Administrators & Furlough – High Court Confirms Application Of CJRS To Employees Of Companies In Administration

We’ve blogged extensively about how the Coronavirus Job Retention Scheme (CJRS) can be utilised by employers, to try and ease the financial strain of the current pandemic.

The headline of the CJRS is that employees who are furloughed will still be paid up to 80% of their regular salary (up to £2,500 per month) through a Government grant. The hope is that, with this assistance, employers will be better able to weather the financial storm caused by the coronavirus, without any employees having to be made redundant.

However, the CJRS has been announced in broad terms only, through guidance published online; there is, for example, no detail as to how the CJRS is intended to interplay with our existing insolvency laws.

Insolvency laws and the CJRS

Whilst the Government’s stated intention is that CJRS will apply to companies in administration, absent details of the framework, administrators appointed as a consequence of the coronavirus pandemic have been faced with considerable pressure as to what to do about a company’s workforce.

If the administrators cannot furlough the company’s employees then they are faced with the stark choice of making them redundant or risk being seen to have adopted the employees contracts of employment.

Whilst redundancies are, unfortunately, a feature of the vast majority of administrations, retaining a certain amount of the workforce is often imperative if the administration is to result in the successful sale of the company’s business (thereby achieving a better result for creditors than a winding up). However, we are in unprecedented times.

Carluccios

When the Italian restaurant chain, Carluccios, called in the administrators, the administrators were met with a situation whereby all restaurants were closed, due to the coronavirus. Accordingly, the administrators’ stated current strategy is to ‘mothball’ the business and seek its sale.

In so doing, the administrators wanted to retain Carluccios’ employees and claim for them under the CJRS, rather than make them redundant. However, and understandably so, the administrators did not want to risk being unable to claim under the CJRS and thereby increase the insolvent company’s liabilities.

Carluccios’ administrators made an urgent application to Court for a ruling on this issue. In finding that it is clearly intended that the CJRS apply to administrations (provided that there was a reasonable likelihood of those employees either resuming work for the company or after sale of the business by its administrators) the Court noted that the specific problem for the administrators was that a claim under the CJRS was a claim by the employer and not the employee. Consequently, the Government grant to pay the employees’ wages would be paid to the company – which is fine, unless that company is in administration, in which case insolvency laws require that the company’s assets be dealt with in a particular way, in order of legislative priorities.

With no express wording in the official guidance that the monies paid under the CJRS are to be held on trust for the employees or allowing for payment to employees in priority over the other claims in the administration, the Court, in reviewing the statutory framework, found that paragraph 99(5) of Schedule B1 of the Insolvency Act 1986 provided the answer.

Carluccios’ administrators had written to all employees and invited them to agree to varied terms of employment, whereby they would be placed on furlough and paid 80% of their regular wages. Notwithstanding an express term within the letters of variation sent that the administrators would not be adopting the contracts of employment, the Court found that, in the case of the employees who had accepted those varied terms, the administrators would be doing just that, once they made an application under the CJRS for payment of those employees. The employees who had refused the offer would have to be made redundant so as to avoid the risk that their contracts were adopted. The contracts of the employees who had not responded would be adopted at the point in time the administrators made an application for grant for them under the CJRS.

By making this finding, the Court was able to then apply the terms of paragraph 99(5) of Schedule B1 to the Insolvency Act 1986, affording payment of those employees priority over the remuneration and expenses of the administrators, as well as unsecured creditors and floating charge holders. In effect, this provided the employees whose contracts were adopted ‘super priority’ in respect of ongoing wages, and so enabled the administrators to make payments from the CJRS grant or other monies if those were available, without being in breach of their legislative duties.

Comment

The case is plainly useful for administrators, as it provides for certainty in what are very uncertain times. What remains to be seen is how this decision will correspond with the legislative framework that will be drawn up around the CJRS.