Covid-19: High Court Result Positive for Carluccio’s Employees

First result for furloughed employees

High Court delivers good news for workers of the Carluccio restaurant chain after it went into administration: Workers can be placed on furlough leave with their wages taking priority over other creditors.

In summary 

When a business becomes insolvent and goes into administration an Administrator (a licenced insolvency practitioner) will assume control of the business. Administrators may help the business restructure or pursue a sale but they must always act in the best interests of the creditors – and that includes the best interests of employees who are owed wages.

We already know from the rather sketchy HMRC guidance that Administrators can access the Coronavirus Job Retention Scheme (CJRS) and furlough a company’s workers.

What the Guidance did not explain was how the CJRS would interact with current insolvency legislation including the Insolvency Act 1986. This very first judgment on the CJRS confirms that wages reclaimed by the Administrator can be paid to the furloughed workers in priority to claims made against the company from other creditors.

This will be encouraging news for the millions of workers now laid off from high street chains on the brink of collapse. There could be one important difference though.  Carluccio’s Administrators had received expressions of interest from potential buyers and so were able to access the CJRS in the hope that workers would transfer to the new buyer and resume work once Covid 19 restrictions are lifted. If Administrators take over a business that appears to have no hope of restructuring or being sold they are unlikely to apply for workers to be furloughed under the CJRS.

In more detail

In a judgment handed down (remotely) on 13 April 2020, the High Court held that the Administrators of the restaurant chain Carluccio’s are able to place the company’s employees on furlough and claim for up to 80% of their wages under the government’s Coronavirus Job Retention Scheme (CJRS).

This is the first published judgment to consider the implications of the government’s CJRS. It gives useful guidance in the specific situation where a company calls in Administrators and the Administrators then seek to retain staff under the furlough scheme.

Carluccio’s closed all of its restaurants on 16 March 2020 after the government asked restaurants, cafes and bars to close. The company, which by all accounts had been struggling prior to the on-going Covid-19 Coronavirus pandemic having recently closed a number of branches, then went into administration on 30 March 2020.

The Administrators hoped to obtain a sale of the company whilst keeping on employees under the government’s CJRS. They proposed, in a variation letter sent to a large number of employees, to furlough them on the condition that they accepted 80% of wages up to £2500 per month in accordance with the CJRS and that they would only be paid in the event the Administrators were to receive a grant under the scheme. Most employees accepted, whilst a few indicated they preferred redundancy. A small (but still significant) number have not as yet responded.

The Administrators were concerned about the lack of clarity in the government’s guidance on the Scheme around how it operated consistently with insolvency legislation. In particular they were worried about the fact that the government guidance on the CJRS made clear money under the scheme would have to be paid to the employer, as opposed to directly to the employees. This would then mean that the money would constitute assets of the administration and would then have to be disposed of in the order of the priorities set out in the relevant insolvency legislation.

The Administrators therefore sought a High Court ruling on the legal basis upon which they could place employees on furlough and pay them wages in priority to other claims against the Company.

The matter was urgent. The Administrators needed to make decisions on furlough by 13 April 2020 as that was the last day of the 14-day window during which their actions would not amount to ‘adoption’ of any employment contracts for the purposes of insolvency law.

Mr Justice Snowden held that the variation letter had validly amended the contracts of those employees who had expressly agreed to it. Those who had not yet responded could not be taken to have given consent.

When the Administrators make an application under the CJRS or make payment to an employee under a varied contract that will constitute ‘adoption’ of the particular employee’s contract for the purposes of insolvency law. Accordingly, the employees will have super-priority ahead of the administrators’ fees and expenses, floating charge creditors and unsecured creditors. Payments will therefore be able to made to those who had accepted the variation, using the grant monies when that is received under the scheme.

For those who had yet to respond, their contracts would remain unvaried and would not be treated as adopted at the end of the 14-day period. The administrators would therefore not have to dismiss them in order to avoid incurring super-priority liabilities towards them.

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