United Kingdom Employment Appeal Tribunal

BAILII case number: [1994] UKEAT 867_93_3003

Appeal No. EAT/867/93

EMPOLYMENT APPEAL TRIBUNAL

58 VICTORIA EMBANKMENT, LONDON EC4Y 0DS

At the Tribunal

On 30th March 1994

Judgment delivered on 19th May 1994

Before

THE HONOURABLE MR JUSTICE MUMMERY (PRESIDENT)

MR T S BATHO

MR P DAWSON OBE

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MRS A M DOEGAR          APPELLANT

(1) HERBERT MUELLER LTD (IN RECEIVERSHIP)

(2) SECRETARY OF STATE FOR EMPLOYMENT          RESPONDENTS

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Transcript of Proceedings

JUDGMENT

Revised


 


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APPEARANCES

For the Appellant MR R C DOEGAR

For the Respondents (1st) MR G GUNSTONE

Solicitor

Actons

2 King Street

NOTTINGHAM NG1 2NX

(2nd) MR N GARNHAM

(of Counsel)

The Treasury Solicitor

Queen Anne's Chambers

28 Broadway

LONDON SW1H 9JS


 


MR JUSTICE MUMMERY (PRESIDENT) Introduction This appeal concerns a point of topical interest: in what circumstances may an administrative receiver be held personally liable by reason of his adoption of a contract of employment made between a company in receivership and a person claiming to be an employee of that company?

The point arises in an appeal from a decision made at a preliminary hearing by the Chairman of the Industrial Tribunal held at Nottingham. For reasons notified to the parties on 6th October 1993, the Chairman made an order that Mr M V McLoughlin, in his capacity as administrative receiver of Herbert Mueller Ltd ("the Company"), be dismissed from proceedings brought against him by a director of the Company, Mrs A M Doegar. She claimed to be an employee of the Company and therefore entitled to redundancy payments. The Chairman order Mr McLoughlin to be dismissed from the proceedings because, in his view, he had not adopted any contract of employment that may have existed between Mrs Doegar and the Company. The Chairman ordered Mrs Doegar to pay £500 to Mr McLoughlin in respect of the costs of his application to be dismissed from the proceedings. He also ordered the proceedings to continue as against the Company, with the Secretary of State for Employment intervening.

Mrs Doegar appeals that part of the order which dismissed Mr McLoughlin from the proceedings and required her to pay £500 costs. At the hearing before the Industrial Tribunal and on this appeal Mrs Doegar was represented by her husband, who is a chartered accountant and was Chairman of the Company.

Present state of Proceedings

It is first necessary to view this appeal in the context of the entire proceedings instituted by Mrs Doegar.

(1) On 4th June 1993 Mrs Doegar presented her complaint to the Industrial Tribunal in the form of a letter dated 2nd June written by her then solicitors, Denison Till. Her case was framed in the alternative: first, against Mr McLoughlin personally for having adopted her claimed contract of employment with the company; and, secondly, against the company itself. Mrs Doegar's case was that she had been employed by the company since 27th November 1979. Mr McLoughlin was appointed administrative receiver of the company on 4th December 1992. He took no action formally to dismiss her until 17th February 1993, even though, "whilst acting as the reporting accountants to Herbert Mueller Ltd, the receivers were aware of the Applicant's employment from at least June 1991 onwards", had access to all the company's statutory books and minutes of meetings and would have been aware of the Board's resolution on 11th November 1991 to continue her employment. She claimed that her role in the company involved development of management contacts within the Herbert Mueller Group as well as general business contacts. She claimed to have been closely consulted by the Chairman in connection with financial and legal matters affecting the company or its directors. She claimed to be involved in accounting and book-keeping and to have administered various property transactions on each of Herbert Mueller's changes of office. In those circumstances she was entitled to a redundancy payment in respect of her dismissal on 17th February 1993, either from Mr McLoughlin personally or from the company.

(2) On 23rd June 1993 the solicitors acting for Mr McLoughlin, Actons, wrote denying that Mrs Doegar was an employee of the company or that Mr McLoughlin as Receiver had adopted any contract of employment. The solicitors asked the Industrial Tribunal for a preliminary ruling on the issue of the alleged adoption of the employment contract by the Receiver and for joinder of the Secretary of State for Employment as a party. The company was insolvent and, if Mrs Doegar was an employee of the company, then any claim for redundancy payments would be met by the Department of Employment pursuant to S.122 of the Employment Protection (Consolidation) Act 1978.

(3) On 15th July 1993 the Secretary of State intervened in the proceedings to resist Mrs Doegar's claim. By a letter dated 24th September 1993 the Secretary of State admitted that the company was insolvent, but did not admit that Mrs Doegar was an employee of the company, or that she was entitled to receive redundancy payments under S.106 of the 1978 Act and put her to proof of her claim.

(4) The Secretary of State did not take any part in the hearing before the Chairman of the Industrial Tribunal at Nottingham on 16th September. It was made clear by the Chairman at that hearing that he would assume, without deciding, in Mrs Doegar's favour that she had a contract of employment with the company.

(5) After the intervention of the Secretary of State in the proceedings Mr Doegar made various applications on behalf of his wife that the Secretary of State should provide further particulars and discovery. Strictly speaking those applications should have been made to the Industrial Tribunal, but they were made to this Tribunal. In order to avoid waste of time and costs, we have, by agreement between the parties, made directions for the discovery of documents, but have declined to make any order on the request for particulars. Apart from brief submissions on those interlocutory applications, the Secretary of State has taken no part in this appeal.

The only issue on this appeal is whether the Chairman of the Tribunal erred in law in deciding to dismiss Mr McLoughlin from the proceedings on the ground that he had not adopted any contract of employment which may have existed between Mrs Doegar and the company.

The Facts

The facts set out in the Industrial Tribunal's decision and the agreed documents may be conveniently summarised as follows.

(1) The company was the holding company in a group of companies engaged in mechanical and electrical engineering, including MEI Engineering Plc and Sheppee Ltd. Mr Doegar was the Chairman of the company. Mrs Doegar, whose maiden name was A M Herbert, was a Director.

(2) In June 1991 Messrs KMPG Peat Marwick McLintock undertook, on behalf of the National Westminster Bank, a full independent review of the group of companies. The National Westminster Bank had been granted a debenture over the assets of the company. A further review was carried out in November 1992.

(3) On 4th December 1992 Mr McLoughlin of KMPG Peat Marwick McLintock was appointed Joint Receiver by the National Westminster Bank. The other Receiver was Mr M A Shaw of the same firm.

(4) On 4th December 1992 Mr McLoughlin, as joint Administrative Receiver of Sheppee Ltd wrote a letter to Mr Doegar and others informing the recipients of his appointment as joint Administrative Receiver. He stated that, as the company was no longer in a position to make payments for services rendered under the recipient's contract of employment, employment by the company was terminated with immediate effect. The letter pointed out that the recipient might be entitled to redundancy payments. It appeared that a copy of that letter was not sent to Mrs Doegar as the Receivers did not know that she was an employee of the company.

(5) On 7th December 1992 Mr McLoughlin sent another letter, as Administrative Receiver of Sheppee Ltd, stating that he had been appointed joint Administrative Receiver and that it was his intention for the time being, as the company's agent, to permit the company to continue to trade whilst he assessed the situation generally. He also wrote -

"Since I am acting as the agent of the company your terms of employment will remain unaltered by my appointment and you will continue to be employed by the company and to be paid as previously. Whilst I cannot give any assurances as to the long term prospects for the company nor can I accept any personal liability in respect of any claim which you may now, or in the future, have arising out of your employment by the company or its termination, I shall be exploring every possible avenue to try to ensure that your job will be safeguarded.

In the meantime I shall be pleased if you will continue about your duties in the normal way."

It appears that the Receiver did not sent a copy of this letter to Mrs Doegar, for the same reason that he had not sent her a copy of the letter of 4th December.

(6) By a letter dated 2nd January 1993, addressed to Mr McLoughlin as Administrative Receiver of the company, Mrs Doegar stated that she had not received her pay for the last two months and asked

"Please will you send it, together with my payslip."

Mr McLoughlin's case is that he did not receive that letter.

(7) On 7th January 1993 Mr McLoughlin, as Receiver of the company, wrote to Mrs Doegar under her maiden name and in her capacity as a director of the company. He asked for her comments on various matters relevant to a report which he was preparing under S.7(3) of the Company Directors Disqualification Act 1986 and under S.235 of the Insolvency Act 1986.

(8) On 5th February 1993 Mrs Doegar's solicitors, Denison Till, wrote to Mr McLoughlin claiming that Mrs Doegar had been in employment of the company as manager at the salary of £36,000 per annum; that no steps had been taken to terminate her employment; and that she had not been paid her salary for the months of November and December 1992 and January 1993. Immediate payment of the sums due was demanded.

(9) The response of the solicitors for the Administrative Receivers on 17th February 1993 was that they did not accept that Mrs Doegar was a full time manager of the company. Without prejudice to that contention, she was given formal notice, on behalf of the company in receivership, that any alleged employment was terminated forthwith. In the letter the solicitors asked for information about the alleged contract of employment.

After Mrs Doegar had presented her complaint to the Industrial Tribunal the Receivers' solicitors requested further particulars by letter dated 23rd June 1993. The replies to the particulars were to the effect that, during the period 4th December 1992 to 17th February 1993, Mrs Doegar received no instructions from the Administrative Receivers and she received no payments, salary or other benefits in respect of her claim. In those circumstances the solicitors for the Receivers notified the Industrial Tribunal that they resisted the joinder of Mrs McLoughlin personally and invited the Industrial Tribunal to make a preliminary ruling.

(10) At the preliminary hearing on 16th September 1993 it appears that the Chairman heard no evidence from Mrs Doegar or from the Administrative Receivers. It was assumed for the purposes of that hearing that Mrs Doegar was an employee of the company, though without prejudice to any right of the Secretary of State to argue to the contrary on another occasion. In the decision it was stated that there was no suggestion that the Administrative Receivers had entered into any contract with Mrs Doegar. It was recorded that, although Mr Doegar said that Mrs Doegar was available for any work that might be required of her, he accepted that she was never given any duties to perform by the Receivers. In the light of the particulars supplied that she had not been paid any remuneration and that no call was made on her services, the Chairman of the Tribunal held that Mr McLoughlin had not adopted any contract of employment. He was not personally liable to meet any claim by Mrs Doegar for redundancy and was therefore dismissed from the proceedings.

The relevant Law

It was common ground that the relevant law is contained in S.44 of the Insolvency Act 1986 and in the recent decision of the Court of Appeal in Powdrill v. Watson (unreported) on 22nd February 1994. The Court of Appeal dismissed the appeal from the decision of Mr Justice Evans-Lombe of 27th July 1993, referred to in the Industrial Tribunal decision.

Section 44 of the 1986 Act provides as follows:

"(1) The Administrative Receiver of a company -

(a) is deemed to be the company's agent, unless and until the company goes into liquidation;

(b) is personally liable on any contract entered into by him in the carrying out of his functions (except in so far as the contract otherwise provides) and on any contract of employment adopted by him in the carrying out of those functions; and

(c) is entitled in respect of that liability to an indemnity out of the assets of the company.

(2) For the purposes of subsection (1)(b) the Administrative Receiver is not to be taken to have adopted a contract of employment by reason of anything done or omitted to be done within 14 days after his appointment."

It is not suggested in this case that Mr McLoughlin entered into any contract with Mrs Doegar. The case is put simply on the basis of adoption by him of an existing contract of employment in the carrying out of his functions.

As pointed out by the Court of Appeal in Powdrill v. Watson an Administrative Receiver has 14 days in which to take stock. What he has done or omitted to do within that 14 days cannot be relied upon to establish that he has adopted a contract of employment. No act or omission of Mr McLoughlin in the period of 14 days after 4th December 1992 can be relied on by Mrs Doegar to establish a case of adoption.

After the 14 days have expired it is a question of fact in each case whether the Receiver has adopted a contract of employment by reason of anything which he has done or omitted to do. There seems little doubt that a Receiver will be taken to have adopted contracts of employment if, after the expiration of the 14 days from his appointment, he continues to employ staff, pay them and use their services in continuing to carry on the business of the company as a going concern. According to p.13 of the transcript of the Court of Appeal decision Lord Justice Dillon regarded as correct the interpretation of the word "adopted" suggested by Professor Goode in his book "Principles of Corporate Insolvency Law" at p.101. The relevant passage, as quoted in the judgment of Mr Justice Evans-Lombe, states that adoption may be effected by "any act or acquiescence (after the expiry of the 14 day period) which is indicative of his intention to treat the contract as on foot."

The issue on this appeal is whether, on this interpretation of "adopted", the Industrial Tribunal erred in law in concluding that Mr McLoughlin had not adopted any contract of employment between Mrs Doegar and the company.

Mrs Doegar's Submissions

On behalf of Mrs Doegar, her husband made the following submissions:

(1) He argued that the Chairman of the Industrial Tribunal had erred in law in finding that, although the Receiver knew that Mrs Doegar was a director of the company, he did not necessarily know that she was an employee of the company. Mr Doegar submitted to the Industrial Tribunal that the Receiver ought to have known, from the investigations and independent review carried out by his firm prior to his appointment as a Receiver, that Mrs Doegar was an employee of the company. She was a director of the company. The Industrial Tribunal commented that knowledge that a person is a director does not imply knowledge that such a person is an employee of the company. Mr Doegar disputes the correctness of that statement. He submitted that on the documents and books of the company it was clear that salary payments had been made by the company to Mrs Doegar. The Receivers must have known from those documents before they were appointed that she was an employee of the company. It is not clear how far this particular submission was made by Mr Doegar before the Industrial Tribunal. He showed us various documents which we are told were in the bundle of some 100 pages or so before the Industrial Tribunal. He has also shown us further documents relating to payments made by the company to Mrs Doegar.

(2) Mr Doegar argued that the Tribunal erred in law in indicating, in paragraph 14 of the decision, that, on the issue of adoption, "a positive act is needed". That was stated immediately after the quotation in the preceding paragraph of Professor Goode's view that the adoption of a contract of employment may be effected by any act or acquiescence indicative of the receiver's intention to treat the contract as on foot. Mr Doegar submitted that the statement that "a positive act is needed" is a misdirection as to the relevant legal test.

(3) In finding that the Receiver had not adopted Mrs Doegar's contract of employment the Tribunal had erred in law. His main point was that between the expiration of the 14 days from apointment and the 17th February 1993 the Receiver had taken no steps to terminate the contract of employment. He had therefore adopted it. Mr Doegar made a general complaint, not mentioned in the Notice of Appeal, that he had not realised that, on the interlocutory hearing by the Chairman, the whole question of the adoption of the contract by Mr McLoughlin would be investigated and determined. Mr Doegar appears to have thought that that issue would be dealt with at a hearing before the full Tribunal after oral evidence and argument.

Conclusions on the Adoption Question

We have examined Mr Doegar's submissions with care and have reached the conclusion that there was no error of law in the Tribunal's decision. On the case advanced by Mrs Doegar in her complaint, in the particulars supplied and in the 100 or so pages of documents before the Tribunal, we conclude that the Chairman rightly found as a fact that Mr McLoughlin had not adopted any contract of employment which he assumed may have existed with the company. The reasons for our conclusion are as follows:-

(1) As decided by the Court of Appeal in Powdrill v. Watson it was essentially a question of fact whether Mr McLoughlin had adopted the claimed contract of employment.

(2) In deciding that question the Tribunal was entitled to accept the factual position asserted by the solicitors then acting for Mrs Doegar in the particulars supplied to Mr McLoughlin's solicitors in the letter of 12th July 1993. The position stated in that letter was that, during the period 4th December 1992 to 17th February 1993, Mrs Doegar received no instructions from the receivers and received no payments, salary or other benefits in respect of her claim to a contract. There was no allegation of an act by Mr McLoughlin indicative of an intention to treat the contract as on foot.

(3) The point repeatedly emphasised by Mr Doegar was that the Receiver had adopted the contract by omitting to notify Mrs Doegar before 17th February that he was not adopting her contract of employment. Only on 17th February did he terminate the contract. The Industrial Tribunal appears to have accepted the Receiver's explanation for not terminating the contract earlier, namely that he was not aware that Mrs Doegar was claiming to be an employee of the company. He had not therefore sent her copies of his letters of 4th or 7th December 1992. The Tribunal did not find as a fact that Mr McLoughlin knew that Mrs Doegar was an employee. Even such knowledge had been established, it is difficult to see how the Tribunal could have found adoption of the contract by Mr McLoughlin, as it appears that there was no evidence of an intention on his part to keep on foot any contract she may have had with the company.

(4) It is true that the Industrial Tribunal stated in the opening of paragraph 14 that the decision that "a positive act is needed". Taken alone that may have constituted a misdirection by the Tribunal as to the correct legal position. It is clear from the decision in Powdrill v. Watson that adoption may take place by acquiesence indicative of an intention to treat the contract as on foot. We are satisfied, however, that the Tribunal did not misdirect itself in law. The statement that "a positive act is needed" must be read in the context of the whole decision. It is clear from the immediately preceding paragraph that the Tribunal was aware of the correct legal test. If that test is applied to the facts found in the decision and appearing from the documents before it, the proper conclusion would still be that there was no adoption of the contract.

(5) As to Mr Doegar's general complaint about the nature of the preliminary or interlocutory hearing, there was no error of law by the Tribunal in proceeding to decide the question of adoption at such a hearing. Mrs Doegar's case had been made clear in the particulars supplied. Mr Doegar put before the Tribunal the bundle of documents to which he referred. The case was argued on both sides on its merits. There was no complaint by Mr Doegar at the time about the nature of the hearing or its conduct.

For those reasons we dismiss Mrs Doegar's appeal. We do not find it necessary to reach a conclusion on other points made on behalf of the Receiver to the effect that, even if he had adopted a contract, he would not have become the employer of Mrs Doeger and would have not become personally liable to make redundancy payments.

Appeal on Costs

Mrs Doegar appeals against the order that she should pay £500 costs to Mr McLoughlin. The Tribunal had power to order costs under Rule 11 of the Industrial Tribunals (Rules of Procedure) Regulations 1985 then in force. That provides that -

"A tribunal shall not normally make an award in respect of the costs or expenses incurred by a party to the proceedings but where in its opinion a party ... has in bringing or conducting the proceedings acted frivolously, vexatiously or otherwise unreasonably the tribunal may make -

(a) an order that that party shall pay to another party ... either a specified sum in respect of the costs or expenses incurred by that other party ... or the whole or part of those costs or expenses as taxed (if not otherwise agreed) ..."

This Tribunal can only interfere with the decision of the Tribunal's discretion on costs if it can be shown that the Tribunal erred in its construction of the Rule or acted on incorrect legal principles or if the decision was perverse in the sense that no reasonable tribunal would have made such an order. In our judgment, Mr Doegar has failed to show that the exercise of discretion on costs was flawed by any error of law. It is difficult to understand why the case against Mr McLoughlin was brought and pursued. The case against him could only succeed if there was a contract of employment between Mrs Doegar and the company for him to adopt. If there was such a contract, Mrs Doegar's claim for redundancy could be made against the company, and, if the company was insolvent, there would be a claim which would be met by the Secretary of State. There was no point in seeking to make Mr McLoughlin personally liable. There was a disadvantage on both sides in incurring costs by pursuing an unnecessary claim. It is said by Mr Doegar that Mr McLoughlin was joined as a party on legal advice. That advice has not been disclosed nor need it be, as it is privileged. In any event it would be no answer to an order for costs in an appropriate case that the conduct of the proceedings had been on legal advice. In our view, it is clear, from the way in which Mrs Doegar put her case in her original notice of application, as amplified by particulars, that it could never succeed as a case of adoption of a contract. No other case was ever advanced.

For those reasons the appeal against the order of costs is also dismissed.