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A recent case involving the long-running saga of the insolvency of Leeds United FC has potential implications for employees of companies which go into administration.

The administrators of Leeds United are the ‘Big 4’ accountancy firm KPMG, who were appointed administrators of the club in May 2007. Leeds United was relegated to League 1 at the end of the 2006/07 season, but still had players on wages based on being in the Premier League. Wishing to be able to cut the club’s payroll, KPMG applied to the court for a ruling on whether any damages payable for wrongful dismissal would rank for payment before or after KPMG’s own fees for the administration. The action related to the contracts of four footballers, the unexpired portions of whose contracts were worth £2.2m. The issue for the club was that if the administrators did not accept the contracts, the club would lose its most valuable assets because the players would become free agents. If the administrators accepted the contracts, there would be a substantial liability if the players were not paid. The administrators foresaw a problem if they were to be considered to have wrongfully dismissed the players because the legislation places sums arising out of a ‘debt or contract’ adopted by an administrator in respect of ‘wages or salary’ as priority items for payment in such circumstances.

At issue was whether a liability in damages arising for wrongful dismissal was a sum arising out of debt or contract in respect of wages or salaries. In the view of the court, ‘damages payable to the employee are not wages’. In similar circumstances, therefore, it is to be expected that the court would rule that damages arising out of other breaches of an employment contract would not have the preference given to wages and salaries in the insolvency legislation.

Another recent decision has confirmed that protective awards made to dismissed employees after a company is put into liquidation are not debts due by the company at the date of liquidation. The employees concerned are not therefore creditors of the company.

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