Following on from our previous updates on the effect of the Government’s furlough scheme (the “Scheme”) and its impact on sales out of administrations, the Government has provided a further update, and the High Court has made its first decision on the interrelation between the Scheme and insolvency practice in the context of the recent administration of Italian restaurant chain, Carluccio’s.
We set out these two updates below:
1. Furlough scheme cut-off date extended to 19 March 2020
The Government announced another update on 15 April 2020, where they extended the eligibility date to receive support from the Government’s Coronavirus Job Retention Scheme (CJRS) to 19 March 2020 (the day before the Scheme was announced).
Employers, including administrators, can claim for furloughed employees that were employed, and on the company’s PAYE payroll, on or before 19 March 2020. In the context of a pre-pack sale, the principles of furlough and TUPE are still the same and employees that have been TUPE transferred to another business will be eligible for furlough provided they were on the transferor’s payroll as at 19 March 2020.
The Government has confirmed that the employee must have been notified to HMRC through a Real Time Information (RTI) submission notifying payment in respect of that employee on or before 19 March 2020.
This extension is over 3 weeks from the original cut-off date of 28 February 2020. This change will mean that thousands more workers can be furloughed in attempts by the Government to assist as many people as possible.
2. Interaction between furlough and insolvency in Re Carluccio’s Ltd  EWHC 886 (Ch)
The High Court has made its first decision in relation to the Scheme and how it impacts insolvency practice. The Joint Administrators of Carluccio’s Limited (in administration) (“the Company”) applied to the Court for directions as to how to implement the furlough scheme and comply with the provisions of the Insolvency legislation.
The directions related to the legal basis upon which the Administrators might place a large number of the employees of the Company on furlough pursuant to the Government's Scheme. The Government’s guidance states that the Scheme is available to companies in administration where “there should be a reasonable likelihood of the employees resuming work either for the company itself or after a sale of the business by the administrators”.
The Company has over 70 branches and around 2,000 employees. Shortly after the Administrators’ appointment, the Administrators wrote to all of the Company’s employees inviting them to agree to a variation of their employment contracts so as to take advantage of the Scheme. The letter confirmed that the Company would only be able to pay employees following receipt of the grant from the Government. The letter sought the agreement of each employee to the terms of the letter and to go on furlough leave. The employees were asked to respond by email by 3 April 2020.
The majority of employees accepted its terms (“Consenting Employees”), only 4 rejected it (“Objecting Employees”) and 77 had not responded (“Non-Responding Employees”).
Snowden J handed down judgment with directions on 13 April 2020 and held as follows:
- the Consenting Employees are employed on the basis of a contract which has been varied in accordance with the letter. The Administrators only need to pay wages and salary at a level equal to the grant received under the Scheme, and only at a time when the grant has been received. The contracts will, however, only be deemed to have been adopted once the administrators take an active step in respect of those contracts such as applying for the grant or making payment of wages to the employees;
- the Objecting Employees’ contracts of employment will not either be varied or adopted by the Administrators, but will be terminated and the employees in question will be made redundant.
- as to the Non-Responding Employees:
- if they accept the offer in the letter prior to the expiry of 14 days into the administration, they will stand in precisely the same position as the Consenting Employees; or
- if, however, the Non-Responding Employees do not accept the offer in the letter prior to the expiry of 14 days into the administration, and nothing else happens, the Administrators will not be treated as having adopted the unvaried contracts of employment of the Non-Responding Employees by the mere failure to terminate those contracts prior to the expiry of the 14 day period. Moreover, it was held that there will be nothing done or said by the Administrators that could amount to an election to treat those unvaried contracts as giving rise to super-priority liabilities in the administration. This was the vital analysis that would enable the Administrators to avoid having to take the precaution of dismissing the Non-Responding Employees prior to the expiry of 14 days into the administration. Any Non-Responding Employees who subsequently accept the variation after the expiry of 14 days will be dealt with in the same manner as the Consenting Employees;
- prior to termination by the Administrators of the employment contract of any Objecting Employee and/or any Non-Responding Employee, such employee is an unsecured creditor of the Company with a provable debt in the administration or any future liquidation in respect of amounts due under their employment contracts;
- the Administrators are not under any duty to apply for a grant under the Scheme in respect of any employee other than a Consenting Employee or a Non-Responding Employee whose contract has been varied; and
- the Administrators will not adopt the contract of employment of any employee merely by virtue of not terminating their contract of employment.
The above shows the Court’s flexibility towards making the Scheme work for administrators in insolvency situations. The judgment does not bind employees or the Government because it had not been served on all employees and the Government as a result of the urgency of the application, however it serves as a very useful authority on the Court’s first approach to the interaction between furlough and insolvency practice in an ever updating climate.
The full transcript of the judgment can be accessed here.
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