There have been two High Court decisions in this area over the past month. In the first, Re Carluccio's Ltd (in administration) the Court considered the validity of variations to employment contracts and adoption of those contracts by administrators wishing to make an application to the Coronavirus Job Retention Scheme (CJRS).
Carluccio's went into administration on 30 March. To avoid making all staff redundant and promote the business as a going concern, the administrators offered to place a large number of employees on furlough. The administrators then sent letters to the employees to vary their employment contracts. The letters set out various conditions, namely that employees would only be paid at CJRS rates, that they would only be paid if the administrators received a grant under the CJRS in respect of the employees, and that any payment to the employees would be limited to the sums received.
Most of the employees accepted, but the administrators were concerned that there had been no precise detail given of how the CJRS would operate consistently with insolvency legislation. The administrators sought a High Court ruling on how they might lawfully put the employees on furlough, and whether they could avoid incurring liabilities if they adopted the unvaried contracts of those employees who had not responded to the letter, rather than being forced to dismiss them.
The High Court held that an offer by the administrators to place employees into the CJRS at a reduced salary level, once accepted by an employee, constituted a variation of the employee's contract with the company. The varied contract was then adopted by the administrators when they acted upon it by making an application in respect of the employee under the CJRS, or by paying the employee's wages. This might happen after the end of the 14-day administration period. The adoption of the varied contracts meant that the payments due to the relevant employees would have priority over the expenses of the administration, floating charge security and other unsecured debts of the company.
In Re Debenhams Retail Ltd the employees had been furloughed before the administration started. Debenhams Retail Ltd was placed in administration on 9 April. Prior to this the directors of the company had placed the employees on furlough and notified them that their entitlement to payment was to the amounts received under the CJRS. On the day after the administrators were appointed, they wrote to the employees asking them to confirm that they accepted that they would receive no payments beyond amounts equal to those received by the company under the CJRS. The administrators were concerned that, if they were deemed to have adopted the employees' contracts, their own fees and costs might be subordinated to other payments due to the employees (including the topped amount of their salary not being paid under the CJRS).
Most of the furloughed employees accepted the terms of the administrators' letter, but as the position on SSP and holiday pay remained unclear, the administrators applied for directions that they would not be deemed to have adopted the contracts of employees who had been furloughed if they remained on furlough and the administrators took no further action in relation to them except to pay them the amounts reimbursed under the CJRS.
The High Court refused to direct that the administrators would not be adopting the contract of employment merely by paying the amounts reimbursed under the CJRS, but it did give guidance on what would constitute adoption. It stated that the administrators would be taken to have adopted a contract where, at any time after 14 days from the time of their appointment, they caused the company to make payments to the employees under their employment contracts including any amounts reimbursed to the company under the CJRS scheme, or they made an application in respect of an employee under the CJRS.
Take note: Following the decisions in Carluccio's and Debenhams the position is that, irrespective of whether employers are furloughed before or after the start of the administration, provided that their contracts are adopted by the administrators (via an agreement to vary and an application to the CJRS), any payments due to them under the CJRS will be given priority under the Insolvency Act 1986.