ROGER LINDOP v. STUART NOBLE & SONS LTD & OTHERS

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ROGER LINDOP v. STUART NOBLE & SONS LTD & OTHERS

OPINION OF LORD MACFADYEN

in the cause

ROGER LINDOP (ASSISTED PERSON)

Pursuer;

against

STUART NOBLE & SONS LTD & OTHERS

Defenders:

________________

7 April 1998

The first defenders ("the company") are a company incorporated under the Companies Acts. The second defenders ("the receivers") were appointed joint receivers of the company in terms of an instrument of appointment dated 2 February 1996. The pursuer was from 28 September 1992 until 29 February 1996 managing director of the company in terms of a service agreement dated 25 September 1992. In this action the pursuer makes a number of claims arising out of his employment by the company and the termination of that employment by the receivers. In particular, in the first conclusion of the summons the pursuer seeks declarator that he is entitled to payment from the company of £64,965.02 with interest, upon averments that that sum represents the aggregate of (i) the salary and other benefits which he was entitled to receive on dismissal in lieu of notice, and (ii) his entitlement to a redundancy payment. In terms of the first conclusion the pursuer also seeks declarator:

"(2) that in respect of said sum the pursuer 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 Insolvency Act 1986; and (3) that the pursuer is entitled to the ranking accorded by said Section".

In the course of his submissions, however, Mr Drummond Young, senior counsel for the pursuer, made it clear that he did not maintain the claim to priority in respect of the pursuer's claim for a redundancy payment. The sum in respect of which priority is sought therefore falls to be reduced to £62,801.56. The defenders dispute the pursuer's claim to that ranking, and plead that the pursuer's averments are irrelevant. The issue of ranking of the pursuer's claim was appointed to debate.

The facts on which the issue turns are in narrow compass and are agreed. The pursuer was employed by the company as its managing director. He was so employed from 28 September 1992. On 2 February 1996 the receivers were appointed. They continued the employment of the pursuer for more than fourteen days. It is admitted that they thus adopted his contract of employment. They dismissed him on 29 February 1996. It is admitted by the defenders that in dismissing the pursuer the receivers were acting as agents of the company.

The statutory provisions on which the pursuer seeks to rely are contained in section 60(1) of the Insolvency Act 1986 ("the 1986 Act"), which is in the following terms:

"Subject to the next section, and to the rights of any of the following categories of persons (which rights shall, except to the extent otherwise provided in any instrument, have the following order of priority), namely -

the holder of any fixed security which is over property subject to the floating charge and which ranks prior to, or pari passu with, the floating charge;
all persons who have effectually executed diligence on any part of the property of the company which is subject to the charge by virtue of which the receiver was appointed;
creditors in respect of all liabilities, charges and expenses incurred by or on behalf of the receiver;
the receiver in respect of his liabilities, expenses and remuneration, and any indemnity to which he is entitled out of the property of the company; and
the preferential creditors entitled to payment under section 59,

the receiver shall pay moneys received by him to the holder of the floating charge by virtue of which the receiver was appointed in or towards satisfaction of the debt secured by the floating charge."

In particular, the pursuer maintains that in respect of his claim for salary and other benefits in lieu of notice he comes within the scope of section 60(1)(c).

It is convenient at this stage to take note of certain other provisions of the 1986 Act (as amended). Section 57 provides inter alia as follows:

"(1) A receiver is deemed to be the agent of the company in relation to such property of the company as is attached by the floating charge by virtue of which he was appointed.

(1A) Without prejudice to subsection (1), a receiver is deemed to be the agent of the company in relation to any contract of employment adopted by him in the carrying out of his functions.

(2) A receiver (including a receiver whose powers are subsequently suspended under section 56) is personally liable on any contract entered into by him in the performance of his functions, except in so far as the contract otherwise provides, and, to the extent of any qualifying liability, on any contract of employment adopted by him in the carrying out of those functions.

(2A) For the purposes of subsection (2), a liability under a contract of employment is a qualifying liability if -

it is a liability to pay a sum by way of wages or salary or contribution to an occupational pension scheme,
it is incurred while the receiver is in office, and
it is in respect of services rendered wholly or partly after the adoption of the contract.

...

(3) A receiver who is personally liable by virtue of subsection (2) is entitled to be indemnified out of the property in respect of which he was appointed.

(4) Any contract entered into by or on behalf of the company prior to the appointment of a receiver continues in force (subject to its terms) notwithstanding that appointment, but the receiver does not by virtue only of his appointment incur any personal liability on any such contract.

(5) For the purposes of subsection (2), a receiver is not to be taken to have adopted a contract by reason of anything done or omitted to be done within fourteen days after his appointment."

In opening the debate Mr Howlin, junior counsel for the defenders, recognised that the pursuer's contention could be simply stated, and appeared prima facie persuasive - the pursuer was a creditor of the company in receivership in respect of his claim for salary and other benefits in lieu of notice, a claim in effect for damages for termination of his employment without the period of notice to which he was contractually entitled; the liability of the company in receivership to meet that claim was a liability incurred by the receivers, since it was the receivers, acting as agents for the company, who effected the dismissal; the claim therefore fell within the scope of section 60(1)(c), and attracted priority accordingly. Before turning to an analysis of the section, however, Mr Howlin warned against a literal interpretation of its terms. He pointed out that if the pursuer's approach was correct, employment for only a little more than fourteen days after the appointment of the receivers could, in the case of a fixed term contract, say for five years, confer priority on a very substantial claim. He illustrated the need to go beyond the literal language of the section by pointing out (i) that "creditors" in section 60(1)(c) had to be read as "creditors of the company"; (ii) that the reference in paragraph (d) to the receiver's liabilities had to be read as including only his liabilities incurred as receiver, and excluding liabilities of a personal nature; and (iii) that the words "except to the extent otherwise provided in any instrument" at the beginning of subsection (1) could not be read literally, since a unilateral declaration by the receiver could not be sufficient to deprive an otherwise qualified person of the priority which the section conferred.

Mr Howlin then turned to section 57 (as amended), and drew attention in particular to (i) the introduction by the Insolvency Act 1994 ("the 1994 Act") of subsection (1A) which, without prejudice to the deemed agency created by subsection (1), specifically deemed the receiver to be the agent of the company in relation to any contract of employment adopted by him in the carrying out of his functions; (ii) the limitation applied at the same time to the personal liability of the receiver under subsection (2) on any contract of employment adopted by him, confining it to the extent of any qualifying liability, as defined in subsection (2A); and (iii) the receiver's entitlement to indemnity in respect of any personal liability out of the property in respect of which he was appointed. The result was that a receiver who adopted a contract of employment became personally liable on it, but only to the extent of any qualifying liability, and in that respect was entitled to indemnity from the company. The employee's claim, to that limited extent, then came to enjoy indirectly a priority in the distribution of the receivership funds by virtue of section 60(1)(d). That was the nature and extent of the practical priority which Parliament had given to the claims of employees in receivership, i.e. through the medium of the receiver's personal liability and indemnity, but to the extent only of any qualifying liability. The present pursuer fell outwith the scope of that scheme, since his claim was not in respect of a qualifying liability.

Mr Howlin went on to make a number of points against the pursuer's construction of section 60(1)(c). He pointed out that since Parliament has restricted the receivers' personal liability on adopted contracts of employment to qualifying liabilities, it would be odd if section 60(1)(c) were to have the meaning contended for by the pursuer, since the result would be to subvert the restriction on personal liability by conferring on other aspects of the employee's claim an even higher priority by an indirect route. He suggested, too, that since the receivers' agency extends to other types of contract as well as contracts of employment, the ranking argued for by the pursuer under section 60(1)(c) could impose enormous burdens on the receivership in the context of other types of contract. The broad reading of section 60(1)(c) could thus be seen to be inconsistent with the "rescue culture" which underlay both the 1986 Act and the 1994 Act. To avoid that unacceptable consequence, it was necessary to restrict the scope of section 60(1)(c). One necessary restriction was to hold that the provision did not apply to liability for breach of a pre-receivership contract. To hold otherwise would be inconsistent with the known intention of Parliament. It would, moreover, result in an irrational discrepancy between English and Scots law. It was artificial to close one's eyes to the fact that the concepts of floating charges and receivers were introduced into Scots law to give Scottish companies the same access to credit as English companies had, by enabling them to charge their whole undertaking, giving security over moveables without delivery. There were, of course, necessary differences between Scots and English law on certain aspects of receivership to accommodate differences in the general law. The provision in section 60(1)(b) about effectually executed diligence was an example. No principle of Scots law, however, required a difference in the priority accorded to the claims of employees. The English approach has been to give the employee a restricted claim against the receiver personally, which is made good against the receivership funds by way of the receiver's indemnity, but otherwise to confine the employee to an ordinary ranking. If the pursuer's broad interpretation of section 60(1)(c) were accepted, that would put the Scottish receivership at a disadvantage, contrary to the whole spirit of the intention underlying the importation of receivership into Scots law. The defenders' central contention, therefore, was that in Scotland, as in England, the only priority accorded to employees' claims was that effected indirectly by way of personal liability and indemnity. Such claims had no direct priority of ranking by way of section 60(1)(c). The position in administration was to be contrasted - there, from the first introduction of the concept in 1985, the employee was given a specific direct priority by way of charge over the assets of the company, while the administrator incurred no personal liability (1986 Act, section 19(5)).

In English law, Mr Howlin explained, receivership is a creature of equity. In Owen v Cronk [1895] 1 QB 265, a distinction was drawn between a receiver appointed by the court who "accepts the appointment on the terms that he will be personally responsible to the creditors of the business, whilst he will be indemnified out of the estate", and one appointed by a mortgagee, who, as deemed agent of the mortgagee, incurs no personally liable (per Rigby LJ at 275). The position was altered by section 87(2) of the Companies Act 1947 (re-enacted in section 369(2) of the Companies Act 1948 ("the 1948 Act")), which provided that a receiver appointed out of court would have the same personal liability on contracts entered into by him in the performance of his functions and the same entitlement to indemnity as one appointed by the court. That was the position in English law at the time when receivers were introduced into Scots law by the Companies (Floating Charges and Receivers) (Scotland) Act 1972 ("the 1972 Act"). Section 17 of that Act made the receiver the deemed agent of the company in relation to the property attached by the floating charge, rendered him personally liable on contracts entered into by him in performance of his functions, afforded him a right to indemnity in respect of personal liability out of the property attached, and provided that pre-receivership contracts would continue in force and that the receiver would not by virtue only of his appointment incur personal liability on such contracts. The effect was the same as that achieved for England by section 369(2) of the 1948 Act. Then came Nicoll v Cutts [1985] BCLC 322, in which it was held that a receiver appointed pursuant to a debenture whereby he was made the company's agent was not personally liable under section 369(2) of the 1948 Act to an employee whose contract of service with the company was continued by the receiver for wages earned subsequent to the receiver's appointment, because there was no new contract on which the receiver could be liable. It was also held that wages earned after the receiver's appointment but not paid could not be considered as part of the costs and expenses of the receivership. As the court recognised, that left the employee to rank as an ordinary creditor of the company, a remedy likely to be worthless. Parliament could, Mr Howlin suggested, have intervened to give employees in that position a statutory priority over the floating charge holder. That was not, however, the approach which was adopted in receivership (although it was in administration). Instead the mischief revealed by the decision in Nicoll v Cutts (later identified in Powdrill v Watson [1995] 2 AC 394 per Lord Browne-Wilkinson at 441E as "the inability of an employee who has rendered services during the receivership to recover his wages for such services if they remain unpaid") was addressed by the introduction into the Insolvency Bill then before Parliament (subsequently consolidated in the 1986 Act) of provisions covering contracts of employment "adopted" by the receiver in the carrying out of his functions. The same reference to adoption of contracts of employment was introduced into the provisions dealing with administration (section 19(5) of the 1986 Act), administrative receivers in England (section 44(1)(b)), other receivers or managers appointed out of court in England (section 37(1)(a)) and Scottish receivers (section 57(2)). As I have already noted, under section 19(5) a charge was created over the property under administration. In sections 37, 44 and 57, however, the solution enacted was to make the receiver personally liable on contracts of employment which he adopted. There is, in English law, no equivalent of section 60(1)(c). A provision to that effect has, however, been part of Scots law since the enactment of section 20(1)(c) of the 1972 Act. It was thus arguable, said Mr Howlin, that, since the rule now found in section 60(1)(c) had been part of Scots law since 1972, if an employee was now entitled to achieve priority by relying on that rule, as the pursuer contended, an employee would have been entitled to claim such priority at any time since 1972, but that was contrary to the general understanding of the law that had prevailed. If section 60(1)(c) has the effect now contended for by the pursuer, its predecessor, section 20(1)(c) of the 1972 Act had a similar effect and gave the employee a direct preferred ranking, making it unnecessary for Parliament to intervene to cure, so far as Scots law was concerned, the Nicoll v Cutts mischief. Yet Parliament had chosen to make the same changes in section 57 as it did in section 44. That could be taken as a clear indication that Parliament did not regard section 20(1)(c), and thus section 60(1)(c), as creating any form of priority in favour of employees.

After the 1985 amendments, the next stage in the development of the law was the decision of the Court of Appeal in Powdrill v Watson [1994] 2 BCLC 118. That was an administration case. The administrators wrote to employees a few days after their appointment stating that the company would continue to meet their salaries, but that the administrators "are not and will not at any future time adopt or assume personal liability in respect of your Contracts of Employment" (a "Specialised Mouldings" letter, so called after the case of In re Specialised Mouldings Ltd, (unreported, 13 February 1987, Harman J)). Some four months later, the administrators, having failed to find a buyer for the company as a going concern, terminated the contracts of employment. The employees claimed salary in lieu of notice, holiday pay and interest. The Court of Appeal held (1) that if the administrators continued for more than fourteen days after their appointment to employ staff and pay them in accordance with their contracts of employment, they would be taken to have impliedly adopted the contracts pursuant to section 19(5), and would therefore be liable on dismissal of the employees to pay out of the property under administration salary in lieu of notice and holiday pay, and (2) that since adoption was a matter of fact, not of mere words, the mere assertion that the administrators were not adopting the contracts was of no legal effect. The ratio of that decision, applied to a case of receivership, had the effect that once the receiver had adopted the contract of employment, he was personally liable for all liabilities under that contract, whether in respect of the period before or after his appointment and whether in respect of wages and other benefits contractually due or in respect of damages for breach of contract. On appeal, the House of Lords ([1995] 2 AC 394) restricted the extent of personal liability on adopted contracts of employment by excluding from its scope claims which had arisen before the appointment of the receiver. In the meantime, however, Parliament had again responded swiftly to cure the mischief perceived to have been identified by the decision of the Court of Appeal. By the 1994 Act, which received the Royal assent little over a month after the date of the decision of the Court of Appeal, sections 19, 44 and 57 (but not 37) of the 1986 Act were all amended. The common theme of all the amendments was the restriction of the charge or personal liability (as the case might be) to certain liabilities only, described as "qualifying liabilities". So far as section 57 was concerned, that was done by amending subsection (2) to restrict personal liability on adopted contracts of employment to "qualifying liabilities", as defined in the new subsections (2A), (2B), (2C), and (2D). At the same time, there was also introduced subsection (1A) deeming the receiver to be the agent of the company in relation to adopted contracts of employment.

Notwithstanding the amendments effected by the 1994 Act, the decision of the House of Lords in Powdrill v Watson (which dealt not only with the appeal in that case from the Court of Appeal, but also with appeals from a decision of Lightman J in the Leyland DAF and Ferranti cases, both of which were receivership cases) remains of relevance, and Mr Howlin referred to it in considerable detail. The leading speech is that of Lord Browne-Wilkinson, with whom Lords Keith of Kinkell, Mustill, Woolf and Lloyd of Berwick all agreed. Mr Howlin first referred to the following passage (at 442A) where, after making reference to the Report of the Cork Committee (Cmnd. 8558), Lord Browne-Wilkinson said:

"This 'rescue culture' which seeks to preserve viable businesses was and is fundamental to much of the Act of 1986. Its significance in the present case is that, given the importance attached to receivers and administrators being able to continue to run a business, it is unlikely that Parliament would have intended to produce a regime as to employees' rights which renders any attempt at such rescue either extremely hazardous or impossible."

The problem which was identified (at 442H) as demonstrated by the decisions under appeal was that a receiver who adopted a contract of employment became personally liable for all liabilities on the contracts, whether incurred before, during or after the receivership, and it was observed (at 443A) that in the ordinary case 14 days (the period during which the receiver could continue employment without adoption of the contract of employment) was quite inadequate to enable him to assess the relative merits of immediate closure of the business with dismissal of the employees or continuance of the business with adoption of the contracts of employment. Lord Browne-Wilkinson went on to identify (at 443F-444A) a number of points which he regarded as of central importance in construing sections 19 and 44 (and which would presumably be of equal application to section 57). These were (1) that the mischief which the introduction of the concept of "adoption" of contracts of employment was intended to remedy was the decision in Nicoll v Cutts; (2) that that decision related only to liability to pay wages falling due, but not paid, during the receivership, and did not deal with liabilities arising before or after the receivership; (3) that the amendments related both to administrators and to receivers, and it would be strange if Parliament intended different results in the two cases; (4) that the rescue culture was a basic feature of the 1986 Act; and (5) that the judgments appealed from, by loading the company in administration or receivership with imponderable liabilities, rendered it hazardous for the administrators or receivers to continue the company's business, and thus militated against the rescue culture. At that point in his consideration of Lord Browne-Wilkinson's speech, Mr Howlin interpolated the submission that, given the mischief which the 1994 Act was intended to cure, namely the excessive scope of the charge under section 19 and of the receiver's personal liability in respect of employees' claims, it would be surprising if the remedy should itself have the effect of imposing on the receiver, by another route, the sort of imponderable liability which was seen as inimical to the rescue culture. Mr Howlin then went on to examine Lord Browne-Wilkinson's approach to the concept of adoption. Pointing out (at 445B) that:

"Parliament may intend to go further than remedying an identified mischief, but it is difficult to attribute to Parliament an intention not only to remedy an intended mischief but to create a new and greater one",

he rejected the two stage process of deciding first whether there had been adoption, then what the consequences of adoption were, in favour of looking "at the joint effect of adoption followed by the statutory consequences said to flow from it". After noting (at 448B-D) that "adopt" is not a term of art but is used in a variety of senses in the law, Lord Browne-Wilkinson set out (at 448G-449A) the conclusion which he reached as to the meaning of adoption as follows:

"... the mere continuation of the employment by the company does not lead inexorably to the conclusion that the contract has been adopted by the administrator or receiver.

It is common ground that adoption does not mean an assumption of personal liability by the administrator or receiver since there is no question of an administrator accepting personal liability under section 19. Nor in my judgment can it mean 'fail to disclaim' as in section 323 of the Act of 1948 ... Nor can adoption connote doing such acts as would suffice to make the payments due an expense of the administration ... [or] receivership. In my judgment ... adoption in sections 19 and 44 can only connote some conduct by the administrator or receiver which amounts to an election to treat the continued contract of employment with the company as giving rise to a separate liability in the administration or receivership."

Mr Howlin accepted that it followed that the concept of adoption in section 57 must be given the same meaning. It did not follow, however, he submitted, that all of that separate liability was to enjoy priority of ranking. Lord Browne-Wilkinson rejected an argument in favour of entitling the receiver to "cherry-pick", adopting the benefits but rejecting the burdens of the contract, and held (at 449G-H) that:

"the concept of adoption of the contract is inconsistent with an ability to pick and choose between different liabilities under the contract".

Mr Howlin pointed out, however, that that was said in the context of the provisions of the 1986 Act, and that section 57(2) (as amended) confined the receiver's personal liability on adopted contracts of employment to "qualifying liabilities". In the result, Lord Browne-Wilkinson held (at 450B) that the contracts were inevitably adopted if the receiver caused the company to continue the employment for more than 14 days after his appointment, but (at 452C) that the consequence of adoption was to give priority only to liabilities incurred by the receiver during his tenure of office.

Mr Howlin submitted that Parliament cannot have intended adoption of the contract of employment to place on the company a priority liability which was not counterbalanced by any benefit proceeding from the employee to the company. The concern devoted in Powdrill v Watson, and by Parliament in the 1994 Act, to defining and restricting the scope of the charge under section 19 and the personal liability of receivers in respect of adopted contracts of employment demonstrated indirectly that that was the only route to priority for employees' claims. It has never hitherto been suggested that claims by employees to payment in lieu of notice have any direct statutory priority. Nothing at any stage of the development of the legislation points to an intention to innovate on that position. The proper conclusion was that, as matters now stood, the only priority enjoyed by employees was the restricted priority achieved by way of the receiver's personal liability for and indemnity in respect of qualifying liabilities. There were two possible ways of looking at the matter, each of which pointed strongly to the inapplicability of section 60(1)(c) to employees' claims for pay in lieu of notice. If the pursuer argued that reliance on section 60(1)(c) became available by virtue of the introduction in the 1994 Act of section 57(1A), then it was extraordinary that Parliament, in seeking to find a solution to the mischief disclosed by the Court of Appeal's decision in Powdrill v Watson, should have limited the scope of the receiver's personal liability to "qualifying liabilities", but simultaneously by introducing section 57(1A) opened the way to a broader claim for higher priority under section 60(1)(c). If section 57(1A) was not an essential part of the pursuer's argument, then the position was that the section 60(1)(c) route to priority, if available now, has been available, but gone unnoticed, since 1972.

Mr Howlin concluded his submissions by setting out his contentions as to the limits which should be placed on section 60(1)(c). At its very broadest, the contention might be that the reference to liabilities should not include liabilities in respect of breach of contract. In the specific context of contracts of employment, Parliament has decided what rights to priority employees are to have, and has provided other machinery for giving effect to them, and section 60(1)(c) should therefore not be construed as applying at all to liabilities to employees. More generally, section 60(1)(c) should be construed as balancing benefit with burden - the sort of liability to creditors which is accorded priority should be the counterpart of a benefit enjoyed by the company in receivership. As an instance of the application of that principle, section 60(1)(c) should therefore not be construed as affording priority to claims for damages for breach of pre-receivership contracts.

Mr Davies, junior counsel for the pursuer, began by submitting that the Scottish provisions concerning receivership, to be found in Part III, Chapter II of the 1986 Act, provided a complete code dealing with the powers and duties of receivers in Scotland. There was no common law background to the legislation in Scotland. The two crucial provisions, sections 57(1A) and 60(1), have no parallel in the English legislation. Section 60(1) sets out how receivers should distribute the funds which they ingather. The pursuer's claim fell squarely within section 60(1)(c) - he was a creditor in respect of a liability incurred by the receivers. The submission could be analysed into a number of elements. These were:-

that the pursuer's contract of employment was adopted by the receivers;
that the receivers were deemed to be the agents of the company in relation to the adopted contract of employment (section 57(1A));
that as agents of the company the receivers dismissed the pursuer;
that by virtue of that dismissal, a liability to make payments in lieu of notice was incurred;
that that liability was a liability of the company, not a personal liability of the receivers - it was not a qualifying liability within the meaning of section 57(2) and (2A); and
that the circumstances therefore fell within the scope of section 60(1)(c).

Expanding on element (i), the fact of adoption was a matter of admission in this case, but it remained necessary to address the meaning of adoption. The concept was introduced in the 1986 Act, and was to be found in sections 19(5), 37(1)(a), 44(1)(b) and 57(2). From Lord Browne-Wilkinson's discussion of it in Powdrill v Watson, three points in particular were taken, namely (1) that adoption was not to be equated with an assumption of personal liability (at 448H), (2) that it gave the contract a new status in the receivership (at 449A), and (3) that the effect of adoption could not be partial, there could be no cherry-picking (at 449G). The amendments effected by the 1994 Act did not alter the meaning or effect of adoption. With reference to element (ii), it was pointed out that it was matter of admission in the present case that in dismissing the pursuer the receivers were acting as agents of the company. With reference to element (iii), it was submitted that the liability incurred by virtue of the dismissal was incurred at the date of dismissal. That followed from Powdrill v Watson, where the liabilities arising on termination were held to have been incurred during the receivership. The liability to make payments in lieu of notice, which arose because of the dismissal, was a liability of the company, not of the receiver (element (v)). It was clear, without any need to apply a forced construction to section 60(1)(c), that the reference therein to "creditors" was to creditors of the company. Creditors to whom the receiver incurred a personal liability had a different route to preference through the priority accorded to claims for indemnity by way of section 60(1)(d). Paragraph (c) must therefore relate to creditors of the company as such, albeit in respect of liabilities incurred by or on behalf of the receiver. Its purpose was to give priority to liabilities incurred by the receiver while acting as agent of the company but not incurring personal liability. The reference to "all liabilities, charges and expenses" was wide enough to encompass wages in lieu of notice or, more generally, damages for breach of contract. The receiver might incur liability on the company's behalf either by entering into a fresh contract as agent for the company or by adopting an existing contract in that capacity. Thus, liabilities which arose under or in respect of a contract adopted by the receiver, so far as it did not give rise to personal liability on the part of the receiver, were liabilities incurred by the company through the agency of the receiver. Given the admitted adoption of the pursuer's contract of employment, and the admission that in dismissing the pursuer the receivers were acting as agents of the company, it followed that the liability which the pursuer now sought to vindicate was a liability of the company incurred by the receiver, and thus one to which the priority accorded by section 60(1)(c) applied.

Turning to the way in which the law had developed, Mr Davies submitted that the concept of adoption had been introduced in the 1986 Act to protect employees from the effect of the decision in Nicoll v Cutts, and the consequences of adoption had been defined in one way (a priority charge) in section 19(5), and in another way (personal liability) in section 37, 44 and 57. Those provisions had been interpreted by the Court of Appeal in Powdrill v Watson as according priority to all claims by employees arising out of the adopted contracts, but that had been restricted, both by the 1994 Act and by the House of Lords. It was to be noted, however, that in England the 1994 Act only amended the position of administrative receivers under section 44 - it did not amend the position of receivers and managers under section 37. There was thus an inevitable partial mismatch of English and Scots law, however section 60(1)(c) was interpreted. The criticism which the defenders directed against the reasonableness of the pursuer's construction of section 60(1)(c) was no more than that it resulted in the positions under Scots and English law being different. If such was the result, it was not necessarily unreasonable. The position now contended for by the pursuer was not one which had been available since 1972. It depended on two factors subsequently introduced, namely the concept of adoption and the deemed agency of the receiver in relation to adopted contracts of employment. If the result was a difference between the law of Scotland and the law of England, that was simply the consequence of the fact that the law was expressed in differently formulated provisions in the two jurisdictions.

The institution of receivership was regulated in England and in Scotland by separate provisions. It was therefore inevitable that there would be differences in its exact effect. In the context particularly under examination in the present case, such differences were the consequence of the absence from English law of any provision equivalent to section 60(1)(c). The structure of the 1986 Act involved a single United Kingdom scheme for administration, a single United Kingdom scheme for winding up, but separate English and Scottish schemes for receivership. That reflected the different history, and different structure, of the institution in the two systems. In particular, English law distinguished between receivers and managers on the one hand, and administrative receivers on the other (see the definition of "administrative receiver" in section 29(2) of the 1986 Act). The personal liability of administrative receivers on adopted employment contracts was restricted to qualifying liabilities. No such restriction applied to receivers and managers. Receivership had no place in the common law in Scotland (Carse v Coppen 1951 SC 233). It was entirely a matter of statutory creation. It was created with a view to introducing into Scots law a concept similar to that which existed in English law. For that purpose an entire statutory code was required, and was provided in the first instance in the 1972 Act. As part of that code, section 20 (the predecessor of section 60 of the 1986 Act) set out the ranking of those entitled to payment out of receivership funds in priority to the floating charge holder. The nearest equivalent in the English legislation was in section 40 of the 1986 Act, which dealt with preferential debts. The treatment of the receiver's costs and expenses at common law (see Nicoll v Cutts at 325h-i) was different and narrower in scope than section 60(1)(c) which referred also to "liabilities". The pursuer's position was that, on a normal reading of the word "liabilities", section 60(1)(c) was broad enough in scope to cover post-receivership liabilities incurred under contracts adopted by the receiver. If the pursuer's claim to priority under section 60(1)(c) was to be rejected, it was necessary to identify an alternative coherent interpretation of the section. There was no justification for the defenders' submission that "liabilities" in paragraph (c) did not include liability for damages for post-receivership breach of adopted pre-receivership contracts. There was no justification for the proposed "benefit-burden" principle in the legislation. It was akin to the cherry-picking rejected as illegitimate in Powdrill v Watson. It would be dangerous to allow a receiver to proceed on the basis that he would not be liable for breach of adopted pre-receivership contracts; that would discourage third parties from dealing with receivers.

Mr Hodge, senior counsel for the defenders, submitted that for the pursuer to succeed a very wide interpretation had to be given to section 60(1)(c); that that interpretation would create anomalies which the House of Lords in Powdrill v Watson considered to be unacceptable and which would go far towards subverting the law of receivership in Scotland; and that, since there was nothing in the language of the section which compelled the adoption of the construction which had those effects, that construction should not be adopted. He identified three building blocks which he said comprised the structure of the pursuer's argument, and addressed each of these in turn. Before doing so, however, he posed the preliminary question: why should Parliament have intended such a radical difference between the position adopted in the law of Scotland and that adopted in the law of England and Wales on the balance to be struck between the interests of employees and those of the floating charge holders as would exist if the pursuer's contention was correct? There was, he submitted, no commercial imperative requiring such a distinction.

The first component of the pursuer's argument which Mr Hodge identified for examination was the proposition that the Scottish provisions on receivership in the 1986 Act (and its predecessor) constituted a self-contained code. He did not dispute that the institution of receivership is, in Scots law, a creature of statute, and that the common law of Scotland sets its face against equitable securities. He therefore accepted that it was necessary to look to the statute for the principal rules relating to receivership in Scotland. The legislative importation of receivership into Scots law was, however, effected with the intention of producing a commercial effect similar to that available in England. It was, moreover, done at least in part by the adoption of existing concepts from English equity, such as the reference in the definition of a floating charge in section 462(1) of the Companies Act 1985 to a company's "property and undertaking". It was therefore inappropriate to view the law of Scotland on receivership as an hermetically sealed compartment. Assistance could legitimately be drawn from English cases. It was accepted that there was no statutory equivalent in the English legislation of section 60(1)(c). Differences in property law between the two systems do not, however, explain why there should be a difference of policy balance between the interests of the floating charge holders and a particular category of creditors, namely employees of the company. The fact of the separate statutory basis for receivership in Scots law therefore does not advance the pursuer's position on the point in issue.

Mr Hodge's formulation of the second element of the pursuer's argument was that changes introduced by the 1994 Act brought section 60(1)(c) into play in relation to a claim of the sort made by the pursuer because: (1) receivers are deemed to be agents of the company in relation to adopted employment contracts by virtue of the introduction of section 57(1A); (2) adoption results in the adopted contract giving rise to a separate liability in the receivership (Powdrill v Watson per Lord Browne-Wilkinson at 449A); (3) since the amendments effected by the 1994 Act that separate liability is twofold, namely (a) personal liability of the receiver in respect of qualifying liabilities, and (b) liability on the part of the company incurred by the receiver and falling within the scope of section 60(1)(c).

So far as section 57(1A) was concerned, Mr Hodge asked whether it is to be construed as innovation or clarification. There was a difference between the language of section 57(1) and that of section 44(1)(a) in that the Scottish receiver is deemed to be the agent of the company "in relation to such property ... as is attached by the floating charge", whereas an English administrative receiver is deemed to be the company's agent tout court. The difference was accounted for by the fact that an English administrative receiver was inevitably the receiver of substantially the whole of the company's property (section 29(2) of the 1986 Act), whereas a Scottish receiver might be appointed over part only of the company's property. The definitions in section 251 of the 1986 Act have the effect that a Scottish receiver cannot be a "receiver or manager" (as mentioned in section 37), but, if appointed over substantially the whole of the company's property, will fall within the definition of administrative receiver. If, therefore, the reference in section 57(1) to agency "in relation to such property ... as is attached" was introduced to accommodate the relatively unusual case of the Scottish receiver appointed over only part of the company's property, it could be seen that in the normal case of the Scottish receiver appointed over substantially the whole of the company's property the effect of section 57(1) was no different from that of section 44(1)(a) in relation to an English administrative receiver. On that analysis, section 57(1A) introduced nothing new, and might be seen as enacted merely for the avoidance of doubt.

Turning to the concept of adoption, Mr Hodge referred to Lord Browne-Wilkinson's rejection of the two stage approach of considering separately what amounted to adoption and what its consequences were (Powdrill v Watson at 444B and 445A-B), and suggested that the pursuer's argument had a flavour of reintroduction of the rejected approach. Adoption is only of significance in the context of the statutorily specified consequences, namely in administration the creation of a priority charge (section 19(5)) and in receivership the incurring by the receiver of personal liability (sections 44(1)(b) and 57(2)). There was no suggestion in Powdrill v Watson that adoption gave rise to a "separate liability in the administration or receivership" other than those specified consequences. The statutory concept of adoption should not be applied outwith the context in which it is deployed in the statute, namely in relation to contracts of employment. Mr Hodge sought to take comfort from the concern expressed in the House of Lords over the consequences of a broad interpretation of adoption before the 1994 Act (Powdrill v Watson at 445E et seq.). There was no logic, he suggested, in giving employees of a company in administration less extensive rights than those of a company in receivership, yet if the pursuer was right that would be the position, since there was in administration no equivalent of section 60(1)(c). There had been no suggestion in the House of Lords that the position of employees in a Scottish receivership was different from that of employees in an English one. The pursuer had advanced no policy reason for the existence of such a difference, and there was none.

Mr Hodge submitted that a further oddity which would flow from the acceptance of the pursuer's argument was that the employees' claims would be accorded a priority over those of preferential creditors, who were covered by section 60(1)(e).

Two other considerations were identified by Mr Hodge as favouring the defenders' position. First, it was quite clear that Parliament's only purpose in enacting the provisions of the 1986 Act which introduced the concept of adoption of contracts of employment was to deal with the mischief of Nicoll v Cutts (Powdrill v Watson at 441E and 447E). Secondly, the legislation should be construed in a way which was consonant with an intention not to frustrate the "rescue culture" (Powdrill v Watson at 445C and 447E). Section 60(1)(c) does not require to be construed in a sense inimical to the rescue culture, although that is the effect of the pursuer's construction.

Mr Hodge made the additional submission that if there was ambiguity as to the effect of the provisions in question, it was appropriate to look at what the minister thought the legislation would do when moving the second reading of the Insolvency (No. 2) Bill on 21 March 1994 (240 Hansard col. 24). What he said was:

"The aim is to discourage administrators and receivers from dismissing employees simply because of the fear of the extensive liabilities which may be incurred - in the case of receivers, extensive personal liabilities - as a result of the adoption of the contracts. Under the proposals, only qualifying liabilities ... would be incurred".

He went on to explain qualifying liabilities, then later said:

"Liabilities, other than qualifying liabilities, arising from a contract of employment will remain, but they will be treated as an unsecured claim against the company."

That supported the defenders' submissions.

The third component which Mr Hodge identified as forming part of the pursuer's argument was the proposition that the court should not be concerned if the result of the pursuer's reliance on section 60(1)(c) was that the law in Scotland was different from the law in England, because the law of receivership in England is differently expressed. Mr Hodge took as his starting point his acceptance that there was no counterpart of section 60(1)(c) in the English legislation. The 1972 Act had, however, in section 20, sought to create a regime in Scotland similar to that which applied in England partly by statute, partly by common law and partly by contract.

In analysing section 60(1)(c) Mr Hodge submitted that where the section referred to "creditors", it meant creditors of the company; and the liabilities mentioned therein were liabilities of the company albeit incurred through the receiver acting as agent on its behalf. Adoption did not cause the company to incur liability. The liability of the company on or under a pre-receivership contract subsisted before any question of adoption could arise. If adoption did not incur liability, something else must constitute the incurring of liability. Here the pursuer relied on the breach of contract. So, the pursuer said, where the receiver terminated the pre-existing contract, the company thereby, through his agency, incurred a liability for that breach. Mr Hodge submitted, however, that if an act of the receiver as agent, such as termination of the contract, was enough to create a section 60(1)(c) ranking, the floodgates were open. It would not arise only on adopted contracts. It would apply to employment contracts terminated within the first 14 days after the appointment of the receiver. It would apply to the termination of unadopted employment contracts. It would also apply to other sorts of contract. Moreover, liability could arise on the termination of an employment contract not only where the termination was in breach of contract, but also where the contract provided for a payment on lawful termination. Having regard to these ramifications of what he took to be the pursuer's position, it was clear that it was not enough for the pursuer to look at the bare words of section 60(1)(c) and say that they covered the pursuer's claim.

What then do the defenders contend that section 60(1)(c) does mean? Mr Hodge submitted that it was concerned with receivership expenses. The balance of benefit against burden was not cherry picking in the sense held to be illegitimate in Powdrill v Watson. What the section sought to do was accord priority to new obligations undertaken by the receiver as agent for the company and for the benefit of the company in receivership. There, in incurring the liability, the receiver was in a position to form a view as to whether the cost (by way of according priority) was justified by the benefit. The section was not concerned with liabilities incurred by actings on the part of the receiver in relation to pre-receivership contracts, such as termination. Another way of formulating the proposition was to say that the reference in section 60(1)(c) to liabilities encompassed only liabilities founded wholly on actings of the receiver as agent of the company, and excluded those which were founded in part on a pre-existing contract.

The language of section 60(1)(c), according to Mr Hodge's submission, did not require it to be read as applying to the pursuer's claim. So to read it would be inconsistent with the rescue culture, and would open the floodgates to the effect of giving priority to a wide range of claims. The court would be justified, if necessary, in adopting a forced reading of the language of the section to avoid those consequences. Primarily, however, he contended that a forced reading was unnecessary.

Mr Drummond Young reiterated the six point analysis of the pursuer's submission which Mr Davies had set out at the beginning of his submissions, before turning to more detailed examination of three aspects of the argument, namely (1) adoption, (2) the agency of the receiver under section 57(1) and (1A), and (3) the scope of section 60(1)(c) and in particular its application to adopted contracts.

Mr Drummond Young submitted that four important points about adoption emerged from Powdrill v Watson, namely

it is not a term of art defined in the legislation (448B);
it does not involve an assumption of personal liability by the receiver (448G);
critically, it gives rise to a separate liability in the receivership (449A); and
it is "all or nothing", at least in relation to contracts of employment passively adopted under section 57(5) (449H).

From these points it may be concluded that adoption gives the contract a new status in the receivership, a ranking distinct from that of ordinary creditors. There are two ways in which that can occur, which are reflected in paragraphs (c) and (d) respectively of section 60(1). These provisions apply to wholly new contracts entered into by the receiver, as well as existing contracts adopted by him. Almost always in practice the priority ranking will be achieved by way of section 60(1)(c), because receivers seldom accept personal liability. The standard way in which a receiver carries on the business of the company, if attempting to effect a rescue, is to continue existing contracts in force. In such a situation (for example, in relation to the delivery of an instalment of materials due under a supply contract) the supplier will raise the issue with the receiver, the receiver will say that he wishes the delivery to be made, the supplier will ask how he is going to be paid, and the receiver will say that he will ensure payment from the receivership funds without incurring personal liability. That, said Mr Drummond Young, is an adoption of the pre-receivership contract, passive adoption under section 57(5) not being available in such a case. The pre-receivership contract continues in force notwithstanding the receivership, by virtue of section 57(4), and the alteration in ranking achieved by adoption is not an alteration of the contract. In contracts of employment the function of passive adoption under section 57(5) is likewise to give a new priority ranking to the employees' claims. One route to such priority was provided by section 60(1)(c). Following Nicoll v Cutts, Parliament introduced the personal liability route to priority ranking for employees' claims. The 1994 Act capped the personal liability of the receiver. But that did not affect the section 60(1)(c) route to priority, which therefore remains open, and not subject to the restrictions now applicable to the personal liability route. It was not as surprising as the pursuer suggested that there had not been previous resort to the section 60(1)(c) route, because for an appreciable period after 1986 it was thought that it was open to the receiver to prevent adoption simply by declaring in a "Specialised Mouldings" letter that he was not adopting the contract. It was only in Powdrill v Watson that that was shown to be wrong.

In relation to the agency of the receiver, Mr Drummond Young's submission was that it was likely that section 57(1) was enough to make the receiver the agent of the company in relation to contracts of employment. Where the floating charge attaches the whole property of the company, contracts of employment affect such property, and are therefore within the scope of the section 57(1) agency. In effect, therefore, section 57(1A), which is expressed as "without prejudice to subsection (1)", was enacted for the avoidance of doubt. The effect of sections 57(1) and (1A) is that when a receiver adopts a contract of employment, he is acting as agent on behalf of the company.

In section 60(1)(c) the reference to "creditors", Mr Drummond Young submitted, was a reference to creditors of the company. "[A]ll liabilities, charges and expenses" was very widely expressed, and extended in effect to any obligation of the company. It covered not only primary contractual obligations, but also the secondary obligation to pay damages for breach of contract, as well as delictual obligations. The phrase "incurred by or on behalf of the receiver" did not refer to the incurring of personal liability by the receiver, but meant incurred by or on behalf of the receiver acting as agent for the company. The essential point was that a liability, to fall within the scope of section 60(1)(c), must owe its existence to an act of the receiver. Where the receiver entered into a new contract the position was clear. Where a pre-receivership contract was adopted by the receiver, that was enough to make the obligations which arose under or as a result of the adopted contract during the receivership liabilities "incurred by ... the receiver". The same applied to substitutional obligations, such as liability to pay damages for breach of contract, or payments in lieu of notice. According to the House of Lords in Powdrill v Watson, obligations which arose before the appointment of the receiver were not covered by adoption. Claims for damages, however, including claims for pay in lieu of notice, were treated as matters within the personal liability of the receiver, and thus as forming part of the liabilities which arose during the receivership (see 416H and 417D, and the fact that those matters were not remitted to the Chancery Division (452E-G)). From that it followed that where a receiver terminated an adopted contract of employment, the resultant claim for damages or pay in lieu of notice was (apart from any question of the receiver's personal liability) a liability of the company incurred by the receiver during the receivership. It therefore fell within the scope of section 60(1)(c).

Mr Drummond Young submitted that Mr Hodge's "floodgates" argument was misconceived. It was no doubt right that the argument under section 60(1)(c) would apply to contracts other than contracts of employment, but since passive adoption under section 57(5) applies only to contracts of employment, in the case of other contracts it was a matter for the receiver to determine whether to treat the contracts in such a way as to adopt them and thus give them the enhanced status in the receivership. The argument, however, did not apply to contracts which had not been adopted. It was wrong, therefore, to say that liability on a contract of employment terminated within 14 days of the receiver's appointment would be accorded priority if the pursuer's argument were accepted, because in that case there would be no adoption.

In response to Mr Hodge's suggestions as to the limitations to be applied to the scope of section 60(1)(c), Mr Drummond Young made the following points:

there was no expression in the language of the section of such restrictions or limitations as were contended for;
paragraph (c) is not restricted to contracts of employment, and must therefore be capable of operating in relation to all sorts of contracts and to substitutional as well as primary obligations under such contracts, otherwise there would be very severe practical limitations on what a receiver could do;
if there is a "benefit/burden" principle such as the defenders contend for, how is the "benefit" to be gauged? To restrict it to actual benefit would be impracticable. Should the search simply be for some reciprocal consideration, without concern for its adequacy? That would run counter to the principles of unity of contract and mutuality. The problem is particularly acute where the breach of contract is termination without the agreed notice. The entitlement to notice is part of the consideration which the employee receives for his whole services.

It was clear, Mr Drummond Young said, that the 1985 reforms were rushed through Parliament to deal with Nicoll v Cutts. There was no indication that the effect in Scots law of section 60(1)(c) was ever considered at that stage. Although the defenders pointed to the anomaly that the section 60(1)(c) route achieved higher priority than personal liability, indemnity and section 60(1)(d), there was no direct comparison, and from a creditor's position, the lower priority (when combined as it was with the receiver's personal liability) might be preferable. Parliament's choice of the personal liability route stemmed from Nicoll v Cutts. If a Scots lawyer had been considering what to do about Nicoll v Cutts, he might have suggested making the section 60(1)(c) route expressly available. Even that might have been unnecessary if the concept of adoption pre-existed the 1985 legislation.

Mr Drummond Young referred to Mr Hodge's submissions about the various types of receiver in England and how they corresponded with Scottish receivers, and pointed out that the 1994 Act had not altered the position under section 37 of the 1986 Act in relation to receivers and managers. The purpose of section 3 of the 1994 Act was simply to limit the personal liability of the receiver. Given the difference in the history of receivers in England and Scotland, it was not cause for surprise if the detailed rules were different. The English law was in origin judge-made. The legislation contained no equivalent of section 60. The order of payment in England can be seen set out in Palmer's Company Law, para. 14.153. That in itself showed that the two systems were different in detail. It was, in principle, unsatisfactory that the construction of a Scottish statutory provision should turn on the details of a technical point of English law.

Finally, in response to Mr Hodge's submission that the pursuer's construction would put Scottish receivers at a significant disadvantage, Mr Drummond Young suggested that it could not be said how serious the disadvantage would be. If the existing legislation yields a result which causes serious problems, the Scottish Law Commission and Parliament are best placed to deal with the matter. In the meantime, parties are entitled to insist on their rights under the existing legislation.

The issue which I have to determine is one of statutory interpretation. The pursuer asserts that his claim has a certain priority of ranking in the receivership by virtue of its falling within the scope of section 60(1)(c). The defenders dispute the claim to priority, submitting that on a sound construction of section 60(1)(c) it does not extend to a claim of the sort made by the pursuer. The issue cannot in my view be determined by a narrow examination of the terms of section 60(1)(c). The fact that that section is part of a statutory code regulating the operation of receivership in Scots law is by itself sufficient to make it necessary to view the section in the broader context of that code as a whole. In my view, however, the context requires to be broadened further than that. The pursuer is no doubt right to emphasise that the law of receivership in Scotland is statutory, and that the answer to the issue before the court must be found by interpretation of the relevant statutory provisions. It does not, however, in my opinion follow that it is irrelevant to examine considerations such as the way in which the concept of receivership developed in decisions of the English courts, the purposes which were seen to be served by the adoption of the concept into Scots law, the effect of the corresponding legislation applicable in England and Wales, and the philosophy which is recognised as underlying the recent development of the legislation.

The problem which led, eventually, to the introduction of receivership into the law of Scotland arose at what might be called the interface between company law and the law of rights in security. It lay in the fact that until 1961 a Scottish company could only grant fixed securities over identified assets, and security over moveables required delivery. By the Companies (Floating Charges) (Scotland) Act 1961 power was given to such companies to grant security for existing and future debts by creating a floating charge over all or any of its property, heritable or moveable. The floating charge crystallised on liquidation, attaching to such property as was owned by the company at the commencement of a winding up. That was found to be an incomplete solution, because of the tie between enforcement of the security and the winding up of the company. The next stage in the development of the law was therefore the introduction into Scots law of receivership, to provide a means by which the security could be realised otherwise than by liquidation of the company. That was done by the 1972 Act, which followed the Scottish Law Commission's Report on the Companies (Floating Charges) (Scotland) Act 1961 (Cmnd. 4336) in which there were identified as factors favouring the introduction of receivership into Scots law (1) the fact that the appointment of a receiver might revive the fortunes of the company and avoid unnecessary liquidation and (2) the fact that the absence of receivership in the law of Scotland constituted a major difference between Scots and English law. Elements of the thinking involved in the "rescue culture" identified in Powdrill v Watson as underlying the 1986 Act can thus be seen to have been present at the time of the introduction of the institution of receivership into Scots law. At the same time there was a recognition of the undesirability of unnecessary differences between the powers enjoyed by companies in England and those enjoyed by companies in Scotland. In contradistinction to the approach later adopted when administration was introduced into both systems of law by a single set of legislative provisions, receivership was introduced into Scots law by a set of provisions separate from those which dealt with receivership in England and Wales. In certain respects, differences in the general law in the two jurisdictions made differences in the legislation affecting receivership necessary. A good example is the one mentioned in the course of the debate, the provision in section 60(1)(b) (section 20(1)(b) of the 1972 Act) giving appropriate priority to rights acquired under the Scots law of diligence. Apart, however, from differences which arise out of existing rules of Scots law, it seems to me to be better in accord with the underlying purpose of introducing receivership into the law of Scotland to construe the Scottish legislation in a way which will minimise rather than maximise differences in result between the two systems.

Another consideration which it is, in my view, important to keep in mind is that the legislation is intended to facilitate, rather than make more difficult, the reconciliation of the rights of the floating charge holder with the preservation of the business of the debtor company as a going concern. As Lord Browne-Wilkinson pointed out in Powdrill v Watson (at 442A), the importance of the "rescue culture" which seeks to promote the preservation of viable businesses is that, in the particular context of the rights of employees of the company in receivership:

"it is unlikely that Parliament would have intended to produce a regime ... which renders any attempt at such rescue either extremely hazardous or impossible."

There seems to me to be no reason to regard the rescue culture as a factor of any less importance in Scots law than it is in English law. I am therefore of opinion that in approaching the task of statutory interpretation which arises in the present case, it is not only legitimate but necessary to bear in mind that an interpretation which facilitates the preservation of the business of the debtor company is to be preferred to one which makes the attainment of that objective more difficult or impossible.

The particular aspect of the law of receivership which is in issue in the present case is the manner in which it treats, and the extent to which it accords priority to, claims by employees of the company. Notwithstanding the separate statutory basis for receivership in Scotland, it would in my view be an inappropriately blinkered approach to ignore the way in which that aspect has developed in English law. The result of the decision in Nicoll v Cutts was to give the employees of the company no priority in respect of unpaid wages earned during the receivership. The argument that the receiver incurred personal liability was rejected on the basis that he had entered into no new contract of employment, although the company in receivership, acting through his agency, had enjoyed the benefit of the employees' services. The alternative argument that the unpaid wages could be treated as part of the costs and expenses of the receivership also failed. It was not suggested on the pursuer's behalf in the present case that Nicoll v Cutts would have been decided differently if it had arisen in Scotland. Faced with the unfairness of the result that the employees, from whose labour the company in receivership had derived benefit, were left with no more than an ordinary ranking for payment, Parliament could have found a solution in either of two ways. One way would have been to provide expressly that such claims should have a priority ranking in the receivership; but that was not the solution which was adopted. Instead, Parliament chose to extend the scope of the receiver's personal liability to contracts of employment adopted by him. The position of the employees was thus safeguarded, while the impact of the resultant personal liability on the receiver was mitigated by his right to indemnity and the priority given to that right. It is in my view significant that the same remedy for the mischief in Nicoll v Cutts was applied in English and Scottish receiverships (sections 37, 44 and 57 of the 1986 Act). When, as a result of the decision of the Court of Appeal in Powdrill v Watson, that remedy was perceived as having gone too far, both the House of Lords on appeal and Parliament in its legislative capacity, sought to redress the balance. The House of Lords did so by restricting the personal liability on adopted contracts of employment to liabilities incurred during the receiver's tenure of office (452C). Parliament took a different course. It introduced the concept of "qualifying liabilities", and restricted the receiver's personal liability to such liabilities. Again, it is in my view significant that the same solution to the perceived difficulty was applied to the Scottish provisions as to the English ones (see sections 2 and 3 of the 1994 Act, amending respectively sections 44 and 57 of the 1986 Act). (There was reference in the course of the debate to the fact that that solution was not applied to the case of English receivers and managers other than administrative receivers - there was no corresponding amendment of section 37 of the 1986 Act. The reason for that difference in treatment of the two types of English receivers was not fully explored in debate before me, and I do not regard it as either necessary or appropriate for me to express a view on that matter. It does not seem to me materially to affect the issue before me.) The net result, as the matter now stands, is that both the English legislation relating to administrative receivers and the Scots legislation relating to receivers contain provisions to the effect (1) that a receiver is personally liable on adopted contracts of employment, but only to the extent of any qualifying liability, and (2) that the receiver is entitled to be indemnified in respect of that personal liability out of the property of the company. If attention were concentrated exclusively on these provisions, they would appear to be definitive of the protection given to employees' claims - the extent of the priority is the amount of any qualifying liability, and the route by which the priority is worked out in the distribution of the company's assets is by way of the receiver's personal liability and right to indemnity. The way in which those provisions developed, first as a reaction to Nicoll v Cutts conferring protection on employees' claims, then as the correction of what was perceived to be the over-generous degree of protection afforded by the 1986 Act as interpreted by the Court of Appeal in Powdrill v Watson, can in my view readily be seen as reinforcing the conclusion that Parliament intended those provisions to be definitive of the extent of the priority accorded to employees' claims.

The pursuer's approach, however, is to concentrate not on the development of the law concerning the priority to be accorded to the claims of employees in receivership, but rather on the terms of section 60(1)(c). There is no doubt that that section gives priority to "creditors in respect of all liabilities ... incurred by or on behalf of the receiver". It is common ground that the creditors referred to are the creditors of the company, and the liabilities in question are liabilities incurred on behalf of the company by the receiver acting in his capacity as agent of the company. The question is whether the pursuer's claim falls within the scope of that section properly construed. To express the matter in general terms, the issue concerns what a receiver must do to "incur" such a liability. There is no difficulty in accepting that if the receiver as agent of the company enters into a fresh contract after the commencement of the receivership, the liabilities arising during the currency of the receivership under that contract are liabilities incurred by the receiver, and thus liabilities to which section 60(1)(c) would apply. The same would apply to liability to pay damages for breach during the receivership of such a post-receivership contract. Where, however, the contract was entered into by the company before the commencement of the receivership, can the receiver "incur" liabilities and, if so, how may he do so? It is on the answer to that question that the parties to the present case are in dispute. The dispute is not, however, as radical as the defenders' counsel apprehended it might be. The pursuer does not argue that the mere intervention of the receiver to terminate the contract brings any liability in damages in respect of that termination within the scope of section 60(1)(c). To that extent the defenders' apprehension that the pursuer is seeking to open the floodgates is ill-founded. However much the receiver may be the agent through whom the company commits or intimates a breach of a pre-receivership contract, the pursuer does not contend, if the contract has not first been adopted by the receiver, that the breach or termination amounts to the incurring by the receiver of a liability within the meaning of section 60(1)(c). The pursuer's position is that it is the conjunction of (1) adoption of the contract by the receiver with (2) subsequent termination of the contract by the receiver which, in the circumstances, amounts to the incurring of a liability by the receiver which falls within the scope of the section 60(1)(c).

I note in passing that the introduction by the 1994 Act of section 57(1A) of the 1986 Act plays no necessary part in the pursuer's argument. Although Mr Davies laid some emphasis on it, senior counsel for both parties were at one in regarding subsection (1A) as a "for the avoidance of doubt" provision, which clarified but did not expand the effect of the agency created by subsection (1). It is unnecessary for me to express a view on the point.

It can therefore be seen that the pursuer's submission depends fundamentally on the deployment of the concept of adoption, and on a gloss put on Lord Browne-Wilkinson's dictum in Powdrill v Watson at 449A that adoption connotes:

"some conduct by the ... receiver which amounts to an election to treat the continued contract of employment with the company as giving rise to a separate liability in the ... receivership".

Mr Drummond Young treats the words "separate liability" in that dictum as if they were synonymous with "enhanced priority", and goes on to postulate that that enhanced priority may be attained not only by way of the receiver's personal liability (which as he rightly points out the receiver will commonly strive to avoid, particularly in the context of contracts other than contracts of employment), but also alternatively by way of section 60(1)(c). In my view, that submission involves detaching the concept of adoption from its statutory context, and deploying it for a purpose outwith the scope of the purpose for which Parliament introduced it.

In my opinion, the concept of adoption of a contract of employment was introduced into the 1985 legislation which became sections 19, 37, 44 and 57 of the 1986 Act simply as the connecting factor between a pre-receivership contract of employment and the stipulated statutory consequence (a priority charge on the assets under administration in the case of section 19, and personal liability on the part of the receiver under sections 37, 44 and 57). It was introduced to deal with a specific problem, viz. the unfairness to employees resulting from Nicoll v Cutts; it was introduced in relation to contracts of employment only; the circumstances in which it might be held to have taken place were to some extent defined (section 57(5) and its equivalents in the English provisions); and its consequences were also defined (differently for administration and receivership). Given the fact that the word adoption is used with varying content in different areas of the law (as noted in Powdrill v Watson at 448B-D), the meaning of the word in sections 19, 37, 44 and 57 of the 1986 Act must, as Lord Browne-Wilkinson said, "be gathered from the context in which it is used" (448E). Against that background, it is in my view clear that when Lord Browne-Wilkinson referred to adoption as an election to treat the continued contract of employment as giving rise to "a separate liability in the administration or receivership", the only separate liability which he had in mind was the priority charge under section 19 or the receiver's personal liability under section 37, 44 or 57. There is, in my view, no justification for giving the statutory concept of adoption of a contract of employment in receivership a connotation wider than its statutory context requires. I do not consider that it is legitimate to apply it to contracts other than contracts of employment, or to use it, even in contracts of employment, as a component in an argument for a different route to priority from the one expressly contemplated in the provisions in which the concept is expressly used.

As Mr Drummond Young pointed out, a receiver on taking up office is normally faced with the fact that there are a number of continuing contracts to which the company is party, and which by virtue of section 57(4) continue in force notwithstanding his appointment. If he is to carry on the business of the company with a view to preserving it as a going concern, he must consider what to do with such contracts. He incurs no automatic personal liability (section 57(4)), and will normally seek to avoid incurring such liability. To take the example given by Mr Drummond Young of a supply contract, he will normally agree with the supplier that supplies should continue in accordance with the pre-existing contract, on the basis that he as receiver incurs no personal liability but will procure that supplies are paid for as they are made out of the receivership funds. Mr Drummond Young described that as adoption by the receiver of the pre-receivership contract, which would result in the incurring of liabilities which would fall within the scope of section 60(1)(c). Thus was illustrated the role said to be played by adoption in the incurring of such liabilities. The ability to adopt contracts in that way was said to be essential if the rescue culture was to have effect. The initial attraction of that argument stems, it seems to me, from the variety of related and overlapping uses to which the concept of adoption is put in the law. The process which Mr Drummond Young describes is one for which the label "adoption" is not self-evidently inappropriate. On closer examination, however, the postulated negotiation between the receiver and the supplier can be seen to result in a new supplementary agreement. The goods to be supplied may be the same, as may be the delivery schedule and the price and timetable for payment. Virtually all of the terms of the pre-receivership contract may be carried forward. There is therefore a more or less substantial core of the pre-receivership contract which is "adopted" in a sense by the receiver. The essential feature of the arrangement, however, is a fresh agreement that the supplier's claim for payment will lie not against the company in receivership as an ordinary debt ranking after the claim of the floating charge holder, but as a liability to be satisfied out of the funds of the receivership in priority to the claim of the floating charge holder. That fresh agreement will, it seems to me, most commonly be the express result of discussion between the supplier and the receiver, although it is conceivable that it might be inferred from actings. The important point is that what must be expressly or impliedly agreed is that there is a fresh liability incurred by the receiver which will be entitled to a priority ranking. However apt the expression "adoption" may, in the abstract, be to describe that type of arrangement, it is in my view something different from the statutory adoption of contracts of employment (particularly when such adoption occurs by virtue of section 57(5) as construed in Powdrill v Watson). In cases of statutory adoption of contracts of employment, there is in my view no basis for inferring an agreement between the receiver and the employee that any part of the employee's claims will have a route to priority other than the one expressly provided by section 57(2) and (3). To hold that adoption of a contract of employment does not open the way to a claim under section 60(1)(c) when the receiver terminates the contract does not, however, mean that receivers are disabled from the sort of negotiation with suppliers and other contracting parties to which Mr Drummond Young referred.

I am therefore of opinion that the pursuer's attempt to bring his claim within the scope of section 60(1)(c) by relying on the fact that his contract of employment was adopted under section 57(5) is ill-founded. It seems to me that that result follows not only from an examination of the proper scope of the statutory concept of adoption, but also from consideration of what the consequences would be if the pursuer's submissions were sound. The result, in that event, would be that a claim which, by virtue of the restriction of the receiver's personal liability to qualifying liabilities introduced by the 1994 Act, was excluded from coming to bear on the funds of the receivership under section 60(1)(d), instead came to bear on the receivership funds under section 60(1)(c). Parliament would thus, having decided in 1994, in light of a judicial decision which was perceived to demonstrate that the existing legislation was too generous in the priority accorded to employees' claims, that part of such claims should no longer have the existing level of priority, be held to have created a situation in which that part of the claims could achieve a higher priority by a different route. That would be a bizarre result. It cannot, in my view, be what Parliament intended.

Further, it seems to me that Parliament cannot have intended to bring about a situation in which the claims of employees were accorded substantially greater preference in Scottish receiverships than that available to them under the law of England and Wales. The pursuer was unable to point to any good reason for there being a difference in treatment of employees' claims between the two jurisdictions. No principle of Scots law requires different treatment. Moreover, the consequence of the difference would be that adoption of employees' contracts would have a substantially more onerous effect on Scottish receiverships. That, in turn, would be prejudicial to the ability of Scottish receivers to achieve the objectives of the rescue culture. These two considerations further reinforce my conclusion that the pursuer's construction of section 60(1)(c) is unsound.

For all these reasons I am of opinion that the pursuer's claim for £62,801.56 in lieu of notice is not entitled to priority ranking in accordance with section 60(1)(c). As recorded earlier, it was accepted in the course of the debate that the claim for a redundancy payment, which made up the balance of the sum mentioned in conclusion 1(1), was not entitled to such a ranking. Since all material matters of fact are agreed, I can go beyond dealing with the matter as one of relevancy. I shall accordingly sustain the defenders' fourth plea-in-law, repel the pursuer's second plea-in-law so far as it relates to the question of ranking, and refuse decree of declarator in terms of conclusion 1(2) and (3). The case will be put out By Order on Monday 27 April 1998 for the purpose of discussing further procedure.

OPINION OF LORD MACFADYEN

in the cause

ROGER LINDOP (ASSISTED PERSON)

Pursuer;

against

STUART NOBLE & SONS LTD & OTHERS

Defenders:

________________

Act:Drummond Young, QC, Davies
Balfour & Manson

Alt:Hodge, QC, Howlin
Bishop Robertson & Chalmers

7 April 1998

ROGER LINDOP v. STUART NOBLE & SONS LTD & OTHERS

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