Old Square Chambers instructed in first case on Coronavirus Job Retention Scheme
Members of Old Square Chambers were instructed in IN THE MATTER OF CARLUCCIO’S LIMITED (in administration)  EWHC 886 (Ch), in which judgment was handed down by Snowden J on 13 April (a rare event, given that it was a Bank Holiday).
This was the first case to consider the application of the Coronavirus Job Retention Scheme (JRS) under which employers can claim for 80% of employee salary, pension and NI costs (up to £2,500 a month) if those staff are kept on the books doing no work (‘furloughed’) rather than dismissed as redundant. The context was that the Carluccio’s chain of restaurants had gone into Administration on 30 March following their forced closure two weeks earlier because of the pandemic.
Oliver Segal QC and Stuart Brittenden appeared for Unite the Union, instructed by Richard Arthur of Thompsons Solicitors LLP, representing the interests of employees of Carluccio’s.
The hearing was dealt with on an urgent basis, by remote video, to determine the legal framework within which the Administrators might work, given that there was no money to pay staff, but there was an intention to ‘mothball’ the business with a view to selling part or all of the business once the Coronavirus crisis in the UK was over. The pressing issue was to clarify the extent to which the Administrators might apply to furlough employees pursuant to the JRS whilst only ‘adopting’ their contracts after the initial 14 day period to the extent consistent with their overarching duties.
The details of the Scheme which are known to date are contained in on-line guidance from the Government here under the heading ‘Who can claim?’. The Guidance includes:
“Where a company is being taken under the management of an administrator, the administrator will be able to access the Job Retention Scheme. However, we would expect an administrator would only access the scheme if there is a reasonable likelihood of rehiring the workers. For instance, this could be as a result of an administration and pursuit of a sale of the business.”
The key matters decided by the Court were these:-
- Where Administrators envisage a future sale of the business as likely, that amounts to “a reasonable likelihood of rehiring the workers” within the meaning of the JRS.
- Paragraph 99(5) of Sch B1 of the Insolvency Act 1986 (the Act), allowing for Administrators to ‘adopt’ the contracts of employees, with the effect that those employees had super-priority as creditors in respect of the assets of the business, should be interpreted to permit the JRS 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.
- On the present wording of the Guidance, grants paid to an employer in Administration from the JRS could only be paid out to employees in priority to other creditors if the Administrators had ‘adopted’ their contracts of employment, pursuant to para. 99(5) (or possibly in exceptional circumstances pursuant to para. 66 of Sch B1) – otherwise such grants received by the employer would not be held on trust for the employees but would be part of the assets available to creditors according to the normal rules as to priority.
- Employees expressly accepting the employer’s or Administrators’ offer to place them on furlough, on the basis that they would only be entitled to receive monies received from the JRS, had their contracts varied on those terms.
- Employees who did not respond to such offers could not, 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 non-response would be taken as acceptance, if those letters could be proved to have been received, etc. That has to be tested in another case.
- If Administrators permit the contracts of employees to continue (without termination) beyond the initial 14 day period in circumstances where the employees have been told they are not required to work, and in particular where the main or only purpose of doing so is to enable those employees to respond to offers to vary their contracts to allow applications to be made under the JRS, that does not constitute adoption under para. 99(5).
- There may well be a duty on employers/Administrators to apply for grants under the JRS in respect of employees who have consented to be furloughed – although Administrators might have a countervailing duty under the Act depending on the intended outcome(s) of the Administration.
- There might be a duty on employers/Administrators, depending on the facts, to take steps or additional steps in order to give employees the opportunity to be furloughed (and receive the benefit of grants made to the employer under the JRS), as opposed to dismissing those employees.