The recent judgment in Re Carluccio’s Ltd [2020] EWHC 886 (Ch) provides some much needed clarity on the interrelation of Coronavirus Job Retention Scheme ("JRS") and the requirements of insolvency legislation. It is to be commended for its clarity in the absence of any statutory guidance as to its implementation. The JRS guidance makes it clear that the JRS was intended by the Government to apply to companies in administration, although does not explain exactly how this might operate in practice and, in particular, how Administrators are to pay the employees under the JRS in a way that was consistent with the requirements of insolvency legislation.
Super Priority
The judgments are important because Paragraph 99 of Schedule B1 to the Insolvency Act 1986 and Rule 3.51(1) of the Insolvency Rules 2016 provides that post-administration employee costs acquire "super-priority" (paid ahead of costs and expenses of the administration) where the contracts of employment were adopted by the administrator; but that nothing done within the first 14 days after the appointment of the administrator shall amount to or contribute to the adoption of the contracts and no account shall be taken of any liability arising by reference to anything that is done or that occurs before the adoption.
The Issues
On 15 April 2020, two days after the Court handed down judgment in Carluccios, the Court considered a similar urgent application from the Joint Administrators of Debenhams also seeking directions in the context of the JRS. Having given directions the Judge reserved judgment, which was handed down on Friday 17 April 2020. Although the two cases have much in common there are some crucial factual differences. The most significant of these being, by the date the Joint Administrators were appointed over Debenhams on 9 April 2020, the vast majority of the company’s 15,500 employees had already been furloughed pursuant to the JRS.
As was the case in Carluccio’s, the urgency of the matter meant that there had been no opportunity for any other interested party to be formally represented, which caused the Judge some concern as to whether it was appropriate to give any directions, but in the end the exceptional circumstances justified the Court’s intervention. In his judgment the Judge referred to the lack of legislation or regulations on the precise workings of the JRS and indicated that the only details were those published in the JRS guidance, first published on 26 March 2020, and updated at intervals thereafter.
It therefore remains the case that, although the JRS expressly applies to companies in administration, the Government has so far not provided any guidance as to how it is supposed to interplay with the Insolvency Act 1986.
Debenhams and the group of companies to which it belonged had, in common with much of the retail sector, been in considerable financial difficulties even prior to the onset of Coronavirus: in April 2019 its holding company had gone into administration; thereafter Debenhams had entered into a CVA.
The issue before the Court was whether the Administrators would be taken to have adopted the contracts of employment of the furloughed employees in circumstances where the Administrators did nothing in relation to those employees but issue such communications as might be necessary to confirm the terms of the employees’ continuing engagement and pay the employees their entitlement under the JRS. The viability of the Administrators’ plans to rescue Debenhams hung on the outcome, since the furloughed employees were an integral part of the rescue plan but, if their contracts were adopted so that the relevant liabilities attracted the "super-priority" under para 99 of Schedule B1 to the Insolvency Act, that plan would not be economically viable. The Administrators estimated that, if the liabilities under the contracts of employment in question attracted super-priority, this could result in an additional burden of over £3 million a month.
Directions Sought and Outcome
They therefore sought a direction whereby they could implement the JRS without formally adopting the employees’ contracts of employment. Although the Administrators accepted the reasoning of the Court's analysis in Carluccio’s they argued that the Judge in that case had reached the wrong conclusion; in particular they argued that it was adverse to the purposes both of the JRS itself and of the rescue culture embedded in the purpose of an administration, to conclude that in taking steps in relation to particular employees pursuant to the JRS, the Administrators would necessarily being electing to adopt the employees contracts of employment.
In considering the application the Court accepted in full both the reasoning and the conclusions reached in the earlier hearing relating to Carluccio’s. The fact that (unlike the position in Carluccio’s) the employees had already been placed on furlough made no material difference to the application of the principles. The Judge reconsidered the key passages in Powdrill v Watson & Anor (Paramount Airways Ltd) [1995] and Re Antal International Ltd [2003] and reached the same conclusions as had the Judge in Carluccios.
Although the Judge was sympathetic to the concerns of the Administrators, he refused to make the direction they sought and instead was only willing to direct that the Administrators were at liberty to act on the basis that they would be taken to have adopted the contracts of employment between Debenhams and its employees where at any time after 14 days from their appointment they caused Debenhams to make payments to employees under and in accordance with their contracts of employment, including in respect of amounts that may be reimbursed to Debenhams under the JRS, or made an application in respect of any such employee under the JRS.
Carluccio’s resulted in a better outcome for the administrators of that company because they had been able to vary the contracts of the overwhelming majority of the workforce in such a way as neutralise the most drastic effects of the insolvency legislation, para 99 of Schedule B1 giving super priority to employees, prior to having to implement any part of the JRS. By contrast that had not been possible in Debenhams, where the Administrators had inherited a largely furloughed workforce, meaning that there was a real risk that para 99 could impose unacceptable levels of super-prioritised liabilities. This judgment therefore underlines the tensions inherent in the underlying policies behind the JRS and the insolvency administration rescue culture, albeit that both are essentially aimed at the same ends, saving jobs and distressed businesses.
