Administrators’ duty to pay NIC and PAYE deductions in priority

In the case, Commissioners of Inland Revenue v Lawrence & Anor (10th February 2000), Jules Sher QC (sitting as a deputy High Court judge) held that the Inland Revenue enjoyed super priority to be paid PAYE and NIC deducted from employees’ wages by administrators in respect of services rendered during an administration. This super priority enjoyed by the Inland Revenue means that they must be paid first out of the proceeds of any of the company’s property in the administrators’ hands, ahead of the administrators’ remuneration, and expenses, and any secured creditor, holding a floating charge.

More detail....

Sections 19(5) and (6) of the Insolvency Act 1986 apply to any sums payable in respect of debts or liabilities incurred by the administrators either:

S19(5) under contracts entered into by the administrator; or

S19(6) under contracts of employment adopted by him, but only to the extent that the liabilities are qualifying liabilities (which means wages, salary or pension contributions to occupational pension schemes in respect of services rendered wholly or partly after the administrator adopts the contract).

In both cases, where the contracts are entered into by the administrator in the carrying out of his functions, then the administrator must pay such sums in priority to his expenses and remuneration and any secured creditor out of such property of the company which is in his custody or control.

Jules Sher QC held that NIC and PAYE deducted from employees’ wages fell within the definition of wages and therefore enjoyed the priority of sections 19(5) and (6) in addition to the amounts paid directly to employees. However, the deputy judge distinguished secondary NIC employer contributions because these did not derive from a liability of the employee, but instead were categorised as a separate liability of the employer. As such, they did not fall within the definition of wages and fell outside the scope of sections 19(5) and (6).

Comment

The administrators have been granted leave to appeal this judgment, but it is not yet known whether an appeal will be made. Whilst it is obviously appropriate for administrators to pay PAYE and NIC under section 19(4) as “any expenses properly incurred by him” out of the company’s property ahead of any secured creditors, this would nevertheless appear to be a rather strained construction of section 19(5) and (6) to give the Inland Revenue super priority ahead of most other creditors.

For further information, please contact Inga West on tel: 0171 367 3478 or e-mail: [email protected]