COVID-19: Landmark High Court ruling on Administrators access to the Coronavirus Job Retention Scheme

The High Court has handed down a landmark judgment which clarifies that employees of an employer who has begun insolvency proceedings can be placed on furlough by an administrator to allow them to benefit from the Coronavirus Job Retention Scheme.

Background

Carluccio’s was placed into administration on 30 March 2020, after closing all its branches on 16 March 2020 in line with the Government’s strategy for combatting the COVID-19 outbreak. The administrators wished to seek a sale for the business, whilst retaining all if its employees under the Job Retention Scheme (the “Scheme”) but required clarification from the Courts on the Scheme’s interaction with Insolvency legislation. Carluccio’s sought clarification on whether it could place employees on furlough leave, claim their wages under the Scheme, and distribute this to employees in priority of other claims against the Company, e.g. those with fixed or floating charges over assets.

The administrators offered to place a large number of employees on furlough leave by suggesting an amendment to their contract of employment by way of a variation letter that set out the conditions of the Scheme, i.e. that they would be paid at 80% of their salary up to a cap of £2,500 per month, and they would only be paid if and when the administrator was in receipt of the sums. 1,077 employees agreed to the alteration, 4 rejected it, and 77 did not respond.

Decision 

The High Court held that the variation letter had validly amended the contracts of employment of those 1,077 who had expressly agreed to the variation. Mr Justice Snowden stated that when the administrators  receive the grant under the Scheme, and this is then paid to the employees, this will constitute an “adoption” of the contract for the purposes of insolvency law, which means that employees will be given super-priority ahead of the administrators fees and expenses, floating charge creditors and unsecured creditors. Therefore, the Court has held the sums received under the Scheme can pass to employees in priority of other claims against the Company.

The administrators were concerned that they would have to make the 77 employees who did not respond redundant, since under Insolvency rules administrators normally have to dismiss workers within 14 days of their appointment in order to avoid liability for their employment and wages. The Court held that in the absence of any clear guidance, the 14-day period could be extended to allow those employees who had not yet consented to the change to provide their consent so they can be placed on furlough. Snowden J confirmed that those who do not consent to the variation, or who merely do not respond, will be treated as unsecured creditors, meaning they could be the last to be paid in the order of priorities under insolvency legislation.

The issues in this case highlights the problems caused by putting together the complex Job Retention Scheme at such speed.  This judgment provides welcome clarification for insolvency practitioners and Is likely to benefit other large employers who may enter insolvency proceedings in the coming months, including the retail giant Debenhams.