In the matter of Re Carluccio’s Limited [2020] directions were sought urgently by its Administrators in respect of furlough arrangements with employees. Snowden J handed down judgment which provided clarity and direction. This will be of interest to insolvency and employment lawyers given the issue of furloughing employees and how the Coronavirus Job Retention Scheme (“CJRS”) operates in business rescue situations.

The Administrators wished to make use of the Furlough Scheme to help them preserve the Company’s employees, rather than make them redundant as part of their efforts to sell the Company as a going concern (so as to achieve a better realisation for creditors than if the Company was wound up). The Administrators only wished to make use of the Furlough Scheme if it would not result in the Company being faced with greater liabilities.

The urgency arose as a result of the 14 day grace period pursuant to paragraph 99 (5) (a) of Schedule B1 of the Insolvency Act 1986 (“IA1986”) This provision provides that action taken within the period of 14 days, after an administrator’s appointment shall not be taken to amount or contribute to the adoption of a contract. If an employment contract is “adopted” by a former administrator, it attracts super-priority over (a) a former administrator’s remuneration and expenses and (b) over a floating charge under paragraph 99(3) and (4) of Schedule B1 of the IA1986. To clarify, this provision provides administrators with a 14-day breathing space following their appointment, to make decisions as to ongoing staffing requirements. The importance of the “adoption rules” is that it determines how employees' claims rank against other debts of a company and who is liable to pay them.

In this matter, the Administrators had written to all employees whose jobs were not essential to the implementation of their plan (i.e. senior management) offering to continue their employment on varied terms under the Furlough Scheme, emphasising that the Company could only pay them once it was in actual receipt of funds from the Government under the Furlough Scheme (“the Variation Letter”). A majority of the employees who were sent the Variation Letter confirmed that they accepted its terms (“Consenting Employees”); a tiny handful refused (“Objecting Employees”) and a small percentage did not respond by the deadline set by the Administrators (“Non-Responding Employees”).

This was the first case to consider: (1) the legal mechanism by which Administrators acting under Schedule B1 of the IA1986 might lawfully place employees on furlough pursuant to the CJRS, (2) the effect of a Variation Letter on the contracts of employment of the affected employees, (3) whether or not the employment contracts of the affected employees would be adopted by the Administrators and (4) if the Administrators were under a duty to apply under the CJRS in respect of any of the employees to whom the Variation Letter had been sent, irrespective of their response (or lack of it).

Snowden J held that:

1. In relation to the Objecting Employees the contracts would not be adopted or varied by the Administrators but would be terminated and those employees would be made redundant.

2. In respect of Consenting Employees, he held that their contracts had been varied following their acceptance of the Variation Letter and given this has been done within the 14 days nothing up to that point attracted super-priority. The varied contracts would only become adopted for the purposes of paragraph 99(5) of Schedule B1 of IA1986 when the Administrators applied to the Government under the Furlough Scheme and/or made payments to the Consenting Employees under their contracts as varied. This would render payment of the sums received under the Furlough Scheme, to the Consenting Employees in accordance with the terms of the Furlough Scheme lawful within the terms of the super-priority liabilities under paragraph 99 of Schedule B1 of IA1986. In relation to the Consenting Employees, the Administrators would be under an obligation to apply under the Furlough Scheme.

3. In relation to the Non-Responding Employees, their contracts would not be adopted by virtue of the fact that the Administrators had not formally terminated their contracts within the 14-day window; they would not be attending work and although their contracts would continue until terminated, super priority would not apply to any liability thereunder. Even if any Non-Responding Employees accepted the terms of the Variation Letter after the 14 days, this would not impose super-priority on any liabilities incurred in the meantime given the later acceptance would not amount to an act on the part of the Administrators.

Snowden J also considered whether the Administrators were under a duty to apply under the scheme in respect of any of the employees who had been sent a Variation Letter. The indication given was that the Administrators would not be under such a duty.

This decision enables administrators to proceed to implement their proposals for furloughing most of the employees without the fear of criticism in the future for acting inappropriately. The judgment is a welcome decision which provides practical guidance and clarity on the circumstances in which the furlough scheme can potentially apply in relation to employees of a company in administration.

If you would like any further information on any of the above, or would like to discuss your particular circumstances and how Knights could help, please contact a member of our Restructuring & Insolvency team.