High Court rules on furlough and insolvency in the first case on the Coronavirus Job Retention Scheme- Re Carluccios Limited (in administration) [2020]

The High Court has provided clarity on how businesses in administration may apply to the Coronavirus Job Retention Scheme (CJRS).

Facts

When a company goes into administration and an administrator is appointed, the employment contracts of the employees do not automatically terminate. However, an administrator has 14 days to adopt these contracts, to allow for breathing space to make decisions on the company’s future without incurring liability. If the administrator adopts the contracts of employment after this time, all liabilities including wages, take priority over other claims against the company.

The restaurant chain Carluccios went into administration on the 30 March 2020 and to avoid redundancies, placed a large number of employees on furlough. As they had no money to pay employees, the administrators wrote to them to ask them to go on furlough and to vary their contracts so that they would only be paid what was recoverable from the CJRS. The majority of employees accepted this variation by the prescribed date.  

The CJRS guidance confirms that company’s in administration are able to access the scheme, however expects administrators to only do so if there is a reasonable likelihood of rehiring workers. The administrators of Carluccios sought direction from the High Court on:

  • How the employees could lawfully be put on furlough due to the lack of information on how the scheme works with insolvency legislation and;
  • Whether they could adopt the contracts of employees who had not responded to the variation letter, rather than dismiss them before the end of the 14-day period
Decision

The High Court held that the proposed variation to the contracts of employment, was only effective to those employees who had expressly agreed. These varied contracts therefore allow the employee to remain employed and entitles them to wages in the sum of grants under the CJRS. The contracts of those who had not responded, had not been varied and the employees who had rejected the variation will be made redundant. 

The High Court held that the contracts of employment for the employees that consented to the variation of contract will be adopted when the administrators apply to the CJRS, or make a payment to the employees under the scheme. At the point of adoption, those employees will have super priority, in accordance with paragraph 99(5) of Schedule B1 to the Insolvency Act 1986. This means they will receive payment of 80% of their salary in priority to other expenses against the company.

It further confirmed that for the employees who have not responded to the variation of contract letter, which in this case was 77 employees, the administrators could simply wait until a response is received, rather than terminate their contract. If agreement is received after the 14-day expiry date, the administrators can similarly adopt their contract by making an application or payment to the employee.

Implications

The decision confirms the availability of the CJRS to companies that are in administration, protecting affected employees. It further clarifies that contracts will not be deemed to have been adopted by administrators until employees have agreed to the variation and an application to the scheme in respect of each consenting employee has been made. This is the case even after the expiry of the normal 14-day period.

Crucially, this may only be the position until further guidance or law is published by the Government and a new Treasury Direction was published on the 15 April which confirms that any agreement to furlough must be made in writing.

The law and practice referred to in this article or webinar has been paraphrased or summarised. It might not be up-to-date with changes in the law and we do not guarantee the accuracy of any information provided at the time of reading. It should not be construed or relied upon as legal advice in relation to a specific set of circumstances.

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