Carluccio’s: High Court guidance on the relationship between furlough under the Coronavirus Job Retention Scheme and insolvency legislation
On 13 April 2020, the High Court handed down its judgement in the matter of Carluccio’s Limited (in administration).
Carluccio’s went into administration on 30 March 2020. The administrators wanted to access the Coronavirus Job Retention Scheme (the Scheme) so they could furlough the workforce (rather than make them redundant) without the company incurring any additional liabilities. Their aim in accessing the Scheme was to help them pursue a sale of the business, as this would achieve the best result for the creditors.
The High Court considered if it was possible for administrators to claim under the Scheme and pay any grant monies received from the government under the Scheme to furloughed employees, whilst not interfering with the statutory order for distribution of company funds under existing insolvency legislation. The judgment is significant because it is the first published decision on the Scheme.
The Scheme
Since the introduction of the Scheme, there have been few, if any, details of what to do if a company goes into administration. The Scheme guidance contains the following advice under the “Who can Claim” section: –
“Where a company is being taken under the management of an administrator, the administrator will be able to access the Job Retention Scheme. However, we would expect an administrator would only access the scheme if there is a reasonable likelihood of rehiring the workers. For instance, this could be as a result of an administration and pursuit of a sale of the business.”
Adoption of Contracts and Priority
When a company goes into administration, an administrator is appointed to promote its rescue as a going concern or realise its assets. The Insolvency Act 1986 provides that nothing administrators do within the first 14 days after their appointment amounts to the adoption of employment contracts. Adoption of employment contracts in administration is a key issue for administrators as employees whose contracts are adopted are entitled to super-priority payments of qualifying wages and salary as an expense of the administration. Therefore, administrators must only adopt those employment contracts that they can afford to pay.
The lack of guidance on the Scheme was problematic for the administrators because any claim for the grant under the Scheme is made by the employer (not furloughed employees) and the grant monies are paid to the employer rather than the employee. Any grant monies claimed by the administrators would have become administration assets which would have to be dealt with in the order of priority of payments required by the Insolvency Act.
As the structure of the Scheme presented administrators with a conflicting duty to preserve assets for creditors, the administrators sought a ruling from the High Court on the legal basis on which they might place employees on furlough under the Scheme and pay out the sums received under the Scheme to the employees, in priority to other claims against the company.
Administrator’s actions
Shortly after their appointment, the administrators wrote to all of the company’s employees whose jobs were not essential to the implementation of their plan, offering to continue their employment on varied terms under the Scheme, emphasising that the company could only pay them once it was in actual receipt of funds from the government under the Scheme (called the Variation Letter in the judgment). The Variation Letter amended their contracts of employment to limit the liability of the company to pay them only such funds as the company received for each of them under the Scheme. The Variation Letter did not state that a failure to respond would be deemed to indicate the employee’s agreement to the proposal.
95% of those employees who were sent the Variation Letter confirmed that they accepted its terms (“Consenting Employees”); 4 employees rejected it (“Objecting Employees”) and approximately 4% did not respond by the deadline set by the administrators (“Non-Responding Employees”).
The Hon. Mr Justice Richard Snowden (the Judge) considered the position of the three classes of employees and held as follows:-
Consenting Employees
The Judge held that their contracts had been successfully varied by their acceptance of the Variation Letter and that this had taken place within the 14 days initial period. He commented that:
- “it seems to me clear that, as and when the Administrators make an application under the Scheme in respect of the Consenting Employees or make any payment to the employees under their varied contracts, this would amount to adoption of the varied contracts of employment”; and
- “if funds were unexpectedly to become available to the Administrators to make payments of wages to the furloughed employees prior to the receipt of monies from the Scheme, that too would amount to adoption of the varied contract”
The Judge confirmed that a varied adopted contract agreed with the Consenting Employees would then give rise to a liability for which super-priority is given.
Objecting Employees
The Judge held that the contracts of employment of Objecting Employees would not be adopted and they would be made redundant (and any liabilities arising from the Objecting Employees would rank as ordinary provable debts).
Non-Responding Employees.
The Judge held that the contracts of the Non-Responding Employees had not been varied in accordance with the Variation Letter unless or until they subsequently accepted the offer prior to termination of their employment contract.
Therefore, where a Non-Responding Employee had not responded by the end of the 14 days, their contracts would not be adopted, but their dismissal would not be compelled. Instead, the unvaried contracts would continue, with the employees unable to attend work, and absent any other action by the administrators, super-priority would not apply to any liabilities in respect of those employees.
This allowed the administrators to retain the Non-Responding Employees beyond the initial 14 days, in order to give the employees an opportunity to belatedly consent to the terms of the Variation Letter. This would allow them to be treated in the same way as the Consenting Employees.
Takeaway points
- The point of adoption did not automatically take place 14 days after the administrators’ appointment. Adoption instead took place when the administrators made an application under the Scheme in respect of those employees or where the administrators made payment to the employee under the (varied) contract.
- Where there are Non-Responding Employees, they do not need to be made redundant during the initial 14 days and may be retained beyond that date. Failure to terminate a contract, by itself, does not amount to adoption of the contract. Adoption requires some additional action on the part of the administrators, such as applying for a furlough grant in respect of a particular employee under the Scheme or paying them under their varied contract (whichever occurs first).
- Administrators are not under any duty to apply for a grant under the Scheme in respect of any employee, other than a Consenting Employee, or a late-consenting Non-Responding Employee whose contract is varied.
- Administrators who apply for a grant under the Scheme can apply funds in the payment of wages in super-priority to all other costs and expenses of the administration.
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Rebecca Butler is an employment managing associate of counsel
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