Carluccio’s – application of COVID-19 furlough scheme to company in administration

As highlighted by the judgment, the furlough scheme is not clear as to how it is to operate in an insolvency process. The furlough scheme guidance indicates that:

1. It is a claim made by the employer.
2. The government will pay any grant monies to the employer.
3. The grant monies will be paid into the employer’s bank account and is to be accounted for as income by the employer.

This would mean that such grant of monies would constitute assets of the company in administration. Assets of a company in administration must be distributed in accordance with the statutory order of priorities for payment prescribed by the insolvency legislation and cannot otherwise be freely disposed of by the joint administrators.

Although the furlough scheme guidance indicates that employers must pay the employee all the grant monies they received for their gross pay, it makes no reference to the grant monies being impressed with a trust (in favour of the employee), such that the monies are not assets of the company to be dealt with in accordance with the statutory order of priorities. The grant monies are merely to be paid into the employer’s UK bank account without any requirement for those funds to be segregated from the company’s general funds. However, as indicated in the judgment, this issue is equally pertinent to companies not in administration.

Accordingly, a mechanism had to be found under the insolvency legislation to justify the payment of wages in priority to other claims against the company. In the Judge’s view the only realistic candidates were paragraphs 99 and 66 of Schedule B1 to the Insolvency Act 1986.

Paragraph 99 of Schedule B1 deals with charges and liabilities on an administrator’s vacation from office. The effect of the paragraph is that liabilities for wages or salary arising out of contracts of employment adopted by an administrator are payable out of the assets held by the administrator in priority to the administrator’s remuneration and expenses. This is the so called “super priority” payment status, and is the effect of paragraph 99 (5).

The judge rejected an argument that paragraph 99 (5) was limited to cases where “services” are actually rendered to the company before these provisions can be engaged, on the basis that if Parliament had wanted to limit super-priority for wages and salary to such circumstances, it could have expressly done so. Furthermore, the judge indicated that it was clear from subsisting case law, that promotion of rescue culture is an important consideration when interpreting the Insolvency Act.

On this basis, paragraph 99 (5) should be interpreted to permit the furlough scheme to be given effect and thus support the rescue culture and the government’s efforts to deal with the economic consequences of the COVID 19-pandemic.

The consenting employees are employed on the basis of terms as varied by way of the variation letter. Those terms only require payment of wages and salary (i) at a level equal to the grant received under the furlough scheme in respect of the employee and (ii) only at a time when the grant had been received.

The judge determined that the variation letter validly amended the contracts of employment as regards the consenting employees. The variation letter indicated that the   company cannot be liable for wages or salary in excess of the amount paid under the furlough scheme. Furthermore, it provided that the company is not obliged to pay the employee before receipt of the Furlough funds.

As and when the joint administrators make an application under the furlough scheme in respect of the consenting employees, or make any payment to the employees under their varied contracts, this would amount to an adoption of the varied contracts of employment. The judge held that such steps would enable super priority payments to be made to the furloughed employees under paragraph 99 (5) using grant monies when received, or, alternatively, it would enable payments to the employees to be made from other funds of the company, which would be reimbursed when the grant money was paid.

Notwithstanding the fact that the variation letters contained express wording to the effect that the joint administrators would not be and will not at any future date adopt the employees’ contract of employment, the judge did not consider that the wording should detract from the conclusion that the varied contracts of employment of the consenting employees will be adopted under paragraph 99 (5).

It was determined that the contracts of employment of the objecting employees will not either be varied or adopted by the joint administrators but they will be terminated and the employees in question made redundant.

The position of the non-responding employees was less clear as to whether or not they could be deemed to have accepted the terms of the variation letter. Subsisting case law did not assist the court in being able to reach a conclusion that they could be deemed to have accepted the variation letter terms. Furthermore, the court indicated that the furlough scheme guidance stated that furloughing should be done by agreement with employees.

The judgment confirmed that any non-responding employees who accepted the offer made in the variation letter prior to the expiry of the 14 days into the administration, would stand in the same position as the consenting employees.

For those non-responding employees that did not accept the variation letter offer prior to the expiry of 14 days into the administration, and on the basis that nothing else happens, then based on subsisting case law, the judge determined that the joint administrators would not be treated as having adopted the unvaried contracts of employment of those employees by the mere failure to terminate those contracts prior to the expiry of the 14 day period.

Those non-responding employees who continue to fail to respond to the variation letter would continue to be employed by the company on the terms of their unvaried contracts of employment, unless and until those terms are terminated.

In light of the determinations made by the court as to the application of paragraph 99 (5) to the circumstances of this case, the judge did not consider it necessary to express any views on the potential applicability of paragraph 66 to this matter.