Legal Update
Carluccios Limited (in administration) [2020] EWHC 886 (Ch). The first judicial decision on the Government’s Furlough Scheme.
16 April 2020

Carluccios Limited (in administration) [2020] EWHC 886 (Ch). The first judicial decision on the Government’s Furlough Scheme.

Introduction  In a judgment handed down by Snowden J on a bank holiday on 13 April 2020 in the matter of Carluccio’s Limited (in administration) [2020] EWHC 886 (Ch), we have the first decision regarding the application of the Government's Coronavirus Job Retention Scheme (“the Scheme”). The Scheme allows employers to claim for 80% of an employee’s salary (up to a maximum of £2500 per month) if staff are kept on the books doing no work (furloughed) rather than dismissed as redundant.  The case concerns the issue whether the Scheme is available to companies in administration and the mechanism by which administrators can give furloughed employees super-priority to other creditors.  Background  Carluccio's, the well-known chain of Italian restaurants, closed its 70 branches on 16 March 2020, when the Prime Minister advised that all restaurants should close as part of the Government’ strategy for combatting the COVID-19 outbreak. The company entered administration on 30 March 2020 as a result of the impact on its business of the Government's restrictions. The Administrators hoped to retain the employees as part of the business for sale. Unless it could take advantage of the Scheme, the Administrators would be forced to make the workforce redundant.  Shortly after their appointment, the Administrators therefore made an offer to place the employees on furlough pursuant to the Scheme (“the Variation Letter”). The Variation Letter sought the agreement of the employee to go on furlough leave by way of variation to the terms and conditions of employment, and requested a response by email by 3 April 2020. If they did not, the Variation Letter stated that the Administrators might consider the possibility that their role was redundant. The Variation Letter did not state that a failure to respond would indicate the employee’s agreement. The overwhelming majority (“the Consenting Employees’) accepted the offer, a handful indicated that they preferred to be made redundant (“the Objecting Employees”), and a relatively small but significant number had not yet responded (“the Non-Responding Employees”).  The Administrators needed to make urgent decisions regarding the employees on before Easter Monday 13 April 2020, which is the last day of the initial ‘safe’ period of 14 days under the Insolvency Act during which the actions of the Administrators will not amount or contribute to the adoption of any contracts of employment.  The Administrators applied to the High Court to determine a number of questions of law to gain assurance that if they acted on those determinations they could not be subsequently be accused of having acted inappropriately in dealing with the employees and making applications for furlough under the Scheme.  The issues and decision  The first issue that the court had to grapple with was whether the Scheme was intended to be available to companies in Administration. Snowdon J held that it clearly should be, subject to the proviso that 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 – [22], [30]. The Judge was satisfied that this was the case here on the basis that there been several expressions of interest in respect of some or all of the company's business – [23].  Less clear-cut was just how the Scheme was supposed to work in an insolvency process. The Scheme Guidance does not explain how Administrators might be entitled to pay furloughed employees consistently with the insolvency legislation, and a mechanism needed to be found under insolvency legislation to justify payment of such wages and salary in priority to other claims against the company – [36]. The answer was found in paragraph 99 of Schedule B1 of the Insolvency Act 1986 (“the Adoption Provisions”). In summary, the effect of this paragraph is that it prioritises the payments of wages or salary under contracts of employment adopted by an administrator – [39].  The next issue was whether there had been an effective variation of the contracts of employment of the employees. Snowdon J held that there was in the case of the Consenting Employees who had expressly agreed to its terms, and the same would apply regarding the Non-Responding Employees who subsequently agreed to it – [45]. Regarding Non-Responding Employees, applying the principles in relation to the implied variation of employment contracts set out by the Court of Appeal in Abrahall v Nottingham CC [2018] ICR 1425, Snowdon J was not satisfied on the present facts of this case that the absence of a response from the Non-Responding Employees gave rise to an inference that they must have consented to the variation proposed – [54]. This was because the Variation Letter did not suggest that a failure to respond would be taken as consent to be furloughed; in fact it suggested the opposite. Only a matter of days had elapsed since the Variation Letter had been sent, and Non-Responding Employees might not have even received it all, and,  finally some of the Non-Responding Employees might reject the proposal.  Snowdon J went on to find that the promotion of the rescue culture is an important consideration when interpreting the Insolvency Act. At [73] he said: 

“In the instant case, a conclusion because furloughed employees could not provide services, the contracts of employment could not be adopted under Paragraph 99(5) would have the unwelcome result that the main statutory provision dealing with the issue of employment in administrations would have no application I would not enable furloughed wages or salary to be paid as the scheme plainly envisages. That would be entirely contrary to the rescue culture in the current situation which such an approach may be needed more than ever before.” 

Accordingly, the Judge found that Paragraph 99(5) should be interpreted to permit the Scheme to be given effect, and thus support the rescue culture and the Government's efforts to deal with the economic consequences of the Covid-19 pandemic – [74].  Applying this analysis to the Consenting Employees, the Objecting Employees and the Non-Responding Employees:  (i)    the Consenting Employees were now employed on the basis of a contract which had been varied according to the Variation Letter. The varied contracts of employment of these employees would be adopted once the Administrators made an application under the Scheme in respect of the Consenting Employees or made payments to the Consenting Employees under the varied contracts – [91];  (ii)   in relation to the Objecting Employees, their contracts of employment would not either be varied or adopted by the Administrators, and would be terminated and the employees in question would be made redundant – [97];  (iii)  in relation to the Non-Responding Employees, their employment contracts would not be varied in accordance with the Variation Letter unless and until the Non-Responding Employee accepted such offer prior to termination of their employment. Upon this happening, their employment contracts would be adopted by the administrators – [101].  Implications  This is a welcome decision for those employees in companies in administration which, sadly, we are likely to see more of. Provided that there is a reasonable likelihood of the employees resuming work either for the company itself after selling the business by the administrators, it appears that the Scheme should be available to furloughed employees in companies in administration.  There are some practical points to consider.  The terms of the written proposal sent to employees will be important. Employees expressly accepting the administrator’s offer to place them on furlough are likely to have their contracts varied on those terms.  Employees who do not respond to such offers cannot, in the circumstances of this case, be taken to have impliedly accepted them, although the situation might be different if the offer letters had said that no response will be taken as acceptance. Proof that the employee has received the written proposal should be considered e.g. recorded post or email with read receipt.  An interesting question was whether administrators have a duty to apply for grants under the Scheme. Snowden J said ‘Yes’ in respect of employees who had consented to be furloughed – [107]. But he declined to determine the issue regarding the non-responders – [109].  There is also the impact of TUPE. The Administrator’s intention was to ‘mothball’ the business for sale with little or no cost to the business. Furloughing staff is a mechanism of ensuring a smooth transfer of staff to the new employer which might strengthen the prospects of a quick business revival.    However, this decision is subject to one big caveat. Snowdon J made it clear that his decision on the law may not in fact be legally binding and was simply his view. This was because of the urgency of the matter, it had not been possible to arrange for other interested parties to be joined to the application and, as a consequence, he said, “I cannot see how my decisions and directions as to the law will actually bind any of the affected employees or the Government” – [7]. It is also subject to any legislation that the Government enacts to give effect to the Scheme.  One thing is certain: we can expect further litigation on the application of Government’s Coronavirus Job Retention Scheme in the weeks/months ahead.  Tariq Sadiq