Re Carluccio’s Limited (in administration) [2020] EWHC 886 (Ch) – first piece of judicial guidance on the Coronavirus Job Retention Scheme.

It should be noted from the outset that Snowden J’s judgment in Re Carluccio’s is not binding. There were no representative employees or interested parties during the remote video hearing so the judgment does not bind the employees or the government.

Nevertheless, the High Court has given us the first piece of judicial guidance on the Coronavirus Job Retention Scheme (“the Scheme”). Snowden J considered the legal basis upon which administrators might place employees on furlough. We know that the published guidance states:

“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.”

Unfortunately, the guidance doesn’t tell us what the legal framework is. There is no detail on how the Scheme will operate consistently with insolvency legislation. In particular, how administrators might be entitled to pay furloughed employees in line with that legislation.

The administrators of Carluccio’s therefore made an application seeking determination of a number of questions of law to ensure they acted appropriately when furloughing employees. The application had an element of urgency because under the insolvency legislation administrators have a “safe” period of 14 days during which their actions will not amount or contribute to the adoption of any contracts of employment.

The problem

The problem facing the administrators was that a claim made under the Scheme is made by the employer not the employee. The grant will be paid into the employer’s UK bank account, to be accounted for as income. This means the grant monies are assets of the company in administration. Administrators must dispose of assets in accordance with the order of priorities set out in the insolvency legislation.

There is no mechanism in the guidance for ensuring that the grant monies do not form part of the insolvent estate. For example, there is no suggestion that the monies will be held on trust or a requirement for segregation.

Administrators therefore need a mechanism under the insolvency legislation to justify the payment of wages in priority to other claims against the company in administration.

Guidance

Available mechanisms

Snowden J opined that the only realistic mechanisms available to administrators can be found in Paragraphs 99 and 66 of Schedule B1 of the Insolvency Act 1986.

The effect of Paragraph 99 is that:

“liabilities for wages or salary arising out of contracts of employment adopted by an administrator following the onset of administration (subject to the condition that no act taken within the first 14 days of the administrator’s appointment may amount or contribute to such adoption) are payable out of the assets held by the administrator in priority to the administrator’s remuneration and expenses, which in turn have priority over the claims of floating charge creditors and unsecured creditors.”

Paragraph 66 provides that:

“The administrator of a company may make a payment otherwise than in accordance with paragraph 65 or paragraph 13 of Schedule 1 if he thinks it likely to assist achievement of the purpose of administration.”

Variation of contracts of employment

 The first issue facing the administrators was that a number of employees had failed to respond to the letter seeking agreement from employees to amend their contract of employment. The key amendments were that employees would be paid no more than the portion covered by the government grant and that they would not be paid until the grant was received.

There was no issue with the employees who consented to or rejected the amended terms. The former’s contracts were varied accordingly and the latter will have their contracts terminated. The question arises in relation to those who did not respond to the letter. Can their silence amount to consent?

Snowden J concluded that those employees could not be said to have consented to the variation for the following reasons:

• the employees are unable to attend work so there is no other conduct from which consent can be inferred (i.e. continuing to turn up for work);
• the terms of the administrator’s letter did not suggest that a failure to respond would be taken as consent but warned that this could lead to a consideration for redundancy;
• only a matter of days had passed since the letter was sent; and
• some employees rejected the amendments meaning that the amendments might also be disadvantageous for some of the employees who hadn’t responded.

This was the case for the employees of Carluccio’s but Snowden J emphasised that the conclusion is fact-sensitive and must depend on the particular circumstances of each case, as recently underlined in Abrahall v Nottingham CC [2018] ICR 1425.

Paragraph 99 Insolvency Act 1984

 Snowden J cited the House of Lords case of Powdrill v Watson & Anor (Paramount Airways Limited) [1995] 2 AC 394 as the leading case on the meaning of “adoption” in the context of Paragraph 99. The conclusions of Lord Browne-Wilkinson in that case were:

• an employee’s contract of employment is “adopted” if he is continued in employment for more than 14 days after the appointment of the administrator or receiver;
• it is not possible for an administrator or receiver to avoid this result or alter its consequences unilaterally by informing the employees that he is not adopting their contracts or only doing so on terms; and
• in the case of both administration and receivership the consequence of adoption of contracts of employment is to give priority only to liabilities incurred by the administrator or receiver during his tenure of office.

The concomitant issues for the administrators of Carluccio’s were:

• how they could lawfully give effect to furlough arrangements with the employees who have agreed to the variation of their contract of employment; and
• whether they could avoid incurring liabilities by adoption of the unvaried contracts of employees who have not responded, so that they are not forced to make all of those employees redundant before the end of the first 14 days of the administration.

The “no services” argument

Snowden J rejected the idea that Paragraph 99 does not apply where employees have not actually rendered services to the company in administration i.e. a contract which provides for an employee to be furloughed could never be adopted by administrators under Paragraph 99(5).

He came to that view because “if Parliament had wanted to limit super-priority for wages and salary to cases where services are actually rendered to a company in administration, it could have said so simply and directly.” The concept employed by Parliament is adoption of the contract of employment itself. Moreover, it may be appropriate for an administrator to pay an employee’s wages whilst not requiring them to work, such as where that employee has particular know-how which would devalue the business if available to a competitor.

Even though the concept of furlough was not foreseen when the insolvency legislation was enacted or when Paramountwas decided, the intention behind both is promotion of a rescue culture. It would be wrong to say that the contracts of employment of furloughed employees could not be adopted under Paragraph 99(5) when this is what the Scheme plainly envisages.

Non-termination, continuation and adoption

 The appointment of an administrator does not terminate a contract of employment, which will continue in effect unless and until notice to terminate is given or the contract is repudiated. Mere failure to terminate a contract of employment does not mean that it has been adopted by the administrator. Adoption requires some conduct by the administrator that amounts to an election or decision that those liabilities arising under the continued contract will be a “separate” (i.e. prior ranking) liability in the administration, rather than simply ranking as an unsecured claim.

In Paramount, Lord Browne-Wilkinson stated that “if the employment is continued for more than 14 days after the appointment of the administrator or receiver, there seems to be no escape from the conclusion that the whole contract has been adopted.” However, Snowden J did not consider that this means that a contract of employment will automatically be adopted if it is not terminated within 14 days.

Instead, Snowden J read this part of Lord Browne-Wilkinson’s judgment in the context of his definition of “adoption” and his equivalence of “circumstances in which the administrator accepted liability for services rendered to him” with the concept of “continuing contracts”. As such, Snowden J interpreted “continued for more than 14 days after appointment” as meaning that that the administrator’s conduct amounted to an acceptance that he had to pay for services to be rendered under the contract, and hence amounted to an election to give super-priority to the claims for wages or salary.

In Re Antal International Limited [2003] 2 BCLC 406, the mere fact that the contracts between the company and the employees had, unbeknown to the administrators, continued in existence for more than 14 days after the commencement of the administration did not amount to adoption. Snowden J agreed with this sentiment.

Employees who have consented to variation

 With respect to the employees of Carluccio’s who had successfully acceded to the variation of their contracts, as that had been done within 14 days from the commencement of the administration it could not be said that the varied contracts had been adopted.

Snowden J determined that when an application was made under the Scheme or any payment was made to the employees, their contracts would then be adopted by the administrators. The administrators would be “doing an act which could only be explicable on the basis that they were electing to treat the varied contract as giving rise to liabilities which qualify for super-priority.” Super-priority payments could then be made to the furloughed employees under Paragraph 99. Payments could equally be made from other funds, to be reimbursed by the grant monies.

A further issue arose for Carluccio’s administrators because the letter sent to employees with the proposed varied contractual terms contained the following wording:

“As noted above, you continue to be employed by the Company. The Administrators act as agents of the Company and will not be adopting, and will not at any future date adopt, your contract of employment. The Administrators have not assumed, and will not at any future date assume, any personal liability in relation to your employment.”

Being included in the letter which was the basis upon which employees agreed to amend their contracts, this could amount to an agreement to exclude the operation of Paragraph 99. Snowden J did not think this was fatal because the above wording was clearly an aberration. The letter overall made clear what the administrators intended and, as such, the administrators will not be prevented from adopting the varied contracts.

Employees who have not responded

 The corollary of Snowden J’s reasoning is that if employees fail to respond after the period of 14 days into the administration, their contracts will not be adopted merely because they have not been terminated. Crucially, therefore, administrators do not need to take the precaution of dismissing employees who have not responded prior to the expiry of 14 days into the administration.

If the variation is accepted after 14 days into the administration, this will vary the contract but not amount to an adoption because it is not an act of the administrators. The adoption will again occur when the administrators act upon the varied contract by making an application under the Scheme or paying the employee’s wages. The acceptance will essentially put the employee in the same position as an employee who accepted before the 14 days were up.

If an employee continues not to respond, their unvaried contract will continue but they will be an unsecured creditor in the administration in respect of any claim under that contract.

Paragraph 66 Insolvency Act 1984

 As Paragraph 99 provides a suitable mechanism for the administrators to implement their proposals for furloughing employees, and because Paragraph 99 is specifically designed to deal with administrators paying wages, Snowden J did not go on to consider Paragraph 66. He simply said that Paragraph 66 could be used to fill in any gaps that might arise in relation to the implementation of the Scheme.

Conclusion

Snowden J has thus provided an appropriate legal route for administrators to pay the subsidised wages of furloughed employees. Under Paragraph 99 of the Insolvency Act 1984, liability for wages arising out of contracts adopted by the administrators will have super-priority. The problem posed by the usual rules on the order of payments does not therefore arise.

The guidance in Re Carluccio’s is given in the context of the current statutory landscape. As the Scheme is transposed into statute, Parliament might well introduce further legislation which sets out a wholly different regime for paying furloughed wages as a matter of priority. However, without an authoritative legal framework in place, administrators can take comfort from Snowden J’s analysis.

This article on Re Carluccio’s was written by Oliver Foy, if you would like any further information on Oliver’s practice or have any other queries in relation to our Employment Team or remote hearings please contact Jonathan Cue or Dean Cunniff through our switchboard 020 7353 0711 or via email.