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14 April, 2020 Open access

High Court considers the legal basis upon which the administrators of an insolvent company might ‘furlough’ the company’s employees pursuant to the Coronavirus Job Retention Scheme

Carluccio's Ltd, Re Insolvency Act 1986 [2020] EWHC 886 (Ch)

In a new judgment, the High Court has considered whether the administrators of an insolvent company can vary the contracts of the company's employees to place them on furlough, pursuant to the Coronavirus Job Retention Scheme (CJRS), in order to limit the company’s liability for wages.

In Carluccio's Ltd, Re Insolvency Act 1986 [2020] EWHC 886 (Ch) (13 April 2020), the Administrators of the Carluccio’s chain of Italian restaurants (the company) were appointed on 30 March 2020 after the company got into financial difficulty as a result of the impact of the government restriction, imposed from 16 March 2020, that all restaurants should close in an effort to reduce the spread of COVID-19.

Subsequently, the Administrators sent a 'Variation Letter' to all of the company's employees making an offer to place them on furlough pursuant to the CJRS. The offer was sent within 14 days of the Administrators' appointment, in order to avoid 'adopting' the employees' contracts and taking on liabilities under them, as provided under insolvency legislation (paragraphs 99 of Schedule B1 to the Insolvency Act 1986), and was designed to limit the company’s liability for wages to the amount that the Administrators would be able to obtain in respect of the employees under the CJRS.

Of the 1,788 employees who received the Variation Letter, 1,707 accepted its terms, four rejected it and stated that they wished to be made redundant, and 77 failed to respond.

Critically, however, while the Administrators wished to retain the company's employees and claim for them under the CJRS rather than make them redundant, they were only willing to do so if, and in so far as, the costs of doing so could be met by the government under the CJRS and they would not incur any greater liabilities for the insolvent company.

NB - the plan to furlough employees rather than make them redundant was part of the Administrators’ strategy to ‘mothball’ the business, running in parallel to seeking a sale of the business in order to achieve a better result for the company's creditors than would be achieved in a winding-up under paragraph 3(1)(b) of Schedule B1 to the Act.

Since no draft legislation or regulations have yet been published in respect of the CJRS - the only details known to date being contained in on-line guidance from the government - the Administrators sought a determination from the High Court of a number of questions of law in order to give them the assurance that, if they were to act on the basis of the Court’s determination, they could not subsequently be accused of having acted inappropriately in dealing with the employees and making applications under the CJRS.

* * * * *

Mr Justice Snowden highlights that the CJRS can potentially apply to companies in administration as well as companies that continue to trade, quoting from the ‘Who can Claim’ section of the CJRS guidance -

‘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.’

However, Justice Snowden points out that the guidance does not explain how administrators might be entitled to pay furloughed employees consistently with insolvency legislation, and notes that -

While noting that the detail of the legislation and regulations that will give effect to the CJRS may propose a regime that imposes a trust mechanism, Mr Justice Snowden finds that until then -

‘… as matters stand, in order that the Administrators can be confident that they will be able to make payments to furloughed employees, there must be a mechanism found under the insolvency legislation to justify payment of such wages and salary in priority to other claims against the Company. In my judgment, the only realistic candidates which could enable such payments to be made are paragraphs 99 and 66 of Schedule B1.’ (paragraph 36)

Prior to analysing the identified legislative provisions, Justice Snowden considers whether the Variation Letter was valid to vary the contracts of employment of the employees that it had been sent to, and finds that it varied the contracts of employees who accepted its terms but did not for employees that either rejected its terms or had failed to respond.

Moving on to consider paragraphs 66 of Schedule B1 to the Act, Justice Snowden observes that the paragraph - that enables an administrator to make payments outside of the normal rules of priority if they think it is ‘likely to assist achievement of the purpose of administration’ - has proven useful to administrators in dealing with particular difficulties arising in administration. However, after assessing the potential of the provision to assist, reaches the conclusion that -

'In the circumstances, I do not propose to express any concluded views on the potential applicability of Paragraph 66 in the current situation. I will say, however, that I am attracted by the possibility that, as with cases such as MG Rover Espana SA A [2006] BCC 599 … Paragraph 66 might be an appropriate way in which the Administrators could fill any gaps, or deal on an ad hoc basis with particular issues of detail that might arise in relation to the implementation of the Scheme.’ (paragraph 112)

Justice Snowden highlights that the focus of the case should in fact be on paragraph 99 - that deals with charges and liabilities on an administrator’s vacation of office - noting that it is clear that the provision includes (under subparagraph 5) powers specifically designed to give administrators the ability and obligation to pay wages or salary to employees where the contracts have been 'adopted' following the period of 14 days after an administrator’s appointment.

Considering whether, and when, the Administrator can adopt the employees' contracts, Justice Snowden holds that -

‘… the Administrators would be doing an act which could only be explicable on the basis that they were electing to treat the varied contract as giving rise to liabilities which qualify for super-priority.

Accordingly, I consider that such steps would enable super-priority payments to be made to the furloughed employees under Paragraph 99(5) using the grant monies as and when received under the Scheme; or in the alternative would enable payments to the employees to be made from other funds of the company, which would be reimbursed when the grant money was paid. (paragraphs 91 and 92)

Summarising the outcome of the hearing, and giving directions contained in an Annex to the judgment, Justice Snowdon says that -

‘The conclusions that I have reached in relation to Paragraph 99 and the directions that I have given will enable the Administrators to proceed to implement their proposals for furloughing most of the employees of the Company without fear that they will be criticised in the future for acting inappropriately. That will be so even if the legal conclusions that I have reached turn out to be wrong or are overtaken by events or detailed legislation giving effect to the Scheme.’ (paragraph 111)

NB - the directions issued by Justice Snowden note that they are made -

'... without prejudice to any argument which an employee may seek to raise as to the true legal position, and subject to any legislation or regulations that may subsequently be enacted to give effect to the CJRS.'

In addition, they include that the contracts of employees who have consented to the Variation Letter will be adopted by the Administrators if an application to the CJRS is made.

Decision in full

Carluccio's Ltd, Re Insolvency Act 1986 [2020] EWHC 886 (Ch)

Date of decision

13 April, 2020

  • High Court