Administrators of the Carluccio’s Italian restaurant chain have recently sought the direction of the High Court on whether and how they can take advantage of the Coronavirus Job Retention Scheme (the Scheme) and furlough employees. This was specifically in the context of existing insolvency legislation providing for the automatic adoption of contracts of employment by administrators after 14 days of the start of the administration (paragraph 99(5) Schedule B1 to the Insolvency Act 1986).

Urgent directions were sought from the Court following the “mothballing” by the administrators of the business during the COVID-19 lockdown, with the underlying strategy of selling the business.

Pending any sale, there were no funds available in the administration to pay wages and salaries. The administrators had written to employees to vary their terms and conditions of employment and place the employees on furlough, on the basis that employees would only be paid when the company (acting by the administrators) had reclaimed the grant available under the Scheme and not before. The majority of employees had consented to the variation, some had objected (opting for redundancy) but a number had not responded. The administrators needed to urgently address, before the expiry of 14 days from their appointment (whereupon employment contracts would be automatically adopted), whether they had varied the employees’ contracts of employment and what the position was regarding the non-responding employees.

The Scheme was introduced by the Government in response to COVID-19 lockdown measures. It enables businesses to place employees on furlough and reclaim 80% of their wages (capped at £2,500 per month) from the Government. Without any draft legislation, regulations and limited information published, the Carluccio’s administrators queried the Scheme in the context of administration. The key issue was the application of paragraph 99(5) of Schedule B1 and the automatic adoption of employee contracts, whereupon liability for wages or salary attracts super-priority (i.e. ahead of the administrators’ fees and expenses, floating charge creditors and unsecured creditors). The Scheme provides for the grant to be reclaimed by the employer (not the employee).

The Court had to first decide whether to give directions at all.  It had not been possible to join in the representative employees at short notice (albeit their union was involved at the hearing). There was also no legislative detail for the Court to rely upon, as regards the Scheme’s application in insolvency situations. Whilst the Court did not consider their decision and directions would necessarily be binding on the employees or the Government, it was prepared to give its view of the legal issues to assist the administrators to allow the implementation of the Scheme in an “innovative manner”.

The following conclusions were reached by the Court:

1. The variations were effective as regards the consenting employees but not the non-responding ones (and the objecting employees would have their employment terminated for reasons of redundancy).
2. There was no adoption of the contracts triggered simply by virtue of sending out the variation letter (since that happened within 14 days of the administrators’ appointment).
3. The adoption of the contracts of the consenting employees, would only take effect when the administrators made an application under the Scheme or paid the employees’ wages or salary (i.e. if other monies became available to pay them). Such payments would be afforded super-priority under paragraph 99(5) of Schedule B1.
4. The contracts of the objecting employees would not be adopted.
5. If and when the non-responding employees consented or objected, they would be treated in the same way as the consenting or objecting employees (as applicable). However, for those non-responding employees who continued to withhold their response, there could be no variation or adoption to their contracts and their claim for wages or salary would be unsecured. Any further attempts by the administrators to engage with the non-responding employees (albeit after the 14 days) would not trigger adoption.

Therefore, IPs can take a degree of comfort from this case to take advantage of the availability of furlough arrangements in the context of administration (where there is a reasonable likelihood of re-hiring employees).

In situations where administrators lack funds to pay the employees’ wages and salary before making the application to reclaim under the Scheme (the portal being due to open on 20^th April), the administrators could seek to vary the employees’ contracts in writing (with their express consent). The administrators can therefore avoid adoption (triggering the super-priority treatment of wages or salary) pending using the Scheme.

It is worth noting that the Scheme does not allow employers to reclaim other liabilities to employees such as holiday and sick pay. The High Court has just been asked to address this particular issue in the Debenhams’ administration whereby the administrators have sought direction on whether contracts of employment of employees furloughed prior to the administrators’ appointment, should be treated as adopted and super-priority be afforded to liabilities accruing under them. Further detail is awaited once that judgment is handed down, but it is understood that the Court favoured the interpretation of treating those contracts as being adopted, notwithstanding the furloughing commenced before the administrators’ appointment.

It is only a matter of time before further similar case law emerges in the context of insolvency. Specific clarification from Government may need to be provided pending the legislation around the Scheme.

If you would like to get in touch with our insolvency solicitors, please call 023 8082 7406 or email online.enquiries@la-law.com.