts are terminated at the outset and those whose contracts are terminated after they have been continued for some period.

Apart from these considerations it is necessary to keep in view the implications of the pursuer's approach. If the pursuer is correct, employees under contracts of employment which the receiver had continued would enjoy a remarkable preference under para. (c) over those whose contracts of employment the receiver had terminated at the outset. It would give rise to a similar disparity to that described by Lord Browne-Wilkinson in Powdrill v. Watson at pages 445-446. Furthermore, as I have narrated in my summary of the arguments, the pursuer's argument involves the result that the efforts which have been made to extend protection to employees under existing contracts of employment which were continued by receivers were for practical purposes unnecessary, since all along their claims would have had priority under para. (c) of section 60(1). It is of some importance to note that in his description of the history of the legislation Lord Browne-Wilkinson plainly treated the equivalent Scottish legislation in regard to the personal liability of receivers as having the same underlying intention as the corresponding provisions in England.

For these reasons I am satisfied that the pursuer's submissions are not well-founded. I move your Lordships to refuse this reclaiming motion. It is common ground that on any view, the Lord Ordinary's interlocutor was too widely expressed in dealing with the pursuer's second plea-in-law. In the circumstances I move your Lordships to recall the Lord Ordinary's interlocutor and to pronounce an interlocutor sustaining the defenders' fourth plea-in-law, repelling the pursuer's second plea-in-law so far as it relates to the question of ranking which is the subject of heads (2) and (3) of the first conclusion of the summons, and to refuse decree of declarator in terms of those heads.

I have had the opportunity of considering the opinion of your Lordship in the chair and find myself in complete agreement with its reasoning and conclusions. I agree that the reclaiming motion should be refused and that an interlocutor should be pronounced in the terms proposed by your Lordship.

I am in full agreement with the opinion of your Lordship in the chair, to which I wish to add only a few words of my own.

In Scotland, the office of receiver has been created by statute and, except to the extent that the relevant legislation admits of their regulation by the instrument creating the floating charge or by contracts entered into by the receiver, such matters as the receiver's powers, agency and liability for contracts are subject to a comprehensive statutory regime. I therefore agree with your Lordship that the issue in the present case should be resolved by means of interpretation of the provisions of the 1986 Act (as amended) which apply to receivers in Scotland. No doubt the approach to interpretation may be informed by the history of the legislation and the case law, so that the current legislation may be understood in the legal context in which it was enacted; and likewise, if it appears that Parliament had the same underlying intention in enacting the corresponding provisions applicable to English receiverships, regard may had to the construction placed on those provisions as an aid to the interpretation of their Scottish counterparts.

"Adopt" is a word with so many meanings, or shades of meaning, that its meaning in any particular instance must depend on the context in which it is found. In my opinion in the particular context of section 57 of the 1986 Act the adoption of an employee's contract of employment means, and is confined to meaning, that the contract is continued in force for more than 14 days after the appointment of the receiver. There may, of course, be various ways in which the contract is continued in force: section 57(5) contemplates in effect that, following the first 14 days after the receiver's appointment, adoption may be "by reason of anything done or omitted to be done" by him. So it is a question of the circumstances of the particular case whether a contract of employment is continued in force and thus adopted. But if it is adopted by being continued in force, and no more, that is all that can be said about it. That is to say, adoption as a concept of itself extends no further than the continuation in force of the contract of employment. It is for this reason that it is necessary for section 57(2) to go further, by imposing on the receiver personal liability, to the extent of any qualifying liability, on any contract of employment adopted by him. If adoption by itself amounted to the incurring of a liability by the receiver, the provisions in section 57 relating to qualifying liabilities would be impossible to reconcile with those relating to adoption. Moreover, the application of the ranking provisions of section 60 would produce unfair and anomalous results, with employees whose contracts of employment were continued being entitled to rank for all claims, and not merely those in respect of services rendered during the receivership, in priority to the claims of those employees whose contracts of employment were terminated by the receiver within 14 days of his appointment. Lord Browne-Wilkinson's approach in Powdrill v. Watson [1995] 2 A.C. 394 to the English provisions in the 1986 Act therefore appears to me to be applicable to the corresponding Scottish provisions.

The expression "liabilities...incurred by or on behalf of the receiver" in section 60(1)(c) must in my opinion be confined to new contractual obligations incurred by the receiver in the performance of his functions. It could apply not only to a new contract but also, depending on the particular circumstances, to the amendment of or innovation upon an existing contract, so long as, on a proper construction, a new contractual obligation was thereby incurred. Simply to continue an existing contract of employment in force and thereby to adopt it, as has happened here, does not involve the incurring of a new contractual obligation.

For these reasons, and for the reasons given by your Lordship, I would refuse the reclaiming motion and pronounce an interlocutor in the terms which your Lordship has proposed.