The administrators of the restaurant chain Carluccio’s can furlough the company’s employees and claim for their wages under the Coronavirus Job Retention Scheme (CJRS), following a High Court ruling – the first to be made in consideration of the new scheme.
It was found that the administrators had validly varied employees’ contracts, thus allowing furlough agreements to be made, and will have ‘adopted’ the contracts of furloughed employees for insolvency law purposes when they come to apply for CJRS funding. As a result, furlough wage payments can be prioritised over the administrators’ fees and expenses and the distribution of assets to floating charge and unsecured creditors.
Carluccio’s, which employed around 2000 employees across the UK, closed all its branches on 16 March 2020, in accordance with the Government’s guidance intended to limit the spread of COVID-19. The company went into administration two weeks later. The administrators intended to retain a large proportion of employees under the CJRS whilst a buyer for the business was sought.
They offered furlough leave to employees through a variation letter. Under its terms, it was proposed that 80% of wages up to £2,500 per month would be covered by HMRC. Of the employees who have responded to the letter, the vast majority accepted furlough, whilst a small number indicated a preference to take redundancy or retirement.
Although HMRC has made the scheme available to companies in administration, the administrators in this case expressed concern at a lack of detail as to how it would operate in relation to insolvency legislation. Under the CJRS, monies are paid to the employer rather than directly to employees, and therefore constitute assets of the administration which are subject to the order of disposal dictated by law.
Consequently, the administrators sought a High Court ruling seeking clarification on how they could implement the furloughing process and, particularly, whether the payment of wages could be prioritised. The ruling was made on 9 April 2020, just four days ahead of the closure of the 14-day window during which the administrators’ actions do not amount to the ‘adoption’ of any contracts of employment for the purposes of insolvency law.
Mr Justice Snowden held that the variation letter had validly amended the contracts of those employees who had expressly agreed to it, and he rejected the argument that the contracts of those yet to respond had also been amended. Those employees on varied contracts are therefore entitled to wages in the sum of the grants to be paid to the company under the CJRS.
The Judge also held that, applications made by the administrators under the CJRS in respect of any payments made to employees on varied contracts, will constitute ‘adoption’ of that employee’s contract for the purposes of insolvency law. Therefore, under paragraph 99(5) of Schedule B1 to the Insolvency Act 1986, the employees will have ‘super-priority’ ahead of the administrators’ fees and expenses, floating charge creditors and unsecured creditors; and so payments can be made using the grant monies provided under the CJRS.
As regards employees yet to respond to the variation letter, they will essentially the same position as consenting employees if they subsequently accept furlough but the unvaried contracts of the non-responders won’t be treated as adopted at the end of the 14-day period provided. As a result, the administrators won’t have to dismiss those employees to avoid incurring super-priority liabilities towards them.
